With flow-through share donation financing, investors gain an opportunity to achieve greater returns on their investment, major charitable donors can reduce their after-tax cost of giving and the selected charities achieve the obvious benefit of the donated funds
Never has there been a more challenging time to be trying to raise capital in the mining exploration sector.
So serious is the situation that the mining industry’s Prospectors and Developers Association of Canada (PDAC) refers to the current environment as a “capital crisis” and continues to press various levels of government to adopt efforts to save the exploration industry in this country.
Fortunately for Canadian mining exploration firms – many of which are based in Vancouver – there is one available avenue to tap into an expanded universe of capital sources: flow-through share (FTS) donation financing.
By transforming “flow-through” share offerings (which are typically accessed only by Canadian retail investors) into financings that can tap institutional and offshore capital pools, flow-through share donation programs give mining exploration firms access to much needed capital that they would otherwise be unable to attain.
In such financings, investors gain an opportunity to achieve greater returns, major charitable donors can reduce their after-tax cost of giving and the selected charities achieve the obvious benefit of the donated funds.
It all works by giving large strategic investors the ability to acquire Canadian mining equities at a modest discount to help offset current market uncertainties.
Ordinarily, the tax benefits associated with flow-through shares (FTS) can be realized only by Canadian taxpayers. As a result, FTS have historically been bought only by Canadian retail investors.
However, FTS donation financing effectively converts FTS into regular common equity that can be purchased by anyone, including foreign and institutional investors who would not otherwise buy FTS because there simply isn’t enough incentive to do so.
This “conversion” effectively expands the universe of potential investors and provides access to a much larger pool of capital.
How much? Well, over the past 12 months, our firm, which specializes in flow-through share donation financings, has directly placed more than $100 million of capital into junior mining exploration firms across Canada. This at a time when the entire flow-through market amounted to little more than $400 million across the whole country.
For local Vancouver firms, the ability to mine a new vein of capital via flow-through donation financing can be a critical lifeline, particularly when the markets are being so unforgiving to juniors.
For example, PearTree Securities arranged an FTS donation financing in which a large block of a B.C. junior mining company’s shares were sold to an institutional investor by the Vancouver General Hospital Foundation, which had received them from a pre-qualified group of charitable donors, who were, in turn, issued a charitable tax receipt equal to the value of the share sale.
Although seemingly complex, all elements of such FTS donation transactions occur within a single business day, with full transparency existing between all parties.
Such is the nature of FTS donation arrangements that resource share issuers can have a direct, positive impact on accelerating and increasing donation funding for everything from universities to hospitals and medical research to local food banks.
Another key to all this is that FTS donations represent one of the only legitimate tools major charitable donors can use to minimize their after-tax cost of giving, while maximizing their giving to Canadian charities. Thus, the donor’s primary incentive to buy the equity has little to do with its perceived value of the underlying share and everything to do with achieving its personal philanthropic goals.
Interestingly, while the end investors in FTS donation financing transactions enjoy the benefit of buying the shares at a slight discount to market, they access the shares at a significantly higher cost than typical FTS investors would pay, thus reducing the downward pressure on the common share price that normally occurs in conventional flow-through deals.
Fortunately, FTS donation financing not only offers share issuers the benefit of access to new sources of capital, but also capital that is supported by a more solid and dependable investor base – no trifling matter in today’s difficult market environment. •
