junior mining companies - canada

8/10/2019 Junior Mining Companies - Canada

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Canadas Natural Resources Now and for the Future

Flow-Through Share Financing for

Junior Mining CompaniesCanadas Experience

Robert J. ClarkNatural Resources Canada

November 2007


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Canadas Natural Resources Now and for the Future 2

Presentation Outline

1. What is a Flow-Through Share ?

2. Development of Flow-Through Shares

3. Key Factors in the Success of Flow-Through Shares

4. Analyzing the Effectiveness of Flow-Through Shares

5. International Interest in the Mechanism


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Simplified Definition of a Flow-Through Share:

! A Flow-Though Share is a type of common sharewhich allows a principal-business corporation

to transfer the tax deductions to investors, whocan apply them against their personal orcorporate income tax.

! A principal-business corporation is a

corporation involved in exploration, productionand processing of a minerals, or oil and gas; orin renewable energy and conservation activities.

1. What is a Flow-Through Share ?


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0

875.328

1750.657

2625.985

3501.314

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007i

ExplorationExpenditu

res($milloin)

Seniors Juniors MPI

Constant 2006

$ millions

ITCE15% tax credit

MEDA,33 1/3%

2. Development ofFlow-Through Shares

1981,proceedssubject tocapital gaintax

1985-1994,$100Klifetimecapital gainsexemption

1996,Look backrule

2001, capitalgaininclusionrate reducedto 50%

Otherdevelopments

:

CEIP30%

MPI

1971=100


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Canadas Share of WorldwideExploration

Pacific/SE Asia7.7%

United States9.8%

Rest of the World8.3%

Africa14.7%

Australia19.3%

Canada12.1%

Latin America28.1%

2007 Worldwide Exploration

Spending by Region

Source: Metals Economics Group

1999 Worldwide Exploration

Spending by Region

Latin America21.8%

Pacific and SE Asia4.0%

United States7.9%

Rest of World16.6%

Africa16.1%

Australia12.4%

Canada21.2%


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3. Key Factors in the Success of Flow-Through Shares


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Key Factors Canadas JuniorMining Companies

! Around 100 Senior mining companies (with one or moreproducing mines) ranging from:

! Large integrated global producers (e.g., Teck ComincoLimited) to;

! One mine companies (e.g., Tahera DiamondCorporation).

! Around 1100 Junior exploration/mining companies orprivate exploration/mining syndicates, with no financialinterest in a producing mine and no cash flow. Their assets

are exploration properties and they raise money by issuingshares.

! Placer miners/small-scale miners.



Mining Companies on SelectedStock Exchanges, 2006

0

375

750

1125

1500

Canada Australia United Kingdom South Africa

AIM-LSE NYSE-

AMEX

Notes: 1Discounting inter listings. As at December 31, 2006.Source: TSX Group based on information from AMEX, ASX, CDNX, JSE, LSE, NASDAQ, NYSE, TSX.

ASXJSE

TSXVenture

TSX

(Number of companies1)



Key Factors - Canadas Expertisein Mining Financing

! Canada is home to the TSX and TSX VentureStock Exchanges which together account for overapproximately 40% of the worlds equity financingfor exploration and mine development in 2006.

! Canada is home to over 200 financial and legalcompanies which provide specialist services tothe mining industry.

! Flow-Through Limited Partnerships have played asignificant role in raising financing for explorationand mining and provide a diversification to theinvestor.



Canadas Equity Capital Markets

Sources: Toronto Stock Exchange; Gamah International; Natural Resources Canada.

Equity Financing for Exploration and Mining Companies RaisedThrough Stock Exchanges Based in Selected Regions of the World

2006 = $31.7 B2000 = $3.2 B

US1.1%

Australia3.5%

Rest of World8.1%

Canada

44.3%

S. Africa4.9%

UK38.0%

China9.5%

US3.6%

Australia8.7%

Rest of World3.8%

Canada38.2%

S. Africa0.6%

UK35.7%


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!Investors receive a 100% income taxdeduction for Canadian Exploration Expenses.

! Since the corporate tax rate is lower than thetop personal tax rate, the tax deduction ismore valuable in the hands of the individual.

! On the sale of the shares, only 50% of realizedcapital gains are included in income.

! For surface exploration, the investor may beeligible for the federal 15% tax credit, andcomplementary provincial tax credits (BC 20%,Manitoba 10% and Ontario 5%) or in Quebecan additional 50% deduction from taxableincome.

Key Factors - Tax Advantagesfor Investors



Tax Advantages by Province/Territory

$0

$250.0000000000000512$500.0000000000001024

$750.0000000000001536

$1,000.0000000000002048

Qu Man NLD PEINB NWT NUV

$519$506$490$484$476$451$447$440$437$433$410$383$284

t of a $1,000 Investment in Flow-Through Shares

Provinces and Territories

Federal Tax Reduction Federal Tax CreditProv/Terr Tax Reduction Prov/Terr Tax CreditNet Cost


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4. Analyzing the Effectiveness of Flow-Through Shares


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Analysis available on the effectiveness offlow-through shares:

! Flow-Through Shares An Evaluation Report Finance Canada 1994.

! Queens University Studies on Costs ofExploration for Gold (1987,1989 and 1992).

! Reports on taxation issues by theIntergovernmental Working Group on the MineralIndustry (2002 to 2006).

