Canada eyeing record year for flow-through

Vancouver — Eyeing another record-breaking year, Canadian mining companies are facing pressure to fund their exploration activities by issuing flow-through shares to investors seeking generous tax shelters, according to consultant Gamah International.

Statistics compiled by the Halifax, N.S.-based Metals Economics Group show that 2006 is shaping up to be a record year for flow-through share financings, with the amount of money raised hitting $600 million by the end of October.

At the current pace, money raised for mineral exploration in Canada from the sale of flow-through shares is expected to easily exceed the $600 million raised in all of 2005, which was itself a record year for financings.

Flow-through shares are investments that allow tax deductions exploration firms would normally incur as income-generating companies, to flow through to investors.

Investors who purchase “super” flow-through shares in qualifying junior mining companies may be eligible for federal and provincial tax credits of up to 100% of the investment, plus another 15%.

Analysts attribute the increase in the money being raised — from $60 million in 1999 — to hot commodity prices, and the soaring price of uranium, which is driving exploration money to regions like Saskatchewan’s Athabasca basin, home of about 30% of the world’s uranium production.

But according to Toronto-based consultant Gamah International, which tracks financings in the global mining sector, the investment firms themselves are helping to set the record pace by putting pressure on mining companies to issue flow-through shares to meet the demands of high net worth clients.

Some companies are even being criticized for refusing to issue flow-through shares to satisfy the needs of investment firms.

“There is certainly pressure at the end of the year to do flow-through,” says David Moore, CEO of Serengeti Resources (SIR-V, SGRNF-O), a Vancouver exploration firm.

“That’s the time of year when everyone seems to be in a mad scramble to ease their tax burden,” he adds.

Andrew Muir, an investment adviser with Canaccord Capital, attributes the surge in flow-through financings to the fact that they are more marketable, especially if the companies don’t seek to offer the shares at a steep premium to the prevailing market price.

“People figure they can get a tax benefit as well as a good (share price) appreciation,” Muir says.

Mark Lee, a spokesman for Vancouver-based Sultan Minerals (SUL-V, SLMLF-O), agrees that investors prefer flow-through shares over non-flow through or regular shares.

“There is no shortage of people wanting flow-through shares when it comes to doing private placements,” he says.

Due to the tax benefit, investors can effectively pick up shares priced at 20 for as little as 13, Lee explains.

However, he says the impact on the issuer can be negative, because some investors tend to sell their shares as quickly as they are permitted to do so, driving the price of the stock downwards.

“We definitely prefer shareholders who are in for the long term,” Lee says.

Meanwhile, Muir estimates that at least 50% of the amounts being raised in flow-through financings is earmarked for uranium exploration in Canada.

He believes as many as 150 Canadian stock exchange-listed companies are looking for uranium.

Among them is Pitchstone Exploration (PXP-V, PEXPF-O), which recently raised $4.2 million from the sale of flow-through shares. Pitchstone spokesman Dan Barnholden says about 75% of that amount will be spent exploring for uranium in the Athabasca basin.

“There is a real exploration renaissance going on in Canada and it is being driven by flow-through,” he says.