Rough ride ahead for flow-through financings

“Disaster,” Barry Tyler of the MVP Partnership told The Northern Miner when asked about the prospects for raising money through an exploration fund this year.

MVP raised $25.8 million for mining exploration across Canada last year, well down from the 1987 total of $85 million. The partnership’s 1988 total, Tyler said, does not properly reflect the negative climate for that year, the issue having closed at the end of 1987 or early in 1988. An offering late in 1988 was pulled from the market, he said. Two main reasons are given for the negative investment climate making it tough on partnership funds, which through exploration- funding agreements with junior- mining firms provide investors with flow-through-share tax advantages: the stock market collapse of October, 1987, and the change in the flow-through program by the federal government.

It is estimated $1.3 billion was spent on mining exploration across Canada in 1987, with flow-through funds accounting for $1.1-$1.2 billion of that total. In 1988, exploration expenses totalled an estimated $1.15 billion, with flow-through accounting for about $900 million. Market fallout

Repercussions from the 1987 market collapse continue to be felt by junior mining issues, whose share prices dropped considerably and, with the odd exception, generally spent most, if not all, of 1988 in the doldrums.

In Ottawa, the federal government has chosen to replace an earned depletion allowance scheme which provided investors in flow- through shares with an additional 33.3% tax write-off, with a new grant plan known as the Canadian Exploration Incentive Program (CEIP).

While more than a few analysts have commented that grass-roots exploration should not be any worse off under CEIP, the investment community seems to have taken a “wait and see” attitude as the government unveils its new regulations.

Under current conditions, the larger funds would be thought to have the best chance of survival. The CMP partnership, for example, raised $300 million across Canada last year, bringing the total amount of proceeds raised by the partnership since 1984 to $1 billion.

CMP’s Robert Buchan would not give an estimate as to how much money his group might raise in 1989; he is not overly optimistic, however. “There will be less money,” he volunteered, although he added it is too early in the year to be making projections because flow-through investment is market-driven. New fund uncertain

In Quebec, the Sofimines partnership, which raised about $23 million in 1987 for mining exploration, did not put together a fund in 1988. Roger Charland of Sofimines, commenting that the market “seems to be a little slow,” was uncertain if a fund would be organized for this year.

One of the smaller partnerships, Mintax, was reported to have raised $16.3 million last year, down from $20 million in 1987. It remains to be seen what Mintax’s plans are for this year.

In order to sell flow-through to the investor, new angles may have to be incorporated into the funds. MVP’s Tyler said his partnership is considering offering a “tax-assisted investment” combining common shares and flow-through shares in a company or companies.

Junior-mining company La Fosse Platinum (TSE), active on a number of Quebec properties, spent about $7.5 million on exploration work last year and, according to secretary Fenton Scott, is hoping to be able to raise a similar amount in 1989. Should his company fail to reach that level of funding, Scott said consideration will have to be given to reducing planned expenditures.

“Junior mining will continue with or without flow-through; flow- through just made it easier,” said Scott, who has lived through the ups and downs of life in the mining community. Exploration expenditures

One of the provinces to have benefited most by flow-through is Quebec. It is estimated flow-through exploration worth $130 million was carried on inside the province last year, well down from the $565 million spent in 1987. (Quebec collects its own provincial taxes, thus providing access to such data.) The Quebec Prospectors Association is confident $150-$200 million can be raised this year, and is hopeful exploration funding will reach as h igh as $250 million.

Responding to the concerns of the mining industry, the Quebec government this year decided to allow investors in junior mining companies an additional tax write- off of 33.3% for money spent on underground work and 66.6% for money spent on surface exploration work. (Investors in all 10 provinces continue to be able to claim a basic $1 deduction for each $1 invested in flow-through financing for mining exploration.)

A fact sheet prepared by the Prospectors and Developers Association of Canada (PDAC) states $3 billion worth of exploration work was financed by flow-through between 1983 and 1988, with 80% of the total spent during the last three years of that period. Sixty new mines have come into production or are being prepared for production, and as flow-through expenditures continue, more new mines are expected to open.

The $3 billion in expenditures has yielded 63,000 person-years of exploration employment. Sixty new mines will produce 6,000 jobs (assuming an average 15-year mine lifespan) and in addition, the construction of these mines will generate 5,600 person-years of work and capital spending of $1.5 billion.

The PDAC estimates that in 1988, flow-through created 25,000 jobs which would not have existed without the investment scheme. In the northern, resource-based communities in particular, jobs related to the mining sector have helped lower unemployment levels substantially.

Besides the new mines, flow- through has led to the discovery of an additional 160 prospects for future production. The cost of a gold deposit discovery, the PDAC calculates, is about $33(C) per oz, a profitable investment at today’s prices.

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