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Hopes rise as top firms arrive at potential flow-through share model to stimulate mining exploration

Minerals Council South Africa Junior Miners’ Forum Chairperson Errol Smart interviewed by Mining Weekly’s Martin Creamer. Video: Darlene Creamer.

27th October 2020

By: Martin Creamer

Creamer Media Editor


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JOHANNESBURG ( – A flow-through share model has been drawn up with the help of top firms to stimulate badly neglected mining exploration in South Africa, Minerals Council South Africa junior and emerging miners leadership forum chairperson Errol Smart said on Tuesday.

Speaking to Mining Weekly in a Zoom interview, Smart expressed excitement at four authoritative South African legal tax accounting concerns arriving at a proposal that has drawn an initial tentative nod of approval from the South African Revenue Service (SARS). (Also watch attached Creamer Media video.)

Intensive discussion has been under way with the Council for Geoscience and the Department of Mineral Resources and Energy, whose director-general Advocate Thabo Mokoena earlier this month pledged at the Joburg Indaba that a comprehensive exploration strategy would be developed in the next three months.

In addition, Mineral Resources and Energy Minister Gwede Mantashe has set a target for South Africa to attract 3% to 5% of global exploration dollars within the next five years. Without an efficient tax incentive system in place this will not be possible, whereas when a discovery is made that leads to the development of a mining project, this has a positive impact across the fiscus as well as on job creation.

“We have to kickstart exploration. Mining is slowly but surely dwindling in South Africa because we’re basically exhausting the discovered mineral resources. For the last 25 to 35 years, there haven’t been virgin discoveries made, because nobody has been exploring,” said Smart, who as CEO of the Sydney- and Johannesburg-listed Orion Minerals is engaged in mining development and exploration in the Northern Cape.

Top minds have been applied to gain the support of National Treasury and SARS and at the same time incentivise people to invest in the high-risk world of exploration and exploration development.

What the proposed flow-through share model does is create a contract between the exploration company, the taxpayer wanting to invest and SARS.

The basic concept of the flow-through share model is that the exploration expenditure of the operating company is foregone in favour of the investor.

The example given is one of a taxpayer with, say, R1-million in taxable profits being permitted to elect to invest that R1-million in a junior exploration company, which in turn spends the R1-million on allowable exploration, and sacrifices R1-million of future tax shield when it comes into production, in return for having been allowed to flow shares to the investing taxpayer in exchange for the investment.

In the case of a corporate investor investing the R1-million, SARS will forego 28% or R280 000 in tax, and get the R280 000 back when the exploration company begins making profits in the future. In the case of an individual investor, SARS will forego 45% or R450 000 and get that R450 000 back when the exploration company begins making profit in the future.


The flow-through share model can be further explained as:

  • the investor concluding a subscription agreement with an operating company for a share called a flow-through share;
  • this share providing the investor with all the rights of an ordinary shareholder but also a right to deduct exploration expenditure incurred by the operating company which will reduce the investor's normal tax liability;
  • the operating company incurring exploration expenditure qualifying for a deduction from its taxable income and choosing to renounce a portion or the full amount of such expenditure to the holders of the flow-through shares in the year in which such expenditure has been incurred;
  • the operating company losing its right to deduct such expenditure to the extent that the expenditure has been renounced;
  • the holders of the flow-through shares then becoming entitled to deduct their portion of the expenditure renounced by the operating company from their taxable income; and
  • this deduction in aggregate being limited to the expenditure incurred by the investor in acquiring the flow-through shares.


South Africa’s mining exploration budget has decreased from $404-million in 2007 to considerably less than $100-million in 2018 and South Africa’s share of global exploration budgets has decreased to 1% in 2018.

A country that does not explore for new minerals runs the risk of being marginalised as a mining jurisdiction.

Exploration is a high-risk activity. Large mining houses largely engage in brownfield exploration, however most greenfield exploration is conducted by junior mining companies, which rely on venture capital raised in capital markets.

Tax incentives are necessary to attract investors into exploration ventures. The Canadians have been highly successful in developing these specialist junior exploration companies largely by using the flow-through share tax incentive model to attract equity investors into the sector.

S&P Global estimates that exploration spend grew beyond $10.5-billion in 2019.

Using data from a typical junior mining company to calculate the economic contribution of the exploration stage, two scenarios were modelled, one based on South Africa’s exploration budget increasing by 1% and another on it increasing by 5%.

