Flow-through revival proposed for mining exploration

Flow-through shares provided the best form of financial aid to Quebec’s mining industry in the past and the tax shelter should be fully re-instated, concludes a study by a Montreal geologist and lawyer with close ties to the mining industry.

Neville-Warren Cloutier, who is proposing a 200% tax deduction for investors, studied the influence of various governmental policies affecting exploration in the mining industry for his study written while he was a student in an M.B.A. program here at Concordia University.

Although the study is based on mining exploration in Quebec, its conclusions can be applied to the rest of the country, Cloutier says.

At the peak of flow-through-share investments in 1987, exploration levels in Quebec were extremely high and “junior companies were flourishing like crazy,” Cloutier says. But drilling declined “the morning after the money dropped.”

That drop occurred after the federal government abandoned the flow-through incentive program, citing abuse of the system, Cloutier says. Quebec abandoned the program soon after.

In his study, titled L’Influence des Politiques Gouvernementales aupres de l’Industrie Miniere Quebecoise en Matiere d’Exploration, Cloutier concludes that flow-through shares are desperately needed again.

To determine the effectiveness of flow-through shares, Cloutier used a scientific approach known as the mathematical regression theory “instead of going on gut feeling or just hearsay.” He concluded that if the full tax shelter had remained in effect until now, governments would have made a return of more than 100%.

If flow-through shares were fully reactivated, Quebec’s mining industry would be back on track in a very short time, Cloutier believes. He says the Quebec government has taken tentative steps by allowing people who have used up their lifetime capital gains exemption to invest in flow-through shares, and realize a 166% deduction.

“I’m happy the government is putting it back again on the forefront,” Cloutier says. But, “the government is not helping much, because my proposal is to put the deduction to 200% and allow everybody to have access to it.” Flow-through shares were a success story during the 1986-88 period, “so why not put them back on the map?” Cloutier asks. “Not everybody has $1,000 to put aside, but if they can for tax purposes, why not?”

Although Cloutier admits there was some abuse of the flow-through program, the solution lies simply in exercising proper control measures. Cloutier says that for too long the government has been paying attention to megaprojects such as James Bay hydroelectric development, while the mining industry seemed to fade into the background.

“My belief is that by helping the mining industry, you’re talking about short-term, mid-term and long-term job creation,” he says.

Cloutier argues that hydroelectric development provides little more than short-term construction benefits. By helping the mining industry, parallel industries are also helped, he says. For example, once money is spent to open roads to mining locations, the roads can be used for future towns or for tourism.

There are also simpler steps that can be taken to rejuvenate the mining industry. For example, Cloutier applauds the Quebec government for sponsoring a program for welfare recipients in the Gaspe Peninsula that gives them courses to become prospectors.

“They’re encouraged to go into the bush and to hammer away,” he says. The result, he says, is that some people have come up with promising claims. Cloutier also says governments have to devise a way to allow companies’ exploration and overhead costs to decline so that they can be more competitive with Third World and East European countries that could sell metals at cheaper prices.

Tax levels should be lowered and companies in the red should be given tax breaks. Otherwise, “you’re going to kill the goose with the golden egg,” he says. “If you close the door, you’re losing a future taxpayer.” Cloutier, who has a 25-year interest in the mining industry, is now developing a minerals policy for Quebec’s association of geologists and geophysicists. His study has been read by mines minister Lise Bacon, who acknowledged that it accurately reflected the problems faced by the mining industry.