Government inaction threatens to lead to the demise of junior

This excerpt is taken from “Working Together,” a brief presented by the Prospectors and Developers Association of Canada to the 47th Mines Ministers Conference at Winnipeg, Man., Aug. 28, 1990. The cancellation of Mineral Exploration Depletion Allowance (MEDA) and Canadian Exploration Incentive Program (CEIP) has rendered flow-through shares unmarketable in spite of the 100% exploration expense deduction. This is due to the manner in which the federal income tax system treats capital gains and, in particular, flow-through shares. Industry and governments must work together to either restore the vitality of flow- through or devise a new and effective incentive system. Doing nothing will see the collapse of the junior mining sector in 1991.

Flow-through shares are the main life-force sustaining the junior mining sector of today. This was not always the case. Prior to the 1970s, the public invested in high-risk, “long shot” junior companies through the purchase of common shares not only because of the potential for high returns, but also because such returns were not subject to capital gains taxation.

This is exactly the way lottery tickets are treated today and the very reason why they are so popular. This climate of investment led to numerous significant discoveries including Elliot Lake, Beaverlodge, New Brunswick lead-zinc, Mattagami Lake, Matabi, a revitalized Noranda Camp, Kidd Creek and others — virtually all discovered by junior companies.

The introduction of capital gains taxation in 1972 changed the investment climate dramatically and seriously dampened the enthusiasm of the high-risk investor. As a result, the junior mining sector declined significantly, as did the rate of new discoveries in Canada. In 1983, however, the extension of MEDA (available to major companies for years) to flow-through share financing stimulated a renaissance of the junior mining sector, which led to hundreds of new discoveries and more than 60 new producing mines over the last five years.

The pattern revealed through this brief historical perspective is simple to discern. The motivation to invest depends solely on the balance between the potential for risk versus the potential for reward. As well, the balance between risk and reward is highly sensitive to the tax regime of the day. Prior to 1983, flow-through shares were not a popular vehicle for investment, simply because in the context of the existing tax regime they did not provide enough incentive to balance against the risk.

The termination of MEDA and now CEIP has returned flow- through shares to their pre-1983 condition. In spite of the 100% tax deduction feature, they no longer offer a good enough potential for reward to balance against the risk, primarily because of the current tax regime. In other words, they are no longer marketable and, therefore, the junior mining sector can no longer depend on this form of financing.

In our view, if the discovery rate necessary to replace mined reserves is to be maintained, the federal government has two options: 1. Restore the investment potential and marketability of flow-through shares 2. Create a completely new mechanism to encourage investment.

If the government is prepared to allow the junior mining sector to wither, it has another option — do nothing.

It is now widely known that the Prospectors and Developers Association of Canada has recommended a relaxation of the tax rules affecting the adjusted cost base (ACB) and cumulative net investment loss (CNIL) which pertain specifically to flow-through shares. The federal government, in the steps it has taken in the last few budgets, has effectively reduced all the alternatives to the point where adjusting the cost base of a flow-through share is quite simply the only method remaining that has the potential for returning this financing mechanism to some form of marketability.

In spite of broad support for the PDAC position by the industry and by provincial and territorial ministers of mines, the federal Department of Finance has rejected our recommendations on technical grounds. We could counter this reasoning with strong technical arguments of our own; however, we believe that the Department of Finance is entrenched in its position and extending such an interchange would not lead to any constructive results.

Thus the message from the federal government is that it has chosen the latter of the three options listed above; that is, to do nothing. And the reason that has been offered is that doing nothing is in keeping with the national priority of reducing the deficit. The PDAC strongly supports the decision to reduce the deficit and we agree that this should be a priority. But conducting this process in a way that seriously damages a major contributor to the nation’s revenue base can be compared to saving the money that should be spent on seeds for planting next year’s crop.

We hasten to remind you that for the balance of 1990, it is only the CEIP grandfathering provisions that are keeping the junior mining sector alive. In 1991, with no vehicle to provide incentives for Canadians to invest in exploration ventures, Canada is in great danger of losing its junior mining sector infrastructure.

The ministers of mines have reliable sources of information in their respective constituencies and will have accurately assessed the current situation for themselves. With the exception of a few “hot spots” of activity in British Columbia and Quebec, which for the most part involve advanced and development stage work, there is little or no grassroots exploration taking place.

The Eskay Creeks, Mount Milligans and Louvicourts can only happen as a result of exploration. Consider the long-term negative effects that prolonging the current situation will have on our mineral inventory and on maintaining our position in the global marketplace.

The industry very much appreciates initiatives, such as those taken by the Ontario government, in introducing regional programs to re-stimulate exploration. However, such initiatives are geographically limited in the context of a national industry. Regional initiatives, in the absence of a federal program, ultimately lead to a balkanization of the industry and an unfair competition between have and have-not provinces.

The PDAC has launched a major communication campaign to appeal to all provincial and federal MPs and mayors of mining communities to recognize the serious dilemma that we are currently facing. We know that the federal Minister of Energy, Mines and Resources and all his provincial and territorial colleagues are concerned about the rapidly declining levels of exploration across the country and the economic well-being of our mining-dependent communities. We ask you, as ministers, to exert your considerable collective influence and persuade our federal leaders that to do nothing would be folly.