Capital Gains, Big Losses
Raising capital in a changing landscape
Canada’s 2024 Budget announced increases to the capital gains inclusion rate. This, alongside changes to the Alternative Minimum Tax (AMT), were a major blow to Canadian exploration capital. In 2023, 83% of all exploration capital raised on Canadian exchanges was financed through flow-through shares (FTS), with 89% of that being charity flow-throughs. The changes were expected to effectively eliminate about a third of all FTS investment, coming as a major blow to Canada’s explorers, which have relied on the FTS model since its inception in the 1970s.
In anticipation of the changes in April 2024, investors and donors rushed to take advantage of the existing regime before changes were enacted, leading to some deal-makers such as WEALTH Group (WCPD) reporting record deal-flows. “WCPD was extremely busy after the budget announcement as the government gave 60 days for people to sell assets, buy more tax reduction strategies, buy more charity flow, etc. so that they could collect more tax, and it worked for them as they collected approximately C$4 billion more in income tax than they would have in just two months. By 25 June 2024, when the capital gains went up, we had reached the equivalent of December 31, 2023, which was phenomenal,” said Peter Nicholson, WCPD’s president and founder.
The changes were opposed by swift lobbying from industry associations, donors, issuers and the financial firms that facilitate FTS deals to amend the AMT and restore the strength of the FTS model. The calls were heard by the government, and the requested changes have been put forth in a draft legislation that is hoped to be enacted soon. “I do not believe that the government understood the impact these changes would have on exploration risk capital, and as critical mineral exploration is a huge priority for the government, they have since advanced measures to reverse some of the changes that were compromising exploration capital,” said David LeClaire, Oberon Capital’s president and founder.
With Canada expecting federal elections in 2025, there is still uncertainty on how a new government would approach capital gains and the AMT, but FTS stakeholders have considered this in their lobbying efforts: “As part of lobbying activities, we are speaking to members on all sides of government in an effort to inform individuals on the connection between tax policy and mineral policy. Regardless of who wins power in the next election, we are hopeful that a new administration will be ready to hit the ground running, understanding the issues and concerns of the mineral exploration industry,” said Kendra Johnston, managing director, PearTree Securities.
It is hoped that the attention around the capital gains changes will elevate the importance of the FTS model to Canadian voters. At a time when juniors need all the financing they can get, the uniquely Canadian FTS model is more important than ever to Ontario’s exploration success. “With charity flow-through today being a dominant part of the financing landscape for Ontario’s mineral explorers, the model has become more understood, and the industry realizes the significant upside of minimizing dilution by raising funds through charity FTS,” said Lisa Davis, CEO, PearTree Securities.
“Institutional investors are currently less aggressive, creating a gap that streamers and private equity are filling, though not sufficiently. High-net-worth individuals are increasingly involved, but it is challenging to replace traditional institutional capital.”
Gavin McOuat, Senior MD, Head of Mining & Metals, Raymond James
Alternative financing
Given the difficulty faced by issuers raising funds traditionally through equity, exacerbated by the capital gains and AMT changes, the attractiveness of alternative financing methods are becoming increasingly hard to ignore. However, for the juniors that are pushed towards more exotic and complex financing packages, there are risks that a company’s leadership may not be aware of, due to their novelty. “My advice to junior development companies based on the challenges we have seen in financings is two-fold. First, understand that these new alternative finance providers, while replacing equity, are not wearing an equity hat and will require additional protections that look very much like debt arrangements. Second, a financing plan should have a well thought out plan for shortfalls and timing delays, as these investors will be looking for some cost protection as well as some outside timing protection,” said Michael Pickersgill, head of mining and metals, Torys LLP.
While most alternative forms of financing continue to have a limited impact on the overall financing landscape, the fallout of the commodity downturn in 2014/2015 forced many issuers towards streams and royalties, leading to the model’s remarkable growth over the past 10 years, particularly in gold and silver, to the point where it is almost always considered as part of almost any major mining financing package. However, this mode of financing is unlikely to help early-stage explorers who are feeling the financing pinch the most, as streaming and royalty companies typically prefer producing mines or advanced near-production projects. “Making a material investment into a junior trying to put a new mine into production is probably too high risk for a royalty company such as Metalla. The market has had trouble fully being able to value the optionality piece of this business,” said Brett Heath, CEO, Metalla Royalty & Streaming.
Moreover, although the lackluster equity markets present opportunities for streaming and royalties to invest further left on the Lassonde curve, only a select few earlier-stage projects will stand out in a sea of thousands of development projects globally. “The capital markets for exploration and single-asset development companies have almost swung too far to a point where there is almost no equity available for them. As a royalty and streaming industry, we find that we do not have enough capital to support the entire mining industry, and additionally, you have to be conservative as you do not want the royalties and streams to be too large or overbearing, making the project uneconomical,” said David Awram, co-founder and senior executive VP, Sandstorm Gold Royalties.
“Executive teams are significantly more cautious around taking risks, and the sector is certainly less aggressive and active in dealmaking activities than in the early 2000s.”
Wes Hall, Chairman and CEO, Kingsdale Advisors
Many of Canada’s biggest streaming and royalty companies are focused on precious metals, with no plans to branch out to other commodities. However, in recent years a number of financiers, such as Electric Royalties and Lithium Royalty Corp, have been attempting to pioneer the model in the energy transition metal space. Moreover, developers of such projects and traditional precious metals streaming and royalty companies are able to find creative workarounds: “Given a finite pool of capital available, there is a never-ending demand for financing from companies like Triple Flag. Additionally, we see an increasing number of projects catering to the green energy transition. Triple Flag is also able to support these projects – by underwriting by-product gold and silver streams on base metal projects, for example,” said Sheldon Vanderkooy, CEO, Triple Flag Precious Metals.
Nonetheless, Ontario’s juniors are continuing to find creative ways of financing their projects, particularly those in the critical minerals space. With EV and battery manufacturers scrambling to secