Tax incentives for Exploration

The Canadian government has extended the tax credit for mineral exploration conducted within the country by one more year.

As junior mining companies struggle to secure capital during challenging conditions for the sector, the 15% Mineral Exploration Tax Credit (METC) helps to keep investment flowing, Canadian Finance Minister Joe Oliver told delegates of the PDAC conference in Toronto. The PDAC had been lobbying the federal government to increase the METC to 30% in the months leading up to the conference. 

The credit complements Canada’s “Super Flow-Through” system, which allows companies to deduct 100% of their exploration expenses, then pass those expenses on to shareholders who, in turn, can claim them against personal income. With the recent announcement, the definition of “eligible” expenses has expanded to include expenses related to environmental permitting and community consultation

Since 2006, when the METC was introduced, Canadian junior mining companies have raised about $5.5 billion for exploration using the flow through system. In 2013, more than 250 companies issued flow-through shares eligible for the tax credit to at least 19,000 investors.

Above and beyond the enticements offered by the federal government, most of Canada’s provinces and territories offer their own incentives to explore locally. The province of Quebec, for instance, has a basket of incentives for both companies and their investors including:

• 125% deduction of exploration expenses for producers in the north

• Venture capital for exploration through organizations such as the Caisse de dépôt et placement du Québec and SIDEX

• C$250-million fund that makes investments of C$5-20 million in Quebec companies that have reached the development stage (announced in 2013)

• Funding for aboriginal exploration groups such as the Cree Mineral Exploration Board

• Tax deductions up to 150% of the cost of flow through shares for investors

So, if you live in Quebec, earn more than $135,000 and invest C$1,000 in the flow-through shares of a junior company, the after-tax cost of your purchase would be $334. That’s not a bad deal for an investment that has the potential for significant capital gains if the junior makes a discovery.

Junior Exchange Could Become World Leader if it Plays it's Cards Right

The formation of a national junior exchange would allow Canada to become a world leader in electronic trading of resource stocks under the right circumstances, say observers.

“If the Canadian exchange turns out to be a very efficient, order-driven, electronic execution system and if it has a decent regulatory system in place, I think a lot of the more legitimate companies would want to list there,” says John Kaiser, editor of the California-based Kaiser Bottom Fishing Report.  “It could become one of the most liquid gambling machines in the world for resource stocks.”

Canadian stock exchanges are known worldwide for their mine financing capabilities, but their credibility has suffered as a result of recent scandals such as Cartaway Resources, Timbuktu Gold and the infamous Bre-X fiasco.

Under the restructuring proposal for Canada’s securities industry announced in March, the Vancouver and Alberta exchanges will merge with Toronto’s Canadian Dealing Network. Junior companies currently listed on the Montreal Exchange and the Winnipeg Stock Exchange have also been invited to join the group.

The restructuring will make the Toronto Stock Exchange Canada’s only senior equities exchange, while Montreal will take over options and futures trading.

The new junior exchange will be similar to NASDAQ in the United States, but a lot smaller and – at least initially - more heavily weighted by resource companies rather than high-tech stocks.  It will be based in either Calgary or Vancouver and maintain offices in Montreal and Toronto.

Michael Johnson, president and CEO of the VSE, says creating a specialized market with uniform regulation will improve the ability of Canadian juniors to compete internationally and attract more institutional investment.

Some dispute this claim, arguing that the merger is little more than a cost-saving measure for the exchanges and their members that will have little impact on the listed companies.

“There are definite advantages to the merger from the point of view of efficiency. But it’s not going to increase liquidity, “ says John Woods, editor of Canada Stockwatch.

And Canada’s position as the world capital of exploration financing may well be lost rather than enhanced if exchange officials do not take advantage of the restructuring to increase accessibility to retail investors, Kaiser says. He argues that both speculative investors and junior listings will move south of the border in search of better liquidity and a larger audience, leaving the new exchange to wither.

“The whole thing clearly must become much more electronic,” concurs Gerald Harper, president of the Prospectors and Developers Association of Canada. “It should be almost as easy as phoning up and asking to rent a terminal for the junior exchange in, for example, Thunder Bay.”

Officials from the ASE and VSE say the new exchange will be fully electronic but that providing online trading for retail investors will not be on the agenda at anytime in the foreseeable future.

“We’re looking to provide, through the merger, improved access to trading for our members. But providing on-line access to trading for investors is not currently part of the consideration,” said a VSE spokesman.

Tom Cumming, president of the ASE, said the new exchange’s first priority will be to foster a reputation for the quality of its listed companies, its regulation and its management.

But regardless of the ultimate direction, the creation of a new junior exchange is facing a number of hurdles.

