Editorial A poor substitute

If there were any doubts about the success of the mineral exploration industry’s attempts to make the continuation of flow- through financing a political issue, they were laid to rest when the federal government announced the new Canadian Exploration Incentive Program. At that news conference, Marcel Masse, the minister of Energy, Mines and Resources, made a point of emphasizing the benefits that will accrue to Quebec. Quebec is, after all, the key to any Canadian general election.

“We expect the benefits of this new program may total $300 million for Quebec alone,” said Masse, pointing out at the same time that unemployment in northwestern Quebec during the Tory years dropped to 6% from 20%.

What is troubling, however, is how this new system will be interpreted by investors. And to advocates of a free enterprise system, this new incentive will surely be seen as a clearcut subsidy for the mineral industry, a way of reducing companies’ costs of finding minerals through government grants.

There is some virtue in the program. It will continue to funnel money into mineral exploration and, by the nature of Canada’s geology, most of that will go into areas where investment is sorely needed. And by altering the rules it may well provide work for stock brokers who should have a field day structuring new deals. But in terms of spurring investment in mineral exploration, it appears to be a poor substitute for the system that prompted much of the exploration in northwestern Quebec and other economically depressed areas of the country during the past five years.

As much as the government may protest, this new system can only be described as a government handout. There are safeguards against excess and abuse, to be sure, but the CEIP is not the simple, elegant solution that has been in place since 1983. That solution was based on the ability to pass on or “flow-through” the Mineral Exploration Depletion Allowance to individual investors,

MEDA added 33% to the 100% tax deduction already available for individual investors for every $1 invested in Canadian mineral exploration, bringing the total tax deduction to 133%. It was clean and simple and channeled money from investors directly into the ground. CEIP, by contrast, will try to make up for the loss of MEDA by directing money from the government to the exploration companies after they have spent their money on exploration.

Masse and Gerald Merrithew, the minister of state for mines, insist that a bureaucracy will not sprout up in order to administer the new program, yet five new offices are being set up to process applications. And even with those offices, there will be no office in Manitoba or either of the territories, all three of which are prime exploration areas.

The new program does make an attempt to limit bureaucratic excess. There will be no civil servants saying where a company must drill or how it must go about its exploration. Also, the same exploration costs that qualified for MEDA will qualify for CEIP and all applications that qualify will automatically receive the grant up to a maximum of $3 million per company per year.

But investors will look for what the program offers them, and it is not clear just what that is. Flow-through shares will still be used to pass on the 100% tax deduction for Canadaian Exploration Expenses. In fact, only money that is raised through flow-through financing will qualify for the CEIP rebate. Theoretically, the company could pass on the grant — 30% of expenses that qualify — to each shareholder on a pro rata basis with each shareholder receiving an individual cheque. In practice, however, it’s likely that the government incentive will be built into a discount on the flow- through shares that are offered.

In other words, a company that plans to raise $1 million for exploration by issuing a million shares with a value of $1 each will actually sell the shares for 70 cents and make up the 30 cents difference with the government grant.

Will the investor find such an arrangement inviting? Is a discount on a junior exploration company’s stock price — stock whose value is much more difficult to determine that that of producing mining companies — as much an incentive for investors as a tax deduction? And if a company can only raise $700,000 for a $1-million exploration project, how long will it have to wait for the government’s $300,000?

There’s little doubt the CEIP will be of help to the industry. For instituting the program the government should be praised. Much simpler, however, and probably much more effective would have been to maintain the existing system. Government grants will always be a poor second choice to private investment.