South African Finance Minister Trevor Manuel’s July 1 tax-break introduction for investment in support of junior mining is seen as an attempt to create a new class of investor that is “generously incentivised” to support the bottom end of the junior mining scale.

“It’s a big incentive, with 100% tax write-offs of investments against income, but it’s quite restrictive,” Keaton Energy CEO Paul Miller tells Mining Weekly.

“If I were to express a dis- appointment it would be that, unlike Canada, where the flow-through share system encourages the development of the overall market, this doesn’t appear to do so to the same extent,” Miller adds.

The tax breaks, which come into effect on July 1, also incentivise investment in small nonmining enterprises.

The incentive is for the creation of venture-capital funds that focus their investment on small companies, with a slightly different set of criteria for small mining companies.

Those venture-capital funds created are required to invest 80% of their funds in mining juniors with book assets of not more than R100-million after capital raising, and small nonmining companies with book assets of not more than R10-million after capital raising.

The direct implication is that bottom-end junior mining companies may soon have a new class of investor.

Qualifying funds are required to have a spread of investments within 36 months and junior mining companies must be producing revenue within 36 months.

Only individuals and listed companies qualify for the 100% write-off of their investment against income.

It will be up to the specialist finance houses, like the New Africa Mining Fund and the Peregrines and the Braits, to set up these types of funds.

As one company cannot own more than 10% of the fund, at least ten investors are needed.

The gazette notice defines a junior mining company as any unlisted company or a JSE-listed AltX company, resident in South Africa, and engaged solely in mining exploration or in mining production.

The company may not be part of a group and must have its tax affairs in order.

A tax deduction for individuals of up to R750 000 a year up to a maximum of R2,25-million a year is allowed.
Because of the success of the Canadian flow-through shares model and the investment difficulties of South Africa’s mining juniors, Manuel looked into the introduction of an incentive to strengthen the local exploration sector in 2005.

Later, the National Treasury-chaired working group that included the Department of Minerals and Energy found a flow-though shares scheme unacceptable and came up with this new South African approach.

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