Declining commodity prices have taken their toll on large mining companies globally and, while investment in small-scale or junior mining operations could provide a silver lining for the industry, some junior miners and law practitioners believe that the uncertainty regarding South Africa’s tax regime is halting investment opportunities.

Suggestions to implement a flow-through share scheme have given various stakeholders hope, as similar schemes have boosted the performance of junior miners in Canada and, most recently, in Australia.

However, some government officials believe that the existing venture capital company (VCC) scheme could be tweaked to benefit junior miners in South Africa instead of implementing an entire new system.

Junior Struggle
Former Mineral Resources Minister Ngoako Ramatlhodi said in July, during a small-scale mining conference held in Kimberley, in the Northern Cape, that small-scale mining could help the mining industry, which was struggling because of falling commodity prices significantly affecting large-scale operations.

A growing concern in the sector, which was expressed during the conference, was the high mining costs that small-scale miners had to deal with.

A study on various junior miners in South Africa, conducted by platinum producer Wesizwe Platinum projects executive Jacob Mothomogolo on the development of innovation funding mechanisms for mining start-ups in South Africa, found that mining projects are capital intensive, with high technical and economic risks.

Subsequently, mining entrepreneurs have had to deal with these challenges when trying to raise seed capital.

Another impediment to mining investment in South Africa is the country’s status as a developing economy, where the standards of living and limited gross domestic product and budget numbers, as well as the sociopolitical environment, determine the size of investments, particularly in mining ventures, according to Mothomogolo’s findings.

Having entered into trade relations to open up its domestic market and fast-track growth initiatives through bilateral agreements, this country, along with its partner countries in the Brics bloc of Brazil, Russia, India, China and South Africa, has been revising its mineral resource development policies to make them more investor friendly.

During the Junior Indaba, which was held in Johannesburg in June, mining representatives agreed that investment was a balance between risk and return, and that higher-quality teams with higher-quality projects attracted investor attention.

Start-up company Bakgatla-Ba-Kgafela Investment Holdings CEO Noah Greenhill said during the event that the JSE was well regulated and had a good set of rules, but the challenge for junior miners was attracting investors to fund exploration.

“The retail investor in Canada is happy to take the risk; however, the depth in South Africa’s retail and hedge fund is weak. We don’t see the risky capital chasing the junior sector [as is the case in] London and Toronto. In Canada, there is a significant listing of companies with South African assets – it’s not right. We need to introduce flow-through shares with tax incentives for the junior sector. We are lagging behind . . . watching the game instead of playing the game,” Greenhill said.

Law firm ENSafrica director Otsile Matlou concurred with delegates that the development of future mines depended on exploration. He said the current regulatory framework, in-country beneficiation and the Mineral and Petroleum Resources Development Act – which has been referred back to Parliament for review – were designed for existing mines, with little or no regard for junior miners.

“If you dispose of a share of a prospecting company, you might . . . need Ministerial consent . . . Prospecting companies will end up not doing the work they are meant to be doing. There is no distinction between someone looking for minerals and one who has a little mine, or even a major [miner], because, currently, they all are subjected to the same legislation,” he said.

Flow-Through Share Scheme
The scheme can be defined as a significant source of financing, which permits the initial buyer to claim a deduction up to the amount of the share subscription price against any income in respect of resource expenses renounced by a publicly traded issuer.

Under the Canadian Income Tax Act, there are two types of flow-through share scheme investments – the regular flow-through share, which entails a 100% deduction write-off for exploration expenses, and the super flow-through share, which is similar to the regular one, but adds an additional 15% federal tax credit for grassroots exploration, as well as provincial and territorial deductions and tax credits.

Mining Weekly reported in June that flow-through share deals in Canada accounted for 72% of all financing raised for exploration-stage activities from 2012 to 2014, highlighting its importance as an incentive to attract capital for the riskiest stage of the mining cycle.

Canadia-based flow-through share financier PearTree Securities president Norman Brownstein further told Mining Weekly that using flow-through shares as a share of total capital raised specifically for exploration tended to peak during times of financial difficulty.

Impressed by the investment that Canada has been able to attract through the flow-through scheme, KPMG corporate tax head Muhammad Saloojee said at a breakfast briefing at the Joburg Indaba, earlier this month, that, if South Africa could adopt the Canadian flow-through share scheme, it would present an opportunity for government to incentivise prospecting in the country for investors. It would also be the first step in a new cradle-to-grave approach.

He mentioned that adopting such a scheme would give rise to new mines, which would be fully functional by the time the sector booms again.

However, under the current VCC scheme used in South Africa, if an exploration venture in the country fails, the venture capital goes into a dead-end because investors cannot claim for any tax deductions on this capital tax deduction. Potential investors can, therefore, lose all their capital in this regard – a risk that few, if any, are willing to take.

VCC Scheme
National Treasury chief director Cecil Morden said during the breakfast that, rather than implementing a flow-through scheme, the VCC should possibly be modified in such a way that it attracted significant exploration company intake to address funding for start-ups.

The VCC scheme – regulated by Section 12(J) of the Income Tax Act of 1962 – was introduced in 2009 and is designed to encourage investment by individual and corporate investors in a range of smaller, higher-risk trading companies

The VCCs can provide access to portfolios of potentially high-growth companies, with the benefit of generous tax concessions where there is up to 40% income tax relief for individual investors on VCC subscription, 28% for corporate investors and 40% trust income tax relief for trust investors.

Further, under certain circumstances, subscriptions to VCCs might be considered part of retirement planning, particularly amid forthcoming retirement funding restrictions. VCC tax relief may be claimed against all forms of income, but not capital gains.

Mining Weekly reported earlier this month that the current difficulty with VCCs was that they were structured on a fund model.

Since the inception of the VCC scheme, and despite amendments in 2011 to enhance its attractiveness, ENSafrica says, the uptake for this tax incentive has been very limited. In the 2014 National Budget Review, government announced that it would propose amendments to the VCC regime.

These amendments were an attempt to make tax deductions permanent if investments in the VCC are held for a certain period; allow for transferability of tax benefits when investors dispose of their VCC holdings; increase the total asset limit for qualifying investee companies in which the VCC may invest R20-million to R50-million, and junior mining companies R300-million to R500-million; waive the capital gains tax on the disposal of assets by the VCC; and expand the permitted business forms.

Moreover, Brownstein averred that the flow-through share scheme was efficient because it was implemented at a stage where the cycle was quite weak, and it was a major tool for the mining sector, specifically junior miners, through which to get capital.

“Canada is a leader in [the flow-through scheme] and could be an example for other countries, such as South Africa, to emulate to increase their exploration investment,” he told Mining Weekly.