Exploration ’88 THE STATUS OF FLOW-THROUGH

It looks very much like the flow-through gravy train is making its last whistle stop. Last year, $1 billion was raised through flow-through share financings for grassroots and more advanced exploration projects. That figure might not be an apppropriate measure by which to gauge the current status of flow-through financings. It was bloated by a surging bull market and a flood of money from investors who were anticipating the changes to be wrought by federal tax reform. The $600 million raised in 1986 is a more accurate barometer. But even by that measure, it does not look good. Based on early returns so far this year, the industry won’t even come close to matching the 1986 level of financings (though exploration, particularly in the first half of this year, should be strong because some of the 1987 funding won’t be spent until this year). More ominously for the very junior players, only the senior projects are attracting flow-through capital. For verification, here’s word from the trenches:

John Larche, president of the Prospectors and Developers Association of Canada, says the outlook for flow- through funds does not look encouraging this year. “The numbers (of flow-through dollars) have dropped, possibly by 60%,” he tells The Northern Miner Magazine. Don Graham of Mintax Placement agrees, adding that “with the tightness of funding and shrinkage of premium (on flow- through shares) only the middle portion of the industry (i.e. those companies with advanced exploration projects) will benefit.”

Last year, the nim Limited Partnerships was able to raise $300 million in flow-through funds. This year, only about one-third of that amount will be placed, says Dennis Milburn, an executive with nim.

Flow-through financings for the mining industry first came into broad use in 1983 when individual investors were allowed to write off against taxes 100% of their investment. This was known as the Canadian Exploration Expense, or cee. Another 33 1/3% writeoff was tacked on to that initial 100% writeoff under a program called the Mining Exploration Depletion Allowance, or “earned depletion” as it’s commonly known. The new rules, coming into force under the federal government’s broader tax reform proposals, will cut the earned depletion to 16 2/3% by July of this year and eliminate it entirely by Dec 31, 1989. A further complication is the government’s reduction of the former $500,000 lifetime capital gains exemption to $100,000 and the introduction of investment tax loss rules, a new wrinkle that in effect makes the normally risky mining investments even less attractive.

The mining industry is fighting back, lobbying the federal government to either reverse its plans or at least soften the blow once the earned depletion is completely done away with. The Ontario government is also making noises about maybe changing the provincial tax rules or introducing new ones to help ease the industry into the new post-flow-through world. Nothing official has come from either branch of government as we go to press.