Flow-through funds jump start juniors

Vancouver — Taking advantage of one of the last remaining officially sanctioned tax incentives in Canada, mineral exploration companies listed on the TSX Venture Exchange raised $41.1 million in flow through financings during the first six months of 2003.

Leading the pack was Canadian Royalties (CZZ-V), which added $3.15 million to its coffers back in February, by issuing 1.05 million flow-through units priced at $3 each. The junior is in the midst of an aggressive drill campaign on its Expo-Ungava property in northern Quebec. The latest results included wide intervals of high grade nickel-copper-platinum-palladium-gold mineralization at the Expo deposit. The first hole of the program into the Expo area yielded 2.82% nickel, 2.82 % copper, 0.14 % cobalt, 2.28 grams palladium, 0.8 grams platinum and 1.05 grams gold over 17.3 metres.

For the past three years, Canadian Royalties has been exploring a 35-km-long sequence of ultramafic rocks some is 15 km south of Falconbridge‘s (FL-T) Raglan nickel-copper mine in a region known as the South trend. The mineralization consists of disseminated, net-textured and massive sulphides positioned in the basal portions of ultramafic flows and intrusions. The property hosts three mineralized structures, Expo, Cominga and Mesamax, all of which were discovered in the 1960s. Mesamax, located 12 km east of the Expo deposit, has an indicated resource of 1.45 million tonnes grading 2.1% nickel, 2.7% copper, 0.08% cobalt, plus 0.3 gram gold, 1 gram platinum and 4.2 grams palladium per tonne; Expo’s resource, calculated in the pre-National Instrument days, is an inferred 19 million tonnes with 0.46% nickel and 0.51% copper.

Working nearby, Cascadia International Resources (CJ-V) completed two flow-through financings aimed to fund further exploration on its Raglan properties. The first financing comprised 5.5 million units priced at 15 each and the second tallied 4 million units priced at 30 for a total of just over $2 million.

Partners Cascadia International and Novawest Resources (NVE-V) recently inked a deal to acquire the Thunder project located on the “Main” Raglan trend just north-northeast of the companies existing Raglan land package. Earlier this month, with exploration heating up in the region, Cascadia International announced plans to offer up another 4 million flow through units.

Champion Bear Resources (CBA-V) started the year off by closing a $1-million financing comprising 800,000 flow through units priced at $1.25 each. The company holds a number of projects in the Sudbury area of Ontario.

Most recently, the junior deepened two previous holes drilled on its Parkin South claim block but both returned only anomalous values.

On the Parkin North property, 2.2 km to the north, the junior tallied gold values of 252 grams, 56.7 grams and 22.3 grams per tonne in three grab samples, while prospecting on the adjacent Halcyon property returned grab samples from one of four previously known showings of 3.2 grams, 1.8 grams and 1.1 grams gold per tonne.

In February, South Malartic Exploration (MSU-V) completed a public offering of 5.84 million flow-through units priced at $0.30 each. The junior aims to use the $1.75 million advancing the Croinor gold project some 70 km east of Val d’Or, Que.

Croinor was discovered in 1940 and subsequently explored by numerous operators. By the late 1980s, with Cambior (CBJ-T) at the helm, near-surface resources had been pegged at 842,429 tonnes grading 6 grams gold.

From 1996 to 1997, Goldust Mines, now Huntington Exploration (HEI-V), tried its hand at an open-pit operation and proceeded to extract 50,000 tonnes to produce 5,332 oz gold. However, the price of gold had, by then, begun its freefall, which brought production to an abrupt halt.

South-Malartic entered the picture in mid-1997 when it inked a deal with Huntington to earn a 70% interest in return for cash and $1.4 million in expenditures, which it has since covered. Huntington retains a 30% interest.

At first, South-Malartic had as little luck as others did, with its first holes returning “inconclusive” results. Then, in early 2000, the tide began to turn in its favour following the discovery of flat-lying tension veins perpendicular to the known, north-dipping shear zones.

