LETTERS TO THE EDITOR Diagnosis of exploration’s malaise

The level of mineral exploration in Canada has fallen dramatically during the past 18 months. The principal causes are:

–The deteriorating state of the equity markets, particularly for junior resource companies;

–The general uncertainty and lack of confidence in the Canadian economy by Canadians.

–Substantial changes to the Income Tax Act as it relates to the treatment of flow-through expenses and valuation of flow-through shares, i.e. Cumulative Net Investment Loss (CNIL) and Adjusted Cost Base (ACB).

–Elimination of Canadian Exploration Incentive Program (CEIP) grants.

–Fluctuating metal prices, particularly drops in the price of zinc and gold.

The mechanism of flow-through financing is still available; however, there is little investor interest at this time. This could be changed by the federal Income Tax Department if it changes CNIL and modifies the ACB.

It is not likely that both items would be adjusted. Therefore, it is suggested that amendment to the ACB be made. At present, it is deemed that the ACB of a flow-through share is zero. This should be amended to reflect the real after-tax cost of the purchased share, i.e., 50% of the purchase price.

This simple amendment will, it is believed, revive to some extent the attractiveness of flow-through financing for mineral exploration across Canada. I have spoken to brokers who have said they could sell this feature.

It would benefit many exploration and service companies and create employment opportunities and wealth from Newfoundland to British Columbia, from the U.S. border to the Arctic. There would be a drop in the current level of Unemployment Insurance Commission (UIC) benefits payable and welfare costs as well as reduce the rate of personal and corporate bankruptcies.

There would be an increase in personal and corporate income taxes as well as provincial and federal sales taxes. On balance, this would be good for Canada and good for the mining industry. The economic and long-term employment benefits will probably outweigh significantly any losses in tax revenues to Ottawa. There has been considerable concern by the Ministry of Finance of abuses to the use of flow-through finances. Some simple checks and balances could diminish the opportunity of abusive practices. There is no way to reduce them all. Some suggestions are:

–Limit the size of a fund to $50,000,000;

–Limit the amount of financing for a single project to $1,000,000 from a specific fund with sponsorship from not more than three funds per calendar year;

–Remove the Feb. 28 deadline for completion of expenditures; however, require that all monies in a fund must be spent within a 12-month period;

–Require that specific program proposals be reviewed and approved by independent professional engineers;

–Require a program completion audit by independent professional engineers. Hold back 10% of funds until the audit is complete and all work performance and expenditures are verified;

–Limit management charges to 5% of funds expended;

–Where practical, require three competitive bids for diamond drill, geophysical, underground development and other contractors;

–Limit the number of programs per property unless the mineral potential can be demonstrated to have been enhanced — say four programs.

This is one alternative to find a remedy to a very serious problem. I am sure there are others. Somehow, the message has to get through to Ottawa that the exploration industry is in serious trouble.

If other sectors of the economy can be subsidized, why can’t the exploration industry be encouraged?

I suggest all members of the mining industry write letters to their MPs, the minister of finance and the minister of mines.

James Wade, P.Eng.

President Bitech Corp.