There is some resistance to the restructuring in Quebec, where an advisory committee is reviewing the proposed changes and ME-listed juniors have voiced concerns about losing credibility from an affiliation with the Western exchanges, where recent scams like Bre-X originated.

“Montreal must have a branch office with the power to make decisions and the board of directors (of the junior exchange) must include representatives from the Montreal exchange,’ says Guy Parent, president  of the Quebec Prospectors Association.

The VSE’s lingering reputation as the “scam capital of the world”, a designation assigned by Forbes magazine about a decade ago, also hangs like a dark cloud over the merger.

“Moving the exchange to Calgary is the easiest way to bring closure to that unhappy time,” says Woods.

Another thorny question is how to police a national exchange when each province has its own independent securities regulator. Although the possibility of forming a national securities commission in Canada has been discussed for years, there has been little progress towards this goal.

Meanwhile, the very companies the new exchange is hoping to serve – junior resource stocks - are mired in the worst bear market this decade. Low commodity prices and the lingering effects of  Bre-X on investor sentiment have turned many high-flying exploration stocks into worthless shells. The barometer of the junior mining sector, the VSE Composite Index, sits at the 425 level, down from about 1500 in early 1997.

Until these stocks become more attractive to investors, the new national exchange will have little clout either domestically or internationally.

Seismics Show Promise as Deep Exploration Tool

For years, mining companies watched enviously from the sidelines as their counterparts in the oil industry perfected a powerful tool to search for petroleum: seismic, or sound wave, technology. Now miners are becoming active participants in the development of seismics for resource exploration.

Since the 1930’s, petroleum explorers have used artificially generated vibrations to penetrate the earth’s crust and outline reservoirs of oil and gas. But the rules of nature prevented North American mining companies from taking advantage of the same technique to explore for their main targets, gold and base metals.

The sedimentary basins that contain petroleum deposits are ideal sound reflectors because they are usually large, flat-lying and spatially continuous. Metal deposits, on the other hand - especially in the volcanic terrain of the Canadian Shield – are relatively small, spotty and tend towards a vertical alignment that complicates sound reflection.

So what has changed? Field equipment and processing, particularly the ability to digitize data, has advanced by leaps and bounds. Meanwhile, mining companies have been forced to probe deeper and deeper for new ore.

Now seismic reflection technology, which relies on sound waves to map underground geology at depths of half a kilometre and more, is emerging as an exciting new tool in the search for deep orebodies.

“Literally hundreds of millions of dollars have been spent by the oil industry,” says Larry Matthews, Noranda Inc.’s seismic technology co-ordinator. “Field equipment and processing technology have finally arrived at a level where some of the more difficult technical problems can be tackled.”

Seismic exploration involves recording sound waves as they are reflected from different rock layers. The sound waves, or vibrations, are generated by a number of different sources – dynamite, dropped weights, or huge vibrating trucks - depending on the target and the environmental conditions. Receivers called ‘geophones’ record echoes from the waves as they bounce back to surface. The digital information is then interpreted by geophysicists like Matthews.

Although the South African mining industry has traditionally used seismics to explore for flat-lying sedimentary gold reefs in the Witwatersrand basin, Canadian deposits were thought to be too discontinuous and steeply dipping to generate useful data.

But in the late 1980’s the Lithoprobe program, Canada’s multidisciplinary effort to piece together the evolution of the continent, began picking up strong signals whenever it’s seismic surveys transected a base metal mining area.

At that point, miners like Inco, Falconbridge and Noranda began to see the possibilities of using seismic exploration techniques to find deep orebodies in established camps like Sudbury, Ont.

Noranda has emerged as a frontrunner to develop the deep exploration tool if only because many of its zinc and copper mines are depleted or are on the verge of closing, including operations near Manitouwadge, Ont., Matagami, Que. and Bathurst, New Brunswick.

“Noranda has a vested interest in making this technology work,” says Matthews. “If there is any opportunity to find other potential sources of ore in those camps, at depths we haven’t explored before, then we will pursue that.”

Noranda has yet to find any new deposits, but the company has demonstrated that seismic techniques can provide an accurate reflection of the deep subsurface, including the location of metal-bearing sulphides.

This is a significant breakthrough for mineral exploration. Although many of the shallower orebodies in Canada have been mined out, it may be economic to develop orebodies as deep as three kilometres below surface in camps where infrastructure is already in place. The trick is to find them.

“There’s a lot of potential for seismics,” says Matthews “What it has that other technologies don’t have is the ability to penetrate below 500 metres with some reliability.”

Seismic exploration is expensive. Costs average about $50,000 per sq. km, at least 10-fold the cost of a magnetic survey over a similar area. On the other hand, compared with a $150,000-250,000 price tag per hole for wildcat drilling, the only real alternative for deep exploration, seismics looks like a bargain.