In early 2002, the discovery, inspired by the similar technical success of McWatters Mining (MCW-T) at its nearby Sigma mine, had expanded the resource to 7.1 million tonnes grading 2.3 grams. The expansion, in turn, prompted the launch of a 45,000-metre drill campaign aimed at bumping up 300,000 oz. to reserve status and pushing the resource past the 1-million-oz. barrier.

By 2005, South-Malartic hopes to begin open-pit production at the rate of 50,000 oz. per year. Run-of-mine ore would be trucked to a refurbished 1,500-tonne-per-day Chimo mill, about 20 km to the southwest. The mill was purchased from Cambior in 2001 for $375,000 plus the assumption of environmental liabilities.

As part of its long-term goal, South-Malartic has tied up more ground in the region: 22 claims were tacked on to Croinor’s southern boundary, expanding the property to 48.8 sq. km; 20.3 sq. km were staked in surrounding townships; and the nearby 3-sq.-km Robinson property was purchased from a local vendor for $10,000 in cash and 100,000 warrants that can be exchanged for shares until mid-2004 at 40 apiece.

Situated 55 km from the Chimo mill, Robinson is the most advanced of the bunch, hosting some 227,000 tonnes that are considered amenable to open-pit mining methods. The resource grades 3.08 grams and had been tested by 4,850 metres of drilling, a 157-metre-deep shaft, and two drifts driven on the 30- and 152-metre levels. It also was exposed at surface.

Mineralization extends 150 metres below surface, in the Pascalis-Tiblemont batholith, near its northern contact with mafic volcanics of the Harricana group. A deformation corridor passes through the rocks and played a role in the deposit’s formation.

Next come Tavernier and Vauquelin, both of which host two prospects. Historic drilling at Tavernier yielded 26.6 grams gold, 9.9% zinc and 4% copper over 7.3 metres, plus 14.6 metres grading 32.6 grams of massive sulphide mineralization. At Vauquelin, the Boycon-Pershing prospect yielded 41.4 grams gold per tonne over 0.3 metre and 33 grams gold over 0.2 metre, while the Baie des Aviateurs prospect averaged 1 gram over 0.4 metre.

The Tiblemont property hosts two showings, dubbed Anaconda-3 and Realore. Chip sampling at the former yielded 26.5 grams gold per tonne over 0.6 metre of massive sulphide mineralization, while a grab sample from the latter returned 21 grams per tonne.

The Bel-Rive property, immediately northwest of the Croinor property, has no showings. Its geological position in relation to the northwesterly strike of the Croinor sill is what caught South-Malartic’s attention.

South-Malartic says the new ground bodes well for an incremental expansion to its resource base and may keep the Chimo mill fed down the road. At Chimo alone, there remains a surface resource of 600,000 tonnes grading 1.9 grams.

Partners KWG Resources (KWG-V) and Spider Resources (SPQ-V) jumped on the flow-through train in May. Via private placements, KWG issued 3.33 million flow-through units priced at 15 each, while Spider dealt out 9.7 million flow-through units priced at 10 each. The companies are exploring for base metal sulphides on the newly dubbed McFauld’s Lake property in the western portion of the James Bay Lowlands of northeastern Ontario.

Drilling resumed in mid-July to follow up on encouraging sulphide mineralization originally cut by De Beers in 2002. The diamond explorer inadvertently hit base metal mineralization while drill-testing 13 diamond targets at the Spider 3 project.

One of the reverse-circulation (RC) holes intersected an 8-metre sulphide section of intermediate-to-mafic volcanics running 1.61% copper, 0.34% zinc and 0.13% lead, plus 0.13 gram gold and 9.9 grams silver per tonne, at the bottom of the hole. The 8-metre section included half a metre of 7.09% copper, 4.67% zinc, 2.68% lead, 0.76 gram gold and 150.6 grams silver.

The Spider 3 project covers a 70-by-180-km area of interest 150 km west of De Beers’ advanced-stage Victor diamond project in the Attawapiskat region and is jointly held by Spider, with a 49% interest, and KWG, with 51%. Between 1995 and 1997, the pair spent a total of $1.4 million on regional mapping and heavy-mineral sampling, in addition to a widely spaced low-level aeromagnetic survey. The geochemical samples were analyzed for kimberlite indicator minerals, as well as multi-element suites.

