Mineral Exploration is the Foundation of the Mining Industry
The mineral industry generates significant economic opportunities for Canadians, including over 380,000 jobs and over $70 billion in taxes and royalties paid to Canadian governments in the last decade. To sustain these benefits, exploration is required to discover new mineral deposits that may become the mines of the future.
In Canada, exploration is undertaken by prospectors, ‘junior’ exploration companies and ‘senior’ mining companies. Juniors take on the bulk of the high-risk, high-reward grassroots (greenfields) exploration that leads to new discoveries. Collectively, juniors are good at making discoveries; in Canada, 80% of significant discoveries over the last five years have been made by juniors (Schodde).
Capital Markets Underpin the Global Exploration Industry
While mining companies finance their exploration programs with internal revenues, most mineral exploration companies (juniors) generate no revenues. Instead, juniors raise the bulk of their budgets from investors primarily by issuing shares. Canada has become a global centre for this type of financing, ranking as the top jurisdiction in the world when it comes to raising mining equity finance. In 2012, 70% of global mining equity finance was raised in Canada.
Mineral Exploration Sector Continues to Face a Capital Crisis
Uncertainty in the global economy has led to significant capital-raising challenges for juniors. In 2013, the total number of financings on the TSX Venture Exchange (TSXV) was one of the lowest since 1999; year-to-date 2014 figures indicate a continued downturn. The limited amount of financing that did take place on the TSXV in 2013 was primarily for very small amounts – over 50% of all financings in 2013 were for $500K or less (compared to 13% in 2010). A significant portion of all financings were barely enough to keep the lights on - 12% of financings in 2013 were for $100K or less, compared to only 0.5% in 2010. Approximately 60% of Canadian-listed juniors had working capital balances under $200,000 as of October 2014 (Kaiser Research Online). Given that it costs at a minimum of $200,000 simply to remain a listed company, companies are in survival mode.
According to SNL Mining and Metals, exploration budgets for all juniors globally dropped 29% in 2014, after falling 39% in 2013. As a result, juniors are expected to account for only 32% of global exploration budgets in 2014, down from a high of 55% in 2007. In Canada, expenditures on exploration (primarily undertaken by juniors) dropped 50% in 2013 to $1.2 billion, from $2.4 billion in 2012.
While Canada has attracted the largest share of exploration budgets for over a decade, its share of global spending decreased from 16% in 2012 to 13% in 2013, only $25 million ahead of Australia. It is anticipated that 2014 expenditure levels will decrease further and that Canada will fall behind Australia for the first time in a decade. Australia has recently introduced the Mineral Development Incentive which is virtually identical to Canada’s METC, further enhancing its attractiveness as a place to invest.
Augment and Renew the Mineral Exploration Tax Credit to Stimulate Exploration in Canada and Sustain the Industry
The Mineral Exploration Tax Credit (METC) is a fundamental component of the policy infrastructure that has helped Canada become the number one jurisdiction to raise capital globally. Finance Canada estimates that every dollar of flow-through financing generates $2.6 of exploration expenditures. Moreover, flow-through financing is a vital source of financing during a downturn; the share of flow-through financing in trough years is more than double than in boom years.
In light of the worsening fiscal conditions for the junior exploration sector, the PDAC recommends that the federal government augment the METC from 15% to 30% for a period of three years to attract risk capital back to the exploration industry. The expansion of the METC will increase the flow of capital to exploration companies and help Canada retain its position as the top global destination for mineral explorers.
Budget 2015 renewed the Mineral Exploration Tax Credit until March 2016.