Sierra Metals is relying on a preliminary internal sale to qualify its capital distribution of a subsidiary under s. 84(4.1)

Sierra Metals is proposing to effect a stated capital distribution of a Newco subsidiary (i.e., Cautivo Mining, which indirectly holds a Peruvian exploration company) to its shareholders in reliance primarily on the exception in ss. 84(4.1)(a) and (b) from deemed dividend treatment, although a nod is also given to the s. 84(2) exception. The disclosure relies on the proposition that the Newco shares will be issued to Sierra immediately before the distribution in exchange for transferring Sierra’s existing subsidiary to Newco, so that what will be distributed will represent proceeds of disposition.

Newco will be making a rights offering immediately after the distribution (which, as compared to the alternative of Newco being capitalized by Sierra with cash beforehand, has the effect of reducing the size of the distribution).

Neal Armstrong. Summary of preliminary prospectus of Cautivo Mining under Spin-Offs & Distributions – Ss. 84(4.1)(a) and (b) distributions of proceeds.