Mine exploration gets some love
FTS model allows the exploration company to raise finance through the issue of shares, and pass its tax benefit on to the taxpayer.
Employees have been forced to work beyond their shifts with no additional pay at cobalt and copper mines. AFP/File/MARC JOURDIER
It’s astonishing how fast things can change. A year ago, mining exploration, while not exactly dead, was gasping for air.
“There’s no reason why SA should not account for a far larger share of global investment in mineral exploration,” says Errol Smart, MD of junior miner Orion Minerals, which has invested R450 million over the last five years on the Prieska Copper-Zinc Project in the Northern Cape.
Smart was speaking at the Joburg Indaba last week. This is a bold statement, given the wholesale desertion of SA as an exploration venue in the last 10 years.
BEE
SA has among the richest mineral endowments in the world, yet accounts for less than 1% of the $10 billion global exploration budget: the result of previous government hostility to mining and several early iterations of a Mining Charter that insisted on black economic empowerment (BEE) participation in exploration, one of the riskiest sectors.
This made no sense to mining investors, particularly those willing to put money up for high-risk, early stage exploration.
Why should they have to take on BEE partners who carry none of the downside risks, but all the upside?
When Gwede Mantashe took over as mines minister he got the message, and BEE obligations were removed from the latest version of the Mining Charter for those seeking exploration licences.
The Canadian model, and why it would work in SA
One plan on the table to unlock financing for exploration is to adopt the hugely successful Canadian model of ‘flow-through’ shares (FTS).
An FTS is a type of share issued by a corporation to a taxpayer.
It allows the exploration company to raise finance through the issue of shares, and pass its tax benefit on to the taxpayer. The taxpayer is then able to sell that share to others looking for a tax benefit.
In practical terms the introduction of this model in SA would have little or no negative effect on tax revenue (due primarily to the secondary and induced taxes resulting from exploration expenditure, such as PAYE on salaries and value-added tax on goods and service providers) – and it would allow for a potentially huge injection of capital at the local level, where it is needed most.
It would also open SA exploration for foreign capital.
As things stand, Smart estimates that every R100 spent on exploration expenditure results in R30 flowing to the South African Revenue Service (Sars) as secondary and induced taxes.
A study by PwC suggests the introduction of FTS could be close to revenue-neutral for Sars by allowing investors to claim their total equity investment in an exploration company as a deduction against earnings and thus experience the benefit of a small deduction (28% of the value invested for
companies or 45% for marginal taxpayers).
Exploration expenditure spent within one year after the investment will result in secondary and induced taxes roughly equal to the reduced direct taxes that the investors, who would be a blend of both corporate and marginal tax payers, benefitted from as a tax reduction in the same year.
The exploration company, in turn, sacrifices its tax deduction for the exploration capital expenditure and thus pays taxes earlier when mining commences.
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