Juniors find innovative ways to fund development

What exploration needs most in Canada is a good discovery, says Fenton Scott, President of the Prospectors and Developers Association of Canada.

At a time when juniors are having trouble raising even small amounts of money, a find to rival the Eskay Creek gold or Louvicourt Twp. massive sulphide deposits would at least get people back into the business, Scott says.

Without a major discovery or some new government program to make financing easier, spending in Canada for exploration and development will inevitably fall this year, according to PDAC projections.

At a mines ministers’ conference in Nova Scotia last fall, Scott said exploration spending in Canada had dropped to $431 million in 1991 from about $800 million in 1990 and more than $1.4 billion in 1988.

Analysts and industry personnel attribute the drop to low gold and base metal prices, tighter environmental regulations, and the withdrawal of federal programs designed to promote investment in exploration. Major companies like Inco (TSE) and Noranda (TSE) are also making life more difficult for juniors by trimming their exploration budgets.

In response to those findings, the federal Ministry of Energy Mines and Resources set up a task force to assess Canada’s ability to compete for investment dollars with emerging countries like Chile and Brazil. According to the PDAC, the average exploration expenditure by Canadian companies decreased by 20% in Canada between 1988 and 1989, doubled in the U.S. and other countries.

With the task force report expected in July, the PDAC has been pushing the federal government to reintroduce the Mineral Exploration Depletion Allowance which was phased out in 1988. It offered investors a tax writeoff of $133.33 on every $100 invested in flow-through shares. By issuing flow-through shares, however, a company gives up the right to deduct those exploration expenses from earnings.

“We have also suggested a change in the capital gains tax on the sale of mining shares and properties,” said Scott, who believes the biggest impediment to investment in mining is the confusion over who has the mandate to implement a myriad of environmental guidelines. “Provincial and federal departments are literally fighting over who is going to regulate what,” he said.

In Quebec, where exploration conditions remain among the most favorable in Canada, majors like Minnova (TSE) and Inco are helping to finance a number of high profile projects like Freewest Resources’ (TSE) Benoit Twp. and Societe d’Exploration Vior’s Douay gold properties. But junior representatives are still hoping that the provincial government will extend the amounts that flow-through investors can deduct for funds spent in Quebec. At the moment the tax writeoff stands at 133% for underground exploration work and 166% for surface exploration. Under the Quebec Stock Savings Plan, investors can also deduct the cost of purchasing new share issues from their provincial income tax returns.

“Meanwhile, other juniors in Canada are going around in circles trying to obtain funding to get various projects off the ground,” says Douglas Hume, secretary at Toronto-based Deak Resources (TSE).

Representatives at Great Lakes Minerals (TSE), for example, were recently preparing to fly out to the Goldstream copper mine in British Columbia to take a look at how contractor Tonto Mining is extracting ore at the operation. If they like what they see, President Nicholas Tintor says Great Lakes may be prepared to hire Tonto’s parent company, Dynatec International, to mine its Keweenaw copper project in northern Michigan. Dynatec chairman Robert Dengler sits on Great Lakes’ board of directors.

In a departure for the engineering firm, Dynatec is trying to generate new business during the mining slump by getting involved in smaller projects such as Tintor’s and Northfield Minerals’ (ASE) Cheminis gold mine at Virginiatown, Ont.

In return for developing the small Cheminis operations, Dynatec can purchase 900,000 Northfield common shares at 80 cents a share up until December 1993. Great Lakes sees a future deal with Dynatec as a way of reducing the risk involved in bringing a new project into production. It is also bidding to reduce perceived risk by hiring an established contractor and securing custom milling contract with Michigan operator Metall Mining (TSE). Tintor, who helped to launch the penny junior in 1990, says he and his colleagues are mindful of mistakes made by other juniors during the critical startup phase. Some suffered startup problems while trying to tune up a new mill, while others experienced operating problems that inexperienced mining teams couldn’t overcome, Tintor says.

With $3 million needed to bring the Keweenaw property on stream, Great Lakes is talking with a number of parties with the expectation that financing will be via traditional means and include some sort of equity issue. “Project financing is out because we don’t have the kind of balance sheet that banks can lend against,” Tintor says.

Meanwhile, other juniors are also avoiding the expense of building their own processing facilities by arranging lease-to-purchase agreements with owners of unused mills.

Central Crude (TSE), for example, is planning to purchase 75% of the Magnacon mill in northern Ontario from Flanagan McAdam Resources (TSE) and Muscocho Explorations (TSE) for $2 million in cash plus 600,000 shares. Crude President Richard Nemis says the purchase will cut the cost of developing its 40%-owned Eagle River deposit to about $11 million. He is currently attempting to elicit support for the project from the Ontario Heritage Fund with the expectation that other properties in the area, including Granges’ (TSE) Mishi deposit, could become viable if the mill is available.

Having purchased the Kerr mill and mine near Kirkland Lake, Ont., Deak Resources is using the facility to custom mill ore from local deposits including its own Kerr mine and nearby Cheminis and Francoeur deposits. “You are going to see more development of the regional mill concept,” said Hume, who says the prevailing trend is away from 100 little mines with 100 little mills and the same number of tailings ponds.

Wheaton River Minerals (TSE), which achieved initial listing status last year, has taken a similar approach by agreeing to purchase Canamax Resources’ (TSE) Ketza River mill in the Yukon plus the Grew Creek deposit located 100 km away. Wheaton River must raise $100,000 to close the deal. In addition, Monk Gold and Resources (ASE) is planning to have the 500 ton-per-day Surlaga mill near Wawa, Ont., up and running sometime this spring after reaching a lease-to-purchase agreement with owner Citadel Gold Mines (TSE).

Monk gold plans to ship ore from a nearby prospect hosting about 50,000 tons of proven reserves. Van Ollie Explorations (CDN), owner of the nearby Van Sickle deposit has expressed interest in providing custom ore.