Junior Mining Companies - Canada
Transcript of 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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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.
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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)
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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.
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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
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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.