Authored by: Dimitri Cavvadas, partner, Fasken and Thandiwe Nhlapho, associate, Fasken

In jurisdictions with depleting reserves, mining exploration can be the catalyst for future economic growth and business opportunity. Yet whenever the mining industry experiences a downturn, exploration spending usually plummets.

A jurisdiction which could best illustrate the foregoing is South Africa, whose exploration budget, according to data from multi-asset-class and real-time data, research, news and analytics provider S&P Global Market Intelligence, decreased from $404-million in 2007 to $87-million in 2017.

From a global perspective, there are signs that the financial performance of the mining industry is improving and a comparative analysis by S&P Global Market Intelligence of exploration expenditure for 2018, 2017 and 2016 yields a similar upward trend. If this trend continues, how is South Africa, a country that has been facing numerous challenges across various fronts, such as regulatory uncertainty and disruptive labour relations, able to support junior miners to access the capital necessary to fund exploration?

Tax Concessions for Investors

In 2009 South Africa introduced concessions on its tax legislation aimed at venture capital companies (VCC) financing early stage businesses including junior mining companies. These concessions are encapsulated in Section 12J of the South African Income Tax Act. This section is akin to the UK’s venture capital trust regime. It allows for investors to benefit from tax concessions, namely a 100% deduction of the amount invested, arising from their investment in a mining company in the period before it generates sufficient taxable income from production.

To qualify for this tax benefit, VCCs must invest in companies with a book value not exceeding R50-million or if such company is a junior mining company – being an unlisted mining company or mining company listed on AltX – with a book value not exceeding R500-million. Although this initiative was intended to encourage exploration funding, it is unfortunate that from a mining perspective this initiative has rarely been used in comparison to other sectors such as construction.

Canadian Comparison

In Canada, a jurisdiction in which exploration expenditure has significantly increased since 2015, ‘flow-through shares’ are an established source of financing targeted specifically at exploration activities. Holders of flow-through shares are entitled to certain tax benefits and therefore such shares are typically issued at a premium to ordinary shares. They become ordinary tradable shares of the issuer once bought by an investor and the tax benefits are conferred. In contrast to the VCC regime, the flow-through share regime relies on junior companies. Furthermore, the Canadian flow-through regime is complemented by the additional 15% mineral exploration tax credit available to individual investors for grassroots exploration. The Prospectors & Developers Association of Canada believes that the flow-through shares concession has propelled Canada to be a global leader in mineral exploration and mining.

JSE Amendments

The Johannesburg Stock Exchange has also sought to support the growth of small and medium-sized businesses and junior mining exploration entities by relaxing its requirements relating to the appointment of a designated adviser for VCCs. A VCC applicant issuer listed on the AltX of the JSE may either appoint a designated adviser or VCC adviser. However, in the event that a VCC seeks a listing on the Main Board of the JSE, it will be required to appoint a sponsor and not a VCC adviser.

2018 Mining Charter

An argument could be made that the Department of Mineral Resources (DMR), under its new leadership, may be recognising the plight of the junior mining sector in South Africa in having dispensed with the empowerment requirements entrenched in the earlier 2017 “Zwane Charter” that would have required the holder of a new prospecting right to have a minimum of 50% + 1 black person shareholding. However, the 2018 Mining Charter III has received criticism for failing to engage with junior miners and deal with exploration more specifically in order to create a legal framework for this sector.

Additional Government Initiatives

Perhaps the most encouraging development to emerge in South Africa to support exploration funding is the junior miners’ programme launched by the DMR to assist new entrants to access funding. To this end, the DMR has partnered with the Industrial Development Corporation to establish a junior miners fund to provide exploration investment capital to black owned emerging miners.

As this initiative is still in the early stages, there are a number of unknown variables, such as the amount to be raised, the funding criteria and the source of capital for the fund. We understand that the private sector will be asked to make a contribution. Despite these uncertainties, the South African government is firmly in support, as expressed in Energy Minister Jeff Radebe’s message to Parliament last year to the effect that his department is prioritising exploration so that South Africa is less reliant on imports.

Minister Gwede Mantashe has also dedicated a national investment of R20-billion to an integrated and multidisciplinary mapping programme to boost global investment in local exploration. The R20-billion dedicated by the Minister is expected to be made available over the next ten years. It is envisaged that the programme will assist South Africa in securing new resources for development, employment creation, economic growth and accelerating transformation.

These are encouraging signs, but whether such initiatives will result in a significant increase in exploration spending in South Africa, as appears to be the case in other mining jurisdictions, such as Canada, remains to be seen.