In April 2000, De Beers signed a confidentiality agreement with the pair and undertook a due diligence investigation that identified more than 20 priority diamond targets in the area of interest. Before signing a formal agreement nearly a year later, De Beers staked those targets and created the property base for the joint venture.

Over the summer of 2001, De Beers explored the Spider 3 properties with low-level magnetic and electromagnetic helicopter-borne surveys, while conducting regional mapping and geochemical sampling. The company mobilized a RC rig to the property in March 2002 and drilled 13 targets without intersecting any kimberlite. De Beers, which had met its earn-in obligations for a half-interest in Spider 3, then handed the discovery over to Spider and KWG in exchange for a royalty interest.

Diagem International Resource (DGM-V) is a major shareholder of KWG, with a 38.9% stake.

The flow-through financings were not restricted to gold and base metals plays: International Samuel Exploration (SAZ-V) floated a total of 4.54 million units at a price of 25 each. The junior is looking to advance the Churchill West diamond project in the Kivalliq region of Nunavut. A $650,000 work program comprising ground geophysics, detailed till sampling, and airborne geophysical surveying with follow-up drill testing is planned.

International Samuel can earn a 65% interest in the newly staked 200,000-hectare project by issuing 200,000 shares, reimbursing $350,000 in property acquisition costs and spending $1 million over two years.

Flow-through structure

Canada’s flow-through shares became popular in the late 1980s, only to see their use significantly decreased in the 1990s after the government reduced the level of tax incentives. However, tax changes introduced last year sparked a revival of flow-share financings and this year large pools of capital are seeking good quality resource companies to invest in.

Under recent tax changes, investors that acquire a flow-through share deem the tax cost of the share to be nil because the investor is entitled to a deduction equal to the cost of the share. A 100% deduction in the year a flow-through share is acquired and having to report only one-half of a capital gain in income in the year it is sold is proving to be an attractive proposition for investors.

Another change is that the federal government gives a tax credit for investors equal to 15% of certain Canadian exploration expenses renounced pursuant to flow-through share transactions, and many provinces do likewise. Ontario has introduced a 5% tax credit for certain exploration expenses incurred in Ontario and renounced by a qualifying corporation under a flow-through share agreement, while British Columbia offers a “super” 20% credit. For taxpayers in Canada’s westernmost province, the net cost of a $1,000 investment in mining flow-through shares can be as low as $383.

The flow-through share rules permit a resource company to issue shares in order to fund its Canadian exploration program and to “flow through” the associated tax deductions to the investors. An agreement is entered into that calls for the investor to subscribe for shares and requires the resource company to spend the funds within the permitted time period (the date is currently set at January 2004) and to file the tax forms for the renunciation of the Canadian exploration expenses to the investor. The result is that the investor becomes entitled to deduct the Canadian exploration expenses that the resource corporation otherwise could have deducted. In this way, an investor can invest in shares of a resource corporation and deduct the full cost of the investment.

The rules include a special timing advantage to grassroots exploration. In this case, a company can spend the money raised after the time the flow-through share agreement is entered into and until the end of the following calendar year, while still permitting all of the expenses (including those estimated to be spent in the following year) to flow through to and be deducted by the investor in the first year.

The rules also contain provisions governing the type of share that may be issued as a flow-through share. The share cannot provide a fixed dividend or redemption entitlements. In order to issue flow-through shares, the company’s main business must be on a list of prescribed businesses, most commonly a company that carries on exploration activities in Canada.

Apart from the existence of the flow-through share agreement and the tax benefits, shares issued under flow-through rules are the same as normal trading shares.

Resource companies can make use of the flow-through shares by entering into flow-through share agreements directly with investors, or, it can enter into a flow-through share agreement with one of a number of flow-through share limited partnerships. These partnerships raise money from the public and invest in flow-through shares of a variety of resource companies.

Despite the large number of flow through financings, the dollar figure pales in comparison to the $790 million raised by all the companies listed on the TSX Venture Exchange during the 6-month period ended June 30. The vast majority, some $701 million, came from private placements.