How has PearTree navigated the last couple years and how has investment in flow-through capital been affected?
PearTree started operations almost 15 years ago and has raised over US$2 billion for resource exploration and development. We have become the single largest source of flow-through capital in Canada. Like most businesses, everyone was paralyzed for a month or two at the time of the first COVID-19 shutdown, but by the end of May 2020 there were more opportunities for financing. This was partly due to the price of gold going up very quickly, resulting in a lot of the exploration in Canada. PearTree has become busier than ever, having hired six new people to meet demand.
How does the process work for issuers and how do investors benefit from acquiring flow-through shares?
From the perspective of an issuer of flow-through shares, they are simply issuing those shares to our clients, the same way they would in any other flow-through offering. Behind the scenes, we then arrange for those clients to donate the shares to their charities, and then the charities sell those shares on to an institution or strategic investor that would otherwise not have been able to participate in the flow-through offering, such as non-Canadian or institutional investors. When somebody is buying shares for donation purposes, they are not looking for a return in the conventional sense, but as philanthropists, they are looking to give a certain amount to a charitable cause.
From the perspective of a Canadian resident flow-through share subscriber, they can reduce the after-tax cost of a cash donation to charity from about C$0.50 cents on the dollar to something in the range of C$0.10 cents after tax. Donors access two Canadian tax incentives with one cheque; they are getting both a donation tax credit and the tax benefits of a flow-through share subscription. The subscribers are not making an investment return, but they are able to give more for less. Once people realize the amount they can get in tax savings, they tend to increase their donations which also results in more exploration capital for the resource sector.
You have mentioned before that 70% of capital raised for exploration in Canadian markets involves flow-through shares. Do you foresee any changes in future trends?
Ten years ago, most of the buyers which have come to be known as “traditional flow-through funds”— were funds set up as limited partnerships which raised money to buy flow-through shares through the distribution of limited partnership units to a largely retail investor base. Over the past eight or ten years, the economics of structuring transactions through the PearTree platform has improved deal economics for the issuer and global investors who are buying newly issued shares through this process. The result is a new investor paradigm. That said, a big part of our business is driven off of strategic buy side investors acquiring 10% to 20% in exploration issuers, both public and private. As far as future trends, we are seeing our platform adopted in ever bigger financings well above the typical flow-through financings we have historically seen. Four transactions this year were all over C$50 million with one – OSK – at C$70 million. I think we are likely to continue to see the trend accelerating value creation in the junior market.
What goals would you like to achieve with PearTree in the next few years?
The future of PearTree can be summed up in two words: growth and innovation. We have built a strong base of relationships with mineral exploration companies, donors, charities, and institutional and strategic buyers that will allow us to continue to grow even if the size of the overall market contracts. For the first time in recent years, there has been a lot of M&A activity providing new applications for our platform. For example, this year we structured and financed an offering with subscription receipts as well as off of a shelf prospectus. We also continue to look at other solutions that are creative financing tools for the mining sector that can allow us to meet the philanthropic objectives of our donor clients without necessarily relying solely on flow-through shares.