Budget fears fuel frenzy for flow-through shares

“A feeding frenzy” is about the only way to describe it, William F. White, senior vice-president of corporate finance at Merrill Lynch Canada says of the public’s rush for the new issue of flow-through shares offered for 1987.

Before the year even began, two of the major flow-through funds, CMP and NIM were sold out, pulling in more than $350 million between themselves. Speaking to a group of brokers in Toronto, who came to hear about First Exploration Fund 1987, a Merrill Lynch flow-through product, Mr. White said the initial offering for $60 million could be increased to $90 million. “We will know shortly if First Exploration is oversubscribed,” he told The Nothern Miner.

What it all means to Canadian mining is that more than $750 million will be funnelled into the ground in search of minerals. Some estimates suggest that the magic $1- billion mark might be reached in 1987 — a sum of money which will fuel what may become the most intense exploration effort ever mounted in Canadian mining history.

Since beginning in 1983, the amount of money raised by flow- through tax vehicles has more than doubled each year. Estimates of 1986 spending hover around $500 million.

Flow-through shares are attractive to people in high income tax brackets. Essentially, exploration costs incurred by a company, which are tax deductible, flow through to the subscriber. The tax savings will vary with each province. For example, a $10,000 investment in a First Exploration Fund unit will result in a tax savings of $6,718 in Ontario, $6,752 in B.C. and $7,296 in Manitoba.

First Exploration Fund 1986 claims to have outperformed the flow-through fund industry, generating a return on investment of 121% compared to an industry average of 64% last year. Exposure to capital gains is also offered by issuing traded shares of a holding company which manages the flow- through share investment. A put option covers the after-tax cost of the investment.

However, the ominous signs coming from Ottawa have been heeded by all the flow-through funds. Finance Minister Michael Wilson has hinted on several occasions that major changes to tax shelters could be forthcoming in the federal budget expected this spring.

As a result, funds such as First Exploration have pushed back their closing dates to ensure that all funding is in place before the budget is delivered. “Maybe the public knows something we don’t know,” First Exploration president Peter Bradshaw said. “We’ve deliberately planned to close before the budget.”

The message to junior exploration companies is that “they should sign heads of agreements now, before the budget,” Mr. White says. “Our feeling is that there will be changes to tax shelters. As a result it’s important to have grandfathered product in place,” he explains.

No changes in 1987 to the flow- through rulings, are expected by Gerard McGrath, vice-president of finance at CMP. “We don’t expect any major tinkering for the 1987 flow-through year.” However, he does note that the fear of changes in the next budget have mining companies and investors scrambling. CMP Resource Partnership 1987, which closed on Dec. 23, 1986, — before the 1987 taxation year even began — raised $175 million. Another Quebec-based fund will raise an additional $100 million, Mr McGrath says. Adding the $25 million which will go into the Deductible Opportunities Fund, CMP comes out the leader, raising $300 million for the 1987 tax year.