Resource World Magazine

30 www.resourceworld.com j u n e / j u l y 2 0 1 4 F low-through: Anyone familiar with the mining exploration business in Canada will inevitably hear and see this term peppered throughout just about any discus- sion, press release or investor presentation dealing with capital financing in the junior exploration sector. Just what is flow-through financing and why does it play such a critical role in funding the junior mining exploration sec- tor in Canada? In short, it's a tax initiative introduced by the federal government in the early 1980s to enable resource exploration firms with little to no revenue or profit, but lots of potentially tax-deductible operat- ing expenses, to transfer (or 'flow') their unused deductions to individual investors willing to accept an incentive to take on the high risk of a junior exploration play. The idea behind the program is that it would help companies, in one of Canada's most important industries, raise the neces- sary capital – money that simply wouldn't be available otherwise – to carry out their mineral exploration activities and make a positive contribution to the national economy. Has it worked? Yes, if you consider that billions of dollars – including more than $2 billion over the past five years – that have been raised on the TSX through flow- through mining financings for projects that have gone on to produce vast quan- tities of gold, diamonds, copper, nickel, uranium and just about every other min- eral resource that gets dug out of Canada's cold, hard ground. At the same time, tens of thousands of jobs – both direct and indirect – have been created in cities, towns and remote com- munities across Canada… the churning of an economic engine that directs hundreds of millions of dollars back into government tax coffers. According to the Prospectors and Developers Association of Canada (PDAC), flow-through investment tax ben- efits played a key role in driving mineral exploration expenditures in Canada from approximately $300 million in the late 1990s to an estimated $2.8 billion in 2011 How doES IT worK? It's important to note that a flow-through share is not a special class of equity. It is simply a common share for which a for- mal agreement has been entered into to pass a firm's eligible exploration expense tax deductions on to an accredited inves- tor. Typically sold at a premium to market, flow-through shares generally have to be held by the investor for a period of four months before they can be sold. The key benefit to the investor is that the flow-through share investment is up to 100% deductible on their personal income taxes. However, when the shares are even- tually sold, capital gains tax must be paid on a zero cost base application, meaning the investor has to pay tax on the total sale price. However, even with this rule, tax- payers in the highest tax bracket stand to gain as much as 30% downside protection on the value of their investment. Sweetening the pot further, the flow- through investment tax incentive was given a major boost at the start of the millennium when the federal government decided to kick in a "temporary" 15% Mineral Exploration Tax Credit (METC) to further stimulate the junior mining explo- ration sector. Originally set to expire in 2004, the METC – or Super flow-through, as it is often called – has been renewed several times, most recently until March 2015. Owing to these tax incentives, flow-through investing can be an attrac- tive option for smartly positioned investors, even in relatively volatile mar- kets. However, the global swoon in mining equities over the past couple of years has taken a huge bite out of the flow-through investment channel in Canada. By some estimates, total capital investment lev- els were down by 50% or more through 2012 and 2013. So far, the situation has improved little in 2014. Given that approximately half of the 2,400 mining companies listed on the TSX and TSX Venture exchanges are junior exploration companies, a great deal of them have been feeling a serious capi- INVESTMENT The ins and outs of flow-through and flow-through share donation financing by David Bosworth It's important to note that a flow-through share is not a special class of equity. It is simply a common share for which a formal agreement has been entered into to pass a firm's eligible exploration expense tax deductions on to an accredited investor.

• Cover