! Studies of Mineral Discoveries by NaturalResources Canada and the Prospectors andDevelopers Association of Canada (PDAC).

Effectiveness ofFlow-Through Shares


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Criteria Used in AnalyzingEffectiveness

! Relevance Whether Programs MeetExpectations of Stakeholders

! Effectiveness Success

! Cost Effectiveness

! Mineral Discoveries

! Cost of Mineral Discoveries

! Ease of Administration and Compliance


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0

275

550

825

1100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006(p) 2007(i)

Off-Mine-Site Exploration Work Phase Expenditures by Type of Company, 1997-2007

($ millions)

Junior Companies Senior Companies

Relevance - Timeliness

Investment Tax

Credit for Exploration


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Effectiveness - Success

Pros! Accounts for a significant portion of Canadian

mineral exploration financing (up to 60%) whenadd-on credits are available and other financingis difficult to obtain.

! Benefits the economy of Canada, particularly inOntario, British Columbia, Qubec, Nunavut andthe Northwest Territories.

Cons

! Exploration costs were inflated before 1996because of the short timeframe to complete thework.


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BritishColumbi

a$425 M Alberta

$15 M

Manitoba$103 M

Ontario$519 M

Quebec

$385 M

Northwest

Territories$153 M

Newfoundland andLabrador$160 M

NewBrunswick

$31 M

NovaScotia$27 M

Saskatchewan$277 M

Yukon

$144 M Nunavut$267 M

2007 Total = $2506 Million

Source: Natural Resources Canada, from the federal-provincial-territorial survey of Mineral Exploration, Deposit Appraisal andMine Complex Development Expenditures. Based on revised company spending intentions compiled in August 2007 (totalscould vary slightly as data are in final validation stage).

Effectiveness RegionalDistribution


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Note: Includes on-mine-site plus off-mine-site activities for field work and overhead

0

500

1,000

1,500

2,000

1975 1979 1983 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006p

Exploration Expenditures by Mineral Commodity Sought (2006$)

$million

Metals PreciousMetals BaseMetals UraniumDiamondsOther

Effectiveness CommodityEmphasis


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Cost Effectiveness toGovernment

! For period 1987 1991:

! Federal tax expenditures = $462.9M;

! Incremental Renunciations = $1,205.6M

(49% of actual);

! Incremental Renunciations )Federal TaxExpenditures = 2.6

! That is one dollar of tax expenditure during thisperiod resulted in $2.6 of new (incremental)

exploration spending (from Finance Canadareport 1994).

! For the period 2000 2007, the multiplierappears to be of a similar magnitude.


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Cost EffectivenessTo The Investor

1986 1990! Investment performance was better for direct

investment in a mining corporation, than in a limitedpartnership.

! The early investors got equity in better projects than

later investors.

! The risk nature of exploration meant that the usualnegative return from investment had to be offset bysignificant tax incentives.

2000 2007! Private placements reducing sharing of premium.

! Lower levels of investment and proportionately moregood projects available.


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Cost EffectivenessTo The Mining Company

! Finance Canada concluded that FTS providedsignificant incentive for exploration by non-taxpaying companies (junior companies

without production).

! Fully taxpaying firms would not wish to passtheir tax deductions to an investor.


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Cost Effectiveness to thePublic - Mineral Discoveries

! Studies by Queens University indicated that the cost ofdiscovering an ounce of gold rose rapidly in the late 1980s,however, Canadas gold production doubled from 5% to10% of the global share by 1990.

! Prominent discoveries attributed in part to flow-through

shares by the Prospectors and Developers Association ofCanada:

! Ekati Diamond Mine Charles Fipke NWT

! Louvicourt Base Metal Mine Aur Resources Qubec

! Lindsley Base Metal Mine Falconbridge Ontario

! Eskay Creek Gold Mine Prime Resources BC

! Jericho Diamond Mine Tahera- Nunavut

! Ni Rim South - Falconbridge Ontario.


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Ease of Administration

Pros

! Tax based programs are administered throughexisting government structures.

! The federal, and most provincial governments, have

harmonized their rules and about 11 federalemployees handle most of the administration.

Cons

! The modification of tax legislation and design of forms

and administrative procedures is required to ensurethat only eligible expenses are claimed.

! Rules for the tax incentives are complex and expensesand renunciations require precise tracking.


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Bottom Line

! The principal beneficiaries of flow-through shares arejunior mining companies who can obtain funds forexploration, partly in exchange for tax deductions thatthey would not be able to use.

! Exploration is restricted to Canada, and new minesprovide economic benefits to Canada and particularlyto northern and rural communities.

!

Investors in flow-through shares reduce their incometax and have shares of variable value in a miningcompany or a mutual fund.

! The direct costs to the government are modest.


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5. International Interest

! Australia has had forms of flow-through sharesat different times. Since 2001, industry and stategovernments have advocated the re-introductionof the mechanism. Information has beenprovided to the federal and state governments.

! South Africa has studied the mechanism forseveral years; a CanadaSouth AfricaGovernment Roundtable was held in Pretoria inFebruary 2003. Currently, a joint working groupheaded by the National Treasury, is evaluatingthe need for and the potential scope of flow-through shares in South Africa.

! Chile has obtained information on themechanism.

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