On a 1%-higher exploration budget of R1.8-billion, 5 500 jobs could be created at a total potential impact on tax revenue of R532-million while on a 5%-higher exploration budget of $8.8-billion, 27 700 jobs could be created at a total potential impact on tax revenue of R2.7-billion.

Mining is a significant driver of the South African economy. For example, in 2019 mining contributed 7.8% to the gross domestic product (GDP), was the largest earner of foreign revenue bringing in R421.7-billion in export earnings, and directly employing 454 921 people. In addition, the knock-on effect of mining into the broader South African economy is substantial, once service providers and suppliers to the industry are taken into account. Anecdotal evidence suggests that for each mineworker employed, ten people directly depend on mining activity. Without a vibrant exploration sector, the life of the South African mining industry will be finite.


Research conducted by the Minerals Council South Africa assessed the direct impact that exploration would have on the South African economy, in terms of contribution to GDP, revenue for the State and jobs created.

Exploration and mining activity occur largely in rural areas which are some of the most impoverished regions in the country. A case study of a typical junior exploration company in South Africa has noted the significant direct economic benefits that the project brings to suppliers, service providers and the wider the local community.

Exploration ensures the sustainability of the mining industry and is essential to discovering future growth projects. Every R1-billion spent on exploration by mining companies potentially contributes about R1.2-billion to GDP through direct and indirect and induced impacts, 3 200 new direct, indirect and induced jobs are created or sustained on average and R0.3-billion is added to total government revenue through direct and indirect tax collection.

Direct taxes refer to taxes based on income generation, for which the entity is entirely responsible and for which it cannot pass on to another entity. SARS defines these as “taxes charged on taxable income or capital of individuals and legal entities".

Indirect taxes refer to taxes relating to consumption activities. SARS defines these as taxes imposed on goods and services rather than on individuals or companies.

Induced taxes refer to the different rounds of the multiplier effect, from the taxes associated with initial spending in the sector, through to employees spending their salaries on goods and services (and its resultant effects).

Using data from a typical junior mining company, the economic contribution over 20 years of the various stages of the mining process show the potential impact on tax revenue from mining activities totalling R15.8-billion.


Benefits of the proposed tax incentive extend to all participants – the National Treasury, investors, explorer miners, employees, contractors, suppliers and service providers. The impact experienced embraces:

  • increased tax revenue from all sources;
  • reduced tax paid on earnings leading to increased investment and an increase in potential capital gains and tax paid;
  • increased taxation on future earnings; and
  • immediate increased earnings equalling increased taxed paid.


Currently, the only tax incentive offered is Section 12J of the Income Tax Act. The venture capital company (VCC) regime has become increasingly popular in recent years and there are more than 100 registered section 12J companies in South Africa. It is estimated that the market has raised more than R3.6-billion in investments at the end of 2018.

Though Section 12J was intended to encourage exploration funding, it is unfortunate that from a mining perspective it has rarely been utilised, with only one VCC operating in the mining space. Reasons for this may include the inability to trade the shares, which makes it an illiquid investment. Investors are required to hold the shares for a period of five years, failing which the tax benefit is lost, and there are restrictions on the amount of shareholding that any individual shareholder may have. In any event, the VCC regime is a temporary measure ending in June 2021, unless extended.

It is, therefore, clear that for South Africa to reach the target of attracting 3% to 5% of global exploration dollars it needs to revise its tax incentive system for exploration, as well as modernise its licensing system to ensure further investment into the mining sector.


After the Second World War, the Canadian government realised that although it was well resourced in minerals, the sector was not growing as it should, being consistently below its potential.

As a result, in 1958 the federal government introduced flow-through shares to encourage investment into the mining sector.

As more countries became attractive destinations for mining foreign direct investment and the competition for capital intensified, Canada scaled up its financial innovation by introducing super flow-through shares. The difference between regular and super flow-through shares is that the regular flow-through shares attract a 100% deduction write-off for exploration while super flow through shares have an additional 15% federal tax credits for greenfield exploration.

The three major effects in Canada of the regular and super flow-through shares are that they have:

  • stimulated and financed exploration and development;
  • positioned Canada as a global leader in mining finance and exploration expertise by developing strong capital markets and exploration management expertise unique to Canada; and
  • created a myriad of new job opportunities.

As a result, from 2000 to 2018, Canada attracted on average $2-billion a year in exploration expenditure. South Africa, in contrast, attracted only $194-million a year in he same period.

Edited by Creamer Media Reporter



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