It may be years before seismic techniques, with their complexity and high costs, find practical applications in the search for new mineral-rich regions. But in the meantime, the technology may serve a much more urgent need: keeping Canada’s aging base metal mining camps - and the communities that depend on them – alive a little bit longer.

Determined Juniors Enter Third Field Season at Voisey’s Bay

Prohibitive costs, brutal weather and limited success have forced many juniors to abandon exploration around the rich Voisey’s Bay nickel deposit in Labrador , but a handful of die-hards are taking another stab at finding mineralization on the fringes of Inco’s growing orebody.

The relative ease of claim-staking in Labrador, where prospectors can acquire ground by outlining an area on a map rather than running claim lines and hammering in corner posts, allowed hundreds of companies to take positions around Voisey’s Bay following the initial nickel discovery by Diamond Fields Resources in 1994.

That number has dwindled to less than two dozen, while the resource at Voisey’s Bay has grown to an estimated 150 million tonnes.  By the end of this year, the number of claims in good standing within Labrador is expected to drop to 125,000 from a high of 280,000 in 1995, says Ken Andrews, Director of the Mineral Lands Division of Newfoundland and Labrador’s Mines Management Branch.

“Map-staking made it possible for companies to pick up land in Vosiey’s Bay and pretend to go mining,” says Douglas Hickey of International CanAlaska Resources, a company which still holds claims in the area. “Most of them never did, but hundreds of them saw their stock double in price over a few days.”

Those who stuck it out in the inhospitable terrain, where high winds are known to hurl drill rigs off cliffs and winter temperatures freeze exposed skin in minutes, will be joined this summer by seniors Falconbridge and Teck. The consolidation means exploration spending in Labrador, expected to fall to $59 million from last year’s $76 million, will be more focused, says Andrews.

The perseverance of some juniors, and the recent entry of senior players around Voisey’s Bay, is attributed to the nature of sulphide nickel deposits, which tend to occur in clusters or belts. All three of the main mineralized zones discovered to date - Ovoid, Eastern Deeps and Western Extension - lie within Inco’s 2,059-sq.-km property. But the belief that additional discoveries will be made has left Inco, which expects to build a mine at Vosiey’s Bay by 1999, surrounded on all sides.

To the south, Donner Resources plans to drill a number of geophysical targets that lie in close proximity to copper-nickel-cobalt mineralization.  The junior expects to spend $5 million, funded in part by a recent private placement with operator Teck, to complete 10,000 metres of drilling on the South Voisey Bay Area.

To the east,  partners International CanAlaska and Columbia Yukon Resources have enlisted the technical expertise of Falconbridge to direct a $3.3 million program to test for extensions of the Eastern Deeps mineralization. Falconbridge will cover a third of the cost of the program in return for an option to earn a 51% interest in the juniors’ property.

And to the north, NDT Ventures is planning to spend most of the $2 million it has budgeted for Labrador this season to investigate troctolite units, the host rock of the Vosiey’s Bay deposit, in the Staghorn Lake area.

A recent exploration update by Inco suggests these regional efforts are more than wild speculation. “Based on geological mapping and recent drilling, the troctolite rock which hosts the mineral resource found in the Voisey’s Bay area may be significantly more extensive than originally estimated,” Inco said in its first quarter report.

The nickel producer will confine its own drilling to the immediate area around the Voisey’s Bay resource, says Rick Gill, executive vice-president of Voisey’s Bay Nickel Company, an Inco subsidiary. But the company has also launched a regional geophysical survey to determine the extent of the troctolite host rock.

And to the chagrin of native groups in the area, who have yet to sign impact and benefits agreements with Inco, Voisey’s Bay Nickel has applied for infrastructure permits to build an airstrip for small fixed-wing aircraft and an 11-km road from the drilling camp to the main camp at Anaktalak Bay. The impact and benefits negotiations with the Labrador Inuit Association (LIA) and the Innu Nation, meant to cover cultural, environmental, educational, and employment issues, have been held up by unresolved issues over financial compensation.

Meanwhile, land claim talks between the two native groups and the Newfoundland government, stalled since the mid-April, are expected to resume on May 12.

Once the land claims are settled, the impact and benefits agreement finalized and environmental permitting in place, Inco can begin building what is expected to be the lowest-cost nickel mine in the world. In the year 2001, Vosiey’s Bay is forecast to provide about 35% of the 750 million pounds of nickel produced at Inco’s Canadian and Indonesian mines. Native groups also stand to benefit, if only in an economic sense, from the mineral riches beneath their land.

“To put the Voisey’s Bay find in perspective, the net benefit over the long term to Newfoundland and Labrador  … is greater than from Hibernia, Terra Nova and other potential oil discoveries,” said Premier Brian Tobin after the deposit was discovered.