PearTree helps industry give back via charity flow-through

VANCOUVER — It’s not too often that a capital financing structure can be described as a true win-win situation. PearTree Financial has come close, however, with its innovative flow-through donation program, which helps mining companies access larger pools of exploration capital while funding worthwhile charities across Canada.

The company was founded in 2007 and has put together over $200 million in structured flow-through share donations over the past eight years. The mechanism has benefits on both sides of the transaction, including saving donors in after-tax costs, and infusing much-needed capital into Canada’s resource and charitable sectors.

“What we’re trying to do is really provide a ‘better way,’ in terms of financing. Over the past two years we’ve seen a relatively consistent growth in demand for this type of deal structure, and that’s pretty unique in the mining sector, since recently we’ve all seen the overall demand for shares decline,” Pear-Tree president Norman Brownstein said at a presentation in Vancouver.

Flow-through is a share — or a right to buy a share — in a mineral resource company where tax deductions “flow through” from the company to the investor. Under the agreement, the individual agrees to pay for the shares, and the corporation agrees to transfer certain mining expenditures to the individual.

Flow-through shares were introduced to address an exploration financing inequity that arose between major and junior exploration companies. Flow-through share investors can deduct their investments from otherwise taxable income.

Under PearTree’s deal structure a donor will subscribe for flow-through to access associated Canadian Exploration Expense and investment tax credit benefits. The next step is for the donor to gift the shares to their chosen charity. The charity then sells the shares to an institutional investor to receive their funds, and a tax receipt is issued to the original donor.

“Part of the upside with our arrangement with the charities is that it turns a Canadian retail product into a global institutional product, and that’s where a lot of the power comes from in terms of being able to access international and diversified capital pools. And our fees are paid by our clients — basically our donors or subscribers — so there are no additional fees for the issuer,” Brownstein said.

“Another key for the smaller companies out there is reducing the downward selling pressure. A lot of times flow-through shares have a four-month restriction, and at that point there is a lot of pressure on the shares. With our method we’re putting the shares into institutional investment basis, so it tends to be more patient money,” he adds.

The trick for PearTree, and the mining company issuer, is assuring there is an end buyer willing to acquire the shares from the charity, which really only benefits from the cash injection.

There are three ways to secure an end buyer: the company finds its own back-end buyer, PearTree uses its market connections, or the company employs a third-party bank or brokerage to arrange the sale.

As Brownstein noted, PearTree’s slice of the flow-through business has grown during the downward trend in the market. The company has accounted for 25% of mining flow-through since January 2013. During the first-quarter, exploration financing totalled $25 million in 30 reported transactions across Canada, with PearTree providing 60% of all exploration dollars.

PearTree’s total includes participation in a $10-million non-brokered financing by AuRico Gold (TSX: AUQ; NYSE: AUQ), a $50-million non-brokered deal with Iamgold (TSX: IMG; NYSE: IAG) and a $5.7-million deal with Red Lake explorer Pure Gold Mining (TSXV: PGM; US-OTC: LRTNF).

“I can speak more from the point of view of explorers who receive the benefits of this type of charity financing. I worked primarily on the Kemess East project, and it’s only been in the past two years we’ve been able to start defining a resource there,” AuRico’s senior geologist Quinn Harper said.

“The benefits of the tax incentive definitely make investors interested in going the PearTree route, and it’s really helped us fund the relatively expensive exploration efforts at Kemess.”