Junior mining companies stand to benefit greatly from increasing investments into venture capital companies (VCCs), which offer investors significant financial returns, owing to the Section 12J tax return benefits provided by the South African Revenue Service (Sars).
Venture capital company Optomise VCC director Gadi Cohen tells Mining Weekly that Section 12J aims to encourage spending in the local economy by providing attractive incentives for investments with small, medium-sized and microenterprises (SMMEs) and junior miners.
He explains that the full amount of Section 12J investments are deductible from all other taxable incomes. Further, Section 12J investors receive an immediate deduction equal to the full amount of their investment (which translates into an immediate cash benefit on the investment of between 28% and 45%). The immediate cash rebate, coupled with the tax income deductions, derisks investment funds by between 55% to 72%.
“This incentivises investors to keep money in South Africa rather than taking it off-shore, because you cannot get these sorts of immediate returns anywhere else,” Cohen avers.
He points out that Section 12J investments have become more popular in the last two years with a number of VCCs opening up. However, Cohen points out that Optomise is not a fund management company, unlike all other Section 12J entities, which manage funds through dedicated investment committees involved in the day-to-day operations of the underlying companies.
Rather, Optomise facilitates capital raising in terms of obtaining the Section 12J deduction, issues shares and invests in machinery and equipment, which is particularly attractive to junior mining companies.
He explains that a junior miner needing load-haul-dump (LHD) trucks but is unable to secure the finance can approach Optomise, which would then invest in a fleet either for or with them. The fleet could then be used on a rental basis, removing a significant financial burden and allowing junior mining companies to issue their own shares, as they are now in a position to invest in a target company and also raise their own capital to fund equipment and machinery, but at a significantly reduced price, owing to the Section 12J tax regime.
However, Cohen points out that VCCs have a lot of restrictions. For example, VCCs cannot invest in companies with a book value exceeding R50-million and no more than 20% of the capital deployed can be in a single target company or investment.
“This is interesting for junior miners in that a VCC can invest in a junior mining company listed on the AltX, which will have a book value limit of R500-million rather than R50-million owing to the listing,” Cohen explains, adding that the VCC will be in a position to raise an additional R450-million, owing to the AltX listing, and still receive the tax benefits of a Section 12J investment.
“It is a really good way to get projects over the line. We are starting to see spending occur that previously would not have occurred. This ultimately sustains the economy, improves mining production, frees up cash flows, alleviates the tax burden and generates greater exports,” he concludes.