Crescat knocks Canada’s flow-through funds as ‘blight’ on juniors

Canada’s flow-through share tax incentives, beloved by many in the mining industry, are facing sharp criticism from Denver-based Crescat Capital, one of the junior market’s biggest specialist hedge funds.

That cash often goes into weak projects, then exits as soon as it can, lowering the stock’s value, according to Crescat founder Kevin Smith. The model rewards churn over value creation, props up “lifestyle companies” and often steers capital away from building proven projects to hit-or-miss exploration.

“It’s just a tax game,” Smith told The Northern Miner this week. “They will blow out the stock after four months and a day, as soon as that hold period is up, and it just destroys the whole capital structure.”

Ron Bernbaum, founder of Toronto-based charity flow-through boutique firm PearTree Financial, says that criticism is outdated. It fits an old retail market, not the institutional-driven model that now supports most financing.

Ottawa last year proposed extending the 15% Mineral Exploration Tax Credit for investors in flow-through shares to March 31, 2027. Finance Canada data show the credit helped about 200 companies raise equity from more than 10,100 investors in 2022, while the Prospectors and Developers Association of Canada said flow-through financing supplies nearly 70% of more than C$7.5 billion raised over the past decade on Canadian exchanges for exploration.

Reinventing the market

Armed with a favourable court ruling in November 2007, PearTree stripped out the tax benefit from the stock itself. Traditional flow-through ties the tax break and the stock to the same buyer, while charity flow-through splits them, with the tax-driven purchaser exiting and a back-end investor taking the equity.

PearTree changed the game, making flow-through less appealing to short-term tax sellers and attracting long-term investors, said Bernbaum, whose firm funnels around $500 million (US$TK million) a year for resource exploration and mine development.

Crescat, which manages more than $500 million (C$692 million), including about $300 million in its precious-metals fund, will join a charity flow-through financing as the real buyer on the back end, Smith said.

Measuring core at Sitka Gold’s RC project in the Yukon. Credit: Colin McClelland

Bernbaum said that format now accounts for about 90% of the flow-through market, leaving the old funds as a small remnant. Recent deals by Gold X2 (TSXV: AUXX; US-OTC: GSHRF) and PMET Resources (TSX: PMET; US-OTC: PMETF) raised a combined C$158.3 million through charity flow-through structures priced at a premium for issuers while placing the stock with institutional back-end buyers, not short-term tax sellers, the PearTree founder said.

The structure, which puts as much as C$2 in the ground for every C$1 invested by global institutions and family offices, cuts dilution, lowers investors’ net share cost and keeps the spending tied to eligible work in the ground, he said.

Pressing concern

The bigger financing threat now is Ottawa’s alternative minimum tax (AMT), not flow-through itself, Bernbaum said.

The 2024 AMT changes stripped more than C$400 million of early-stage exploration capital from the market in 2025, he said. Budget 2024 describes AMT as a parallel tax calculation that allows fewer credits, deductions and exemptions than the ordinary personal tax system.

The firm argues the 2024 AMT changes effectively left flow-through investors facing a higher tax burden, even after Ottawa restored the capital gains inclusion rate to 50%, because AMT still taxes gains at an effective rate above that level and adds back deductions such as Canadian Exploration Expenses.

PearTree is running a public petition urging Ottawa to roll back the AMT changes and restore the tax efficiency of flow-through financing for exploration and charitable giving, Bernbaum said.

Junior M&A

Majors have increasingly shied away from conducting their own exploration, leaving them short of new reserves and on the M&A hunt to replenish ore Smith said. He expects acquisition activity to heat up for juniors soon.

“I do think there is a lot of value and a lot more room to run for the juniors,” he said. “The only means majors have to find the new tier-one level projects that they’re going to develop into mines is they’re going to have to buy them from the juniors.”

Crescat is leaning into that view across precious and base metals. It is investing in Tectonic Metals’ (TSXV: TECT; US-OTC: TETOF) Flat gold project in Alaska, Sitka Gold’s (TSX-V: SIG; US-OTC: SITKF) RC Gold in Yukon and Eloro Resources’ (TSX: ELO; US-OTC: ELRRF) Iska Iska in Bolivia.

Crescat’s hedge-fund book is not just long miners; its macro and long-short funds have also bet against overcrowded U.S. large-cap indices and megacap tech, which the firm argues now sit on stretched valuations and weakening free-cash-flow outlooks as AI capital spending surges.

It also supports Bell Copper’s (TSXV: BCU; US-OTC: BCUFF) Big Sandy in Arizona, BCM Resources’ (TSXV: B) Thompson Knolls in Utah and Mogotes Metals’ (TSXV: MOG) Filo Sur in Argentina.

“I’m a believer in the demand-for-copper story,” Smith said. ”With AI and data centres and defence and onshoring and manufacturing in the U.S. and electric vehicles, electrification, et cetera.”