Whenever the mining industry experiences a downturn, exploration spending usually plummets, a phenomenon best illustrated by South Africa, whose exploration budget, according to S&P Global Market Intelligence, decreased from $404-million in 2007 to less than $100-million in 2018.
From a global perspective, there are signs that the industry’s financial performance is improving and a comparative analysis on exploration expenditure for 2016, 2017 and 2018 by S&P Global Market Intelligence demonstrates an upward trend with exploration expenditure in 2019 expected to exceed $10.5-billion, says law firm Fasken partner Dimitri Cavvadas.
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, explains Fasken partner Conor McFadden.
The holders of flow-through shares are entitled to certain tax benefits and therefore such shares are typically issued at a premium to ordinary shares.
In 2009 South Africa introduced concessions on its tax legislation aimed at venture capital companies (VCCs), financing early stage businesses including junior mining companies. Cavvadas explains that these concessions are encapsulated in Section 12J of the South African Income Tax Act (ITA).
Similar to the UK’s venture capital trust regime, Section 12J enables 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 R500-million in the case of a ‘junior mining company’ such as an unlisted mining company or mining company listed on AltX,” Cavvadas notes, adding that while the initiative was intended to encourage exploration funding, it has rarely been used as intended, as only one VCC is operating in the mining space.
He reasons that the dearth of mining specific 12J investments could be attributed to the inability to trade the shares in a VCC, the limit on the investment amount and restrictions on the amount of shareholding, but adds that, regardless, the regime is a temporary measure ending in June 2021, unless it is extended.
In contrast to the 12J regime, the flow-through share regime allows a mining company to obtain funding for expenditures on exploration and pre-mining development. The company is able to renounce or flow-through certain expenses to the holder of the shares, McFadden states.
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.
“This regime has been extremely successful in Canada. We are of the view that a similar flow-through system tailored specifically for junior miners would definitely incentivise investors from a fiscal perspective.
“We are in the process of putting together a paper in conjunction with the Minerals Council motivating for a system similar to the flow-through share structure in Canada,” says McFadden.
2018 MINING CHARTER
An argument could be made that the Department of Mineral Resources and Energy (DMRE), under its new leadership, has recognised the plight of the junior mining sector in South Africa by dispensing with the empowerment requirements entrenched in the earlier 2017 Charter, states Fasken associate Thandiwe Nhlapho.
Nevertheless, the 2018 Mining Charter has received criticism for failing to create an enabling legal framework for this sector, owing to its failure to engage with junior miners and deal with the specific challenges of exploration.
She adds that despite, “certain steps” recently taken by regulators, it appears that the regulatory framework still does not encourage exploration and investment in junior mining when compared with Canada and Australia.
Nhlapho notes that other encouraging developments to emerge in South Africa to support exploration funding are initiatives by the DMRE and the Minerals Council, namely the DMRE’s junior miners’ programme and the council’s Junior and Emerging Miners’ Desk.
Further, Mineral Resources and Energy Minister Gwede Mantashe dedicated a national investment of R20-billion over ten years to an integrated and multidisciplinary mapping programme to boost global investment in local exploration.
“It is envisaged that the programme will assist South Africa in securing new resources for development, employment creation and economic growth and accelerate transformation,” Nhlapho comments.
She notes that the mining industry has, in the past, fulfilled a significant role for employment creation on a large scale, adding that “if the junior mining industry can attract investment as it does in Canada and Australia, it may play a significant role in addressing President Cyril Ramaphosa’s recent call for two-million jobs in the next ten years”.