TORONTO (miningweekly.com) – The current turbulent financial environment has many junior explorers searching in vain for capital injections on public markets and through private investors, but, for certain qualifying issuers, there might be a financing alternative in flow-through share donation transactions.
Mining Weekly Online recently reported that 65% of the 1 300 mining exploration companies listed on the TSX-Venture Exchange (TSX-V) had $250 000 or less left in their kitties, which was insufficient to keep exploration going.
Negligible levels of equity capital were being raised on markets and market liquidity had become so poor that significant investors were unable to trade out of their holdings.
Other specialist junior exploration markets like the Aim in London, and the ASX, had also declined significantly.
TSX-V, Aim and ASX markets had fallen 30% in 2012 and 47% in the first quarter of this year.
Nearly 60% of 2013 share issues had raised less than $1-million, which was really fundraising for survival.
The funds available in kitties were insufficient to pay the salaries of exploration personnel, let alone to continue with exploration.
However, PearTree Financial Services is arranging flow-through donation financing transactions, which could prove to be valuable sources of finance for explorers struggling to raise cash.
“Many miners do not know this avenue of securing financing - while at the same time helping charitable causes in Canada - is available to them,” Norm Brownstein, president of PearTree subsidiary PT Securities told Mining Weekly Online in an interview.
REVENUE-NEUTRAL TAX SHELTER
He explained that the flow-through donation format PearTree had been following since 2007 was a revenue-neutral tax shelter that benefits all parties in the flow-through donation universe, including Canadian resource companies, charities, donors and investors.
“Our tax shelter does not defer, circumvent or avoid any tax that would otherwise be payable. In fact, the net result of this flow-through financing activity is of significant social benefit to Canada by way of better-funded charities and a strengthened natural resource industrial sector,” Brownstein said.
The process begins with the donor subscribing for flow-through shares from a qualifying issuer, thereby accessing the associated Canadian Exploration Expense and investment tax credit benefits.
The next step is for the donor to gift the shares to their chosen charity. The charity then sells the shares to an institutional investor, arranged through PearTree, for which a tax receipt is issued to the original donor.
As all three steps must take place, or the transaction cannot be completed, all funds are held in escrow until the completion of the transaction. In the event the transaction is not completed for any reason, all funds are returned to the donor.
“Despite there being complex tax and securities mechanisms involved in the function of PearTree’s flow-through donation programme, the process for donors to participate is actually quite simple, with PearTree managing the process through every step, in consultation with our clients and/or their financial and tax consultants,” Brownstein noted.
However, he stressed that doing sufficient due diligence is of utmost importance in a climate of faltering junior companies.
He explained that under the flow-through regime, funds raised in the first year have to be spent by the end of the second year. Therefore, investors and those protecting investors, including intermediaries and their counsel, should be satisfied at the outset that the issuer has the working capital necessary to pay its general and administrative expenses during the period of exploration, without the pressure of encroaching upon funds raised and designated for exploration.
“Nevertheless, as an increasing number of junior mining issuers run out of working capital, we are seeing a significant increase in issuers using capital raised in flow-through financings for ineligible expenses,” he said.
PearTree’s flow-through financing process includes working with the broker or investment banker community to source appropriate flow-through issues; the legal and accounting community to provide tax analysis to their respective donor clients on how to tailor flow-through deductions that best suit their needs; and the tax authorities, including the Canada Revenue Agency and Revenue Québec, in confirming tax policy and audit positions by securing advance tax rulings.
“We offer a format that expands the universe of potential capital sources by transforming retail flow-through share offerings into financings in which institutional and offshore capital pools can be deployed. This approach allows Canadian subscribers to take tax benefits in the same transaction in which global investors can acquire the equity at a discount reflective of current market uncertainties,” Brownstein said.