EDITORIAL PAGE EMR report tells only half the story

The federal Department of Energy, Mines & Resources (EMR) has come up with an important document outlining its view of the current state of affairs in the Canadian mineral exploration industry. What makes this report so significant is that its myopic view of the industry is likely to be the foundation for future government policy. The report, based largely on unsubstantiated figures, comes up with some interesting observations and conclusions. It is essential reading for anyone in the business, but it is so politically motivated it really requires a companion study in order to get a complete picture of the industry.

Unfortunately, there is no such companion study available. Some professional associations allied with the industry were seeking government help in conducting a more comprehensive — and arm’s length — study. Now, however, those efforts have been blindsided by this EMR report. The result is that only half the story will get out. Missing is the evidence of economic suffering in communities that depend on exploration or on mines where ore reserves are being depleted faster than they are being replaced with new discoveries.

One of the most misleading aspects of the report is the way Canada’s 100% deduction permitted for exploration expenditures is portrayed. Currently, the deduction is only of use to major companies with earnings from production. Flow-through shares allow that deduction to be passed on to individual investors. Junior companies without operating income, therefore, can make use of it.

That is a fair approach, but it is simply not working. It fails because the current tax regime treats the purchase of those flow- through shares unfairly. It considers the purchase price to be zero, and that is simply not true. That is the other side to the story.

Experience has shown that the mineral exploration depletion allowance that made flow-through shares so attractive in the mid-1980s was too successful an incentive. It led to excesses that still haunt the business. But the current flow-through tax deduction does not rectify the situation. It fails to recognize that flow-through shares carry a definite cost, even with the 100% tax deduction available. For someone in the top tax bracket, the after-tax cost of a $1 share is still something in the order of 55 cents. For others, the after-tax cost is even higher.

Because the tax collector does not recognize that flow-through shares have a purchase price, the incentive is lost. What you save on the purchase side with the tax deduction, you pay on the sell side with capital gains tax.

And the report itself recognizes that incentives are used in countries that are our competitors for exploration dollars. Those countries are considering other incentive systems, ones that Canada pioneered. Chile, for example, is considering the introduction of flow-through provisions, Venezuela is proposing a 5-year tax holiday for new gold mining investments and Brazil has been relaxing regulations that discouraged foreign investment in the past.

The EMR report says those countries have not attracted investment because of unacceptable investment climate and political instability. But that perception is considerably dated. There is a large and growing commitment in those countries by Canadian companies. The biggest — Inco, Placer Dome, LAC, Noranda — are investing in those countries and, increasingly, so are junior and mid-sized companies.

Should those countries offer anything to make investment more attractive, the steady flow of exploration capital out of Canada is bound to increase dramatically.

EMR has traditionally been seen as an agency dedicated to maximizing Canada’s mineral potential by fostering an active exploration industry. It was seen as an ally, not an adversary. This document, however, totally overlooks the crucial need for equity financing to pay for the exploration that is essential to maintain a healthy mining industry.