Plight Of The Juniors

Having read Budget 2009 I am generally pleased with its proposals as far as they go and assuming they are implemented in a timely fashion. However, having been involved in the mining industry in Canada and elsewhere in the world for more than 40 years, I was disappointed in the lack of specific proposals directed at the Canadian mining industry, especially at the exploration stage.

The mining industry is one of the most significant industries in Canada and a large employer. Its projects have a very long gestation period and need to be nurtured at the early stages or they will never mature. We saw this in the post Bre-X period from which we had just emerged before the big meltdown this time. Let’s not get back into that mode.

Clearly, mature mining companies will benefit from some of the proposals in the 2009 Budget which are of general application such as accelerated capital cost allowance for certain equipment acquired since March 19, 2007, somewhat of a retroactive provision but primarily aimed at the manufacturing sector. However, these proposals do not assist the mineral exploration sector. Extension of the mineral exploration tax credit for another year is appreciated, but it was anticipated in any event.

Most mineral exploration is carried out by small public companies (the so-called “juniors”). Very few new deposits have been discovered by major mining companies. However, the majors do require a food chain of juniors so that the majors may prosper and grow by acquisition. In the capital market meltdown of 2008, especially in the last half of 2008, the junior exploration sector got devastated. This flattened the treasuries of most of the juniors

and evaporated the portfolios of a large portion of the investing public. It became virtually impossible for the juniors to raise “hard dollar” financing. Even the “flow through share” market shrunk drastically in 2008, in part because would-be investors were so devastated that they did not need or use the tax shelter.

I believe that a couple of simple revisions to the existing flow through share regime would be of great assistance to the junior mineral exploration sector and would come at a very modest cost to the Treasury.

These are:

• Proceeds of the issue of flow through shares can only be used to fund qualifying Canadian exploration expenditures (CEE). Currently, CEE does not include any allowance for payment of administrative costs. When the flow through regime was first introduced there was a 10% allowance for administrative costs. This should be reinstated, perhaps increased to up to 20%.

• Flow through funds can only be used prospectively, to fund CEE incurred after the date of the investment commitment. This created a hardship in 2008 because, in order to maintain mineral title, many companies went ahead and carried out qualifying exploration but were unable to raise the necessary funds to pay the costs when they were incurred because of the crash of

the capital markets. A temporary provision should be added to allow retroactive flow through share funding of costs incurred from January 1, 2008 until, say, March 31, 2011.

I believe these proposals would go a long way to bolstering the junior explorers. A number of quite worthwhile proposals were included in the Budget which could benefit the juniors such as programs for skills development in aboriginal communities, the effect of the proposed Community Adjustment Fund, the programs to stimulate northern development and programs for construction of roads, bridges and other transportation infrastructure, especially in northern locales.

However, skills development and transportation infrastructure will not be efficiently deployed if the juniors that create the economic opportunities fail to obtain adequate and effective funding.

These suggestions have been presented to the Ministry of Finance.