The tax credits produced by “super” flow-through shares appear to have had a positive impact on the mineral exploration industry but still fall short of the expectations of the Prospectors & Developers Association of Canada (PDAC). The association is therefore lobbying the federal government for enhancements to the program.
The latest figures show that $160 million was raised in 2001 — 50% more than was raised in 2000. However, former finance minister Paul Martin is reported to have told a group of explorationists in Timmins, Ont., that the federal government had budgeted $300 million for flow-through share tax deferment in 2001. He expressed concern that the sector had not recovered as quickly as expected.
“Is the program working? Yes,” says Tony Andrews, executive director of the PDAC. “Super flow-through financings have arrested the decline in junior company expenditures at the grassroots stage.”
He adds, however, that the industry is short of the goals the PDAC had set. Assessing 2001, PDAC issues director David Comba says the most obvious change from the previously tax-enhanced boom years of 1986 and 1987 is the failure to form partnerships with fund companies to participate in the new program.
“Only one significant fund financed mine exploration last year, and that was [Dundee Wealth Management’s] CMP fund,” Comba says. “As the only significant player, they were able to cherry-pick whom they financed, with a preference for operating companies.”
William McGuinty, industry liaison geologist for the Ontario Geological Survey, has compiled comprehensive statistics on junior company financings. He reports that flow-through financings have outnumbered other equity financings by almost two-to-one since the announcement of the tax credit program in late 2000.
His statistics to Dec. 31, 2001, show that $69.3 million was raised for Ontario exploration work by 79 companies but that $26.9 million, or 30%, was raised by just five companies, and of those five, two are operating companies.
The remaining 74 companies raised between $15,000 and $2 million, with an average financing of $574,000.
“This implies that the exploration projects were relatively small and are being financed by private placements rather than prospectus-type financings,” says Comba. “We would interpret this to reflect the high cost of doing multi-jurisdictional prospectus-type financings in Canada.”
In order to make the super flow-through program even more attractive to investors, the PDAC is lobbying Ottawa to enhance the program. Andrews, Comba, PDAC director Anne Slivitzky, and Shari Gardiner, president of the British Columbia & Yukon Chamber of Mines, have pushed for several initiatives.
In early June, the PDAC, the Association des prospecteurs du Qubec, and the B.C. & Yukon Chamber of Mines wrote to Finance Minister John Manley asking for four minor changes to the super flow-through share program.
They are recommending that the government extend the buying period for the purchase of super flow-through shares from Dec. 31 to the end of February, in order to coincide with the deadline for registered retirement savings plans. They also want to extend eligibility for purchasing the shares to bona fide mining companies.
Furthermore, the PDAC suggests that 15% of the money raised be eligible for “hard dollar” financing costs, such as prospectuses, offering memorandums and broker sponsorships.
Finally, the letter suggests extending the spending period in the final year of the program to Dec. 31, 2004, from Dec. 31, 2003. It points out that one of the major problems of the previous Mineral Exploration Depletion Allowance (MEDA) program (in effect from 1983 to 1988) was the requirement that the money be spent shortly after it was raised.
The government subsequently eliminated this requirement by extending the spending period to the end of the following year.
— The preceding is an excerpt from PDAC in Brief, a quarterly newsletter published by the Prospectors & Developers Association of Canada.
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