Editorial Time to bury the flow-through myth

That’s not to say that the flow-through scheme was a disaster on the scale of those used in other sectors. There have certainly been worse fiscal measures than the tax breaks that made flow- through so popular before it was altered in 1988. By stimulating mineral exploration, flow-through financing resulted in a flow of investment to areas of Canada where employment was low and local economies were struggling. Indeed, it was on that basis that The Northern Miner supported the incentives. Better that investors’ funds should go to developing the resources of northern Ontario or Newfoundland than to stimulating, say, a housing market in Toronto.

The success of flow-through financing also came at a time when many of those mining communities were struggling through a severe recession. In 1985, for people in Val d’Or, Que., Kirkland Lake, Ont., and La Ronge, Sask., flow-through was a godsend.

Furthermore, the exploration successes that were funded with the help of flow-through financings cannot be dismissed as insignificant. They may not have resulted from the most efficient use of funds, but several new mines owe their existence to the financing scheme. Those new mines have been contributing significantly to the nation’s economy and will continue to do so for years. Information that has been added to the exploration “database” also will prove its worth in years to come as future mines are discovered with the help of exploration results funded by flow-through financing.

In truth, the flaw in flow-through financing was that it was too successful. It resulted in an aberration in the level of exploration activity that is proving impossible to rival. It created a ghetto of flow-through “junkies” who, without it, have found it difficult — in some cases impossible — to survive. And it has tarnished the image of the industry, not only to those who are on the outside looking in, but also to those within the industry who may have succumbed to the temptation of easy money or have watched their colleagues do so and have lowered their professional standards accordingly.

Even the staunchest supporter of flow-through financing cannot deny that money was spent frivolously. That was partly because the scheme enforced arbitrary deadlines. Money was simply thrown at a project in ill-conceived exploration programs simply to spend the money in time to qualify for investors’ tax returns.

That has made it all the more difficult today for an exploration company to plan a modest but conscientious program of $500,000 in order to drill in a systematic manner some justifiable exploration targets. Is that all you’re spending? an investor will ask, convinced that unless a sum in the neighborhood of $10 million is being spent, the property has little value. Where are the grandiose scenarios to which we’ve become accustomed? Will the property be in production six months from now? A year? Where’s the payoff?

If only it were that simple. If only the rate of success were simply a function of the money spent. If that were true, we would wholeheartedly back the old flow-through scheme. In truth, however, there’s a great deal of “fermentation” required in mineral exploration. No amount of dollars can replace that lengthy process of accumulating and analysing information.

Worst of all, flow-thorough financing has reinforced the boom- and-bust image of mining. Commodity prices and productivity improvements are what lifted the mining industry out of its prolonged slump earlier this decade; flow-through financing merely exaggerated the cyclical nature of the business. If anyone in those single- industry mining towns believed the days of boom and bust were over in the enlightened 1980s, the rise and fall of flow-through financing must have convinced them otherwise.

This industry does not need special treatment to prosper. There may be times when it is legitimately in the national interest to support certain goals through fiscal policy — replenishing base metal ore reserves, for example, or supporting a sector if prices are artificially kept low such as the Emergency Gold Mining Assistance program did in the 1940s.

The legacy of flow-through financing, however, is one of destabilization to the point where an undue amount of energy is now spent on convincing government officials to maintain or enhance a system of grants. Mining would be better served by policies that are simple and stable. They may not offer the instant gratification investors have come to expect, but it would pay off in the long run.

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