Reaction mainly favorable to flow- through successor

Reaction to the federal government’s new resource exploration incentive, or grant scheme which will replace flow-through funding runs from “cautious optimism” to positive, The Northern Miner found in questioning a number of individuals and groups involved in the mining industry.

Changes in flow-through financing for exploration activity have been a source of heated discussion since it became known they formed part of Finance Minister Michael Wilson’s tax-reform package. A lobbying group, the Save Flow- Through Committee, sprang up in Kirkland Lake, Ont., in an effort to persuade Ottawa not to diminish exploration financing.

Flow-through as it currently stands allows an investor a tax writeoff of $1.33 for each $1 spent on exploration in Canada. Proposed by Ottawa was reducing the tax writeoff to $1.16 at the end of June, 1988, and to $1 (a dollar-for-dollar deduction) at the end of 1989.

Now, Ottawa is proposing reducing the $1.33 tax writeoff to $1 for individual investors on Jan 1, 1989, and implementing a new Canadian Exploration Incentive Program (CEIP), also on Jan 1, 1989. (For corporations, the tax writeoff would fall to $1.16 on Jan 1, 1989, and to $1 on Jan 1, 1990.) Under CEIP, mining firms will be able to claim 30% of grass-roots exploration costs up to $10 million per year. Extension welcomed

While welcoming the extension of the $1.33 tax writeoff to the end of the current year, the Prospectors and Developers Association of Canada (PDAC) says it views CEIP “with cautious optimism.” The PDAC says the new program is designed to complement flow- through financing and, on the basis of preliminary calculations, thinks CEIP should provide an incentive roughly equal to the $1.33 tax writeoff under current tax regulations.

The CEIP rate of 30% will be guaranteed for two years, until the end of 1990, after which time the rate may be adjusted up or down, according to market conditions.

The new program could be developed into a reasonable alternative, the PDAC says, able to sustain “the current level of economic activity which has been so beneficial to resource-based communities across Canada.”

It is estimated that in 1987 almost $1 billion was raised in flow-through funds across the country. The paring back of flow-through by Ottawa, combined with the difficulty in raising funds through equity financings since the October, 1987, stock market collapse, raised fears that grass-roots exploration by junior mining companies would all but dry up.

The president of the Quebec Prospectors Association, Regis Labeaume, said his group is pleased with the new proposal. “We think the investors will come back,” he said. An estimated $500 million was spent last year on exploration in Quebec, mostly in the province’s northwest.

“What’s important is that you give a certain stability to the industry,” said Labeaume, who co-chaired the Save Flow-Through Committee. Market climate

Stock broker Brian Davidson of Prudential-Bache in Toronto said that in general, CEIP should help complete some of the projects currently under way. He added that the new program is tempered by the current low prices of stocks, the result of a “dull gold price” and the October market collapse.

Davidson also said the market seems to be suffering from a case of “flow-through hangover,” in which shares from flow-through financings of the past year or two have started to make their presence felt.

According to Fenton Scott of La Fosse Platinum (TSE), a junior firm active in the Labrador Trough area of Quebec and which raised $9.1 million in flow-through funds in 1987, the best part of CEIP is the extension of the $1.33 tax writeoff to the end of this year. “It means we don’t have to fire the students at the end of June,” he said.

Scott said there has been minimal misuse of flow-through funds. On a cost-per-orebody basis, the 5-year period between 1982 and 1987 shows superior results when compared with any previous such period, he said. Positive move

Toronto mining analyst Bruce Reid of McNeil, Mantha sees the new program as a positive move for mining firms which should now be able to carry on with their exploration programs provided they can raise money in the equity markets (which, he said, is not so easy under current conditions).

Another mining analyst, Ron Coll of McLean McCarthy, said his preliminary assessment is that CEIP “is every bit as good, if not better” than the current program. While calling the new proposal positive, he said CEIP would appear to allow Ottawa more control in starting up and closing down its exploration incentive program.

Happy that Ottawa has come up with an alternate proposal but willing to give CEIP only guarded approval is Eveline Kasner of Kirkland Lake, who co-chaired the Save Flow-Through Committee. “There are a lot of things that look great on paper but until you start working with them you don’t know the benefits,” she said.

Kasner and her committee members recently took their message across the country. What the committee was asking Ottawa to do, Kasner said, was to make sure any new program would be attractive to investors so that funds for exploration would continue to flow.

The committee raised about $83,000 through contributions, but according to Kasner, who says she received no remuneration other than for travel expenses, it has a deficit of about $25,000.