Flow-through isn’t through yet What the industry says . . .

Gerald Merrithew, Federal Minister of State for Mines

“Many people expected the bottom to fall out, but that certainly did not happen. In fact the mining industry received some very special treatment in that the flow-through mechanism itself was retained. That is significant. True, earned depletion is one of the things we lost, but I think flow-through will remain attractive, even at 100%. If one looks at the whole tax field, one will realize that flow-through is probably the only tax-assisted investment left. So we didn’t do too badly. Besides, the system can always be changed because a budget is brought down every year. Nothing is etched in stone.” Raymond Savoie, Quebec Minister of Mines

“I am certainly cheezed off. You either believe in regional development or you don’t — and from what I can see, he (Michael Wilson) doesn’t. I’m dead set against the elimination of earned depletion. It’s going to put a serious damper on exploration activity in Quebec; and areas in the far north need all the help they can get. The flow-through share structure was an excellent initiative for regional development at a time when mining, on the whole, isn’t doing very well. And from the standpoint of exploration, the reduction doesn’t make any sense either. I’m going to do everything I can to keep flow-through at 133% in Quebec. The elimination of earned depletion will undoubtedly cost the government in at least two ridings in northwestern Quebec.” George Miller, President of the Mining Association of Canada

We will have to wait and see whether or not flow-through will continue to be attractive at 100%. What we know for sure is that the cut in earned depletion is going to cut into the cash flow of all the operating mining companies which perform exploration. There will definitely be a reduction in their after-tax income. As for the future of flow-through shares, it is very true that the investor will receive less of a benefit than he has previously received. But, on the other hand, I’m not sure what alternatives, in terms of tax shelters, the investor has. Robert Parsons, Tax Committee Chairman, Prospectors and Developers Association of Canada

The elimination will make it more difficult for the junior companies to raise equity capital through flow-through shares, but I don’t think the impact will be serious. Although the 100% deduction will continue to be attractive, the average amount raised by flow-through could possibly drop by $200 million, which wouldn’t be the end of the world. But it’s difficult to predict because other factors, such as the price of gold, must be considered. However, I think the industry will adjust to the change. Edward Thompson, President of Mingold Resources

The return on flow-throughs will probably drop by about 80%. The 100% deduction is much less attractive than 133% when buying risk stock, so the junior companies will have a very difficult time selling flow-throughs. That’s just my initial gut reaction (to the decision to eliminate earned depletion). Of course, a lot will depend on metal prices and other factors.