Flow-through funding off by 75% this year

According to recent figures compiled by the PDAC, total funds raised by flow-through shares slid to a low of $125 million in the first half of the year, compared with $480 million raised in the same period a year ago.

New tax rules, lower gold prices, and the persistent weakness of equity markets have combined to make the once popular tax shelter scheme much less attractive to investors.

The resulting decline in available financing has staggered many junior mining companies, which up until recently had been the most aggressive and entrepreneurial explorers in the country. That vitality was based largely on easy access to flow-through funding.

But sources now say as little as $200 million in flow-through dollars will be available to Canadian mining companies this year, down nearly 80% from the $850 million raised last year. In 1987, some $950 million was raised through the popular tax shelter and incentive scheme.

It is estimated that flow-through share funding accounted for almost 80% of the total $1.1 billion spent on mineral exploration in Canada during 1988.

Flow-through financing virtually kept mineral exploration alive during a tough period for most major mining companies when metal prices were at low levels.

In Canada, total exploration expenditures over a 6-year period between 1983 and 1988 amounted to about $4.8 billion, nearly $3 billion of which was attributed to flow- through share financing and the resulting activity of junior mining companies.

Industry sources say the current decline in junior activity will have serious consequences not only to the vitality of the Canadian exploration and mining industry, but also to the economic well-being of numerous resource-based communities across the country. Sliding gold prices and depressed share prices for many junior firms haven’t helped the perform ance of the big flow-through funds either. They are receiving a cool reception this year from cautious investors.

Over-all, Canadian exploration expenditures in 1989 could be less than $700 million, estimates Jean- Guy Masse, president of CMP Funds Management, one of the more successful flow-through funds.

CMP raised only $80 million in the first half of 1989 and is planning a second offering later this year which is expected to net about $50-$100 million. Masse estimates total flow-through financing will range between $200-$250 million in 1989, or roughly a quarter of last year’s level.

Shifting some of its focus away from gold, CMP is now investing only about 60% of its portfolio in gold shares with the balance in base metals, and about 12% in oil and gas companies.

The big funds that package flow- through offerings in mutual funds are now focusing on more conservative, higher quality companies with larger market capitalizations.

Midland Doherty Ltd. of Hamilton, Ont., has been keeping track of how the various flow-through funds have performed during the past three years. The broker compiles a monthly “flow-through fund comparison chart” to help investors track the performance of their flow-through shares.

“Nobody has kept track of how these funds have performed,” says Midland Doherty’s Grant Gingrich.

The firm’s compilation reveals that a bleak performance has been turned in by most of the big funds since 1986. After-tax returns for many of the funds, based on current values, are negative. Only a few, such as CMP and MRF, have yielded positive after-tax returns.

But though flow-through funded exploration has been on the decline, spending by the major mining companies appears to be on the rise.

Most senior mining companies have become cash-rich again, thanks largely to a boom year of record profits. Many are plowing money back into exploration in a bid to replace the country’s dwindling reserves of base metals.

According to Energy, Mines and Resources Canada, a progressive decline in the annual output of copper, lead and zinc from Canadian mines will begin before 1995 unless substantial new discoveries are made very soon.

Increased major company spending could serve to offset some of the slack left by declining flow- through funded junior activity, but the urgency to find new deposits remains.

A recent survey of planned spending by senior mining companies shows they are busier than ever on the exploration front, and will likely spend about $650 million exploring for new mineral deposits in Canada this year. Flow-through fund comparison 1988 Funds After-tax return MRF 1988 II 44% CMP 1988 III 30% CMP 1988 II 1% NIM Res. 1988 0% CMP 1988 –4% NIM 1988 –11% MVP 1988 –27% Mintax 1988 I –39% TAP IV 1988 –71%

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