EDITORIAL PAGE — Rethinking government exploration incentives

For most investors, mining is a game — and an extremely risky one at that. By far the largest risk is the simple fact that ore deposits are rare and, typically, difficult to find.

This element of risk can be a serious obstacle in the quest to attract funding for exploration and development projects, particularly those at the grassroots level.

Flow-through share funding has gone a long way in compensating the investor for the risk taken in buying exploration stocks.

Flow-through shares provide investors with considerable tax breaks for investing in junior companies that perform exploration work. Previously, the federal government allowed a tax writeoff of $1.33 for every dollar spent. In the late 1980s, the Conservative government of Brian Mulroney decided this was too rich and, in an attempt to eliminate the perception that the mining industry was receiving preferential treatment, eliminated the additional 331U3% writeoff. Under the federal Income Tax Act, investment in Canadian mining stocks now allows for a writeoff of 100% against income.

Since the purchaser typically has to hold the stock for a period of one year, the investment represents what is regarded, in the high-risk exploration game, as a long-term investment and a commitment, of sorts, to the company.

Still, flow-through carries a drawback in that the investor may base his decision not so much on the merits of the company as on the value of the writeoff itself. For the writeoff allows the purchaser to make money on an after-tax basis, even if the stock drops (hardly a success-based incentive).

We suggest that, as an alternative to flow-through, the government consider introducing a program whereby the purchaser, rather than being offered a tax writeoff,is entitled to tax-free capital gains subject to a specified holding period.

This would promote investment on the merit of the properties and companies, rather than on the basis of tax advantages, and, more to the point, would reward the risk-taker in the event the company is successful.

Turning to the provincial level, the government of British Columbia instituted its own incentive program last year.

And although we welcome the B.C. government’s support of exploration through its Explore BC program, we cannot help but suspect that there must be a better way to stimulate exploration.

This year, in an effort to encourage mineral exploration in the province, the government is providing $2.5 million in grants to 75 mining companies. In 1994, when the program was launched, $2.4 million was handed out to 46 projects.

The grants cover up to one-third of eligible exploration costs to a maximum of $150,000.

Still, the $2.5 million in grants represents little more than a token gesture to the province’s mining and exploration industry. The investors in that industry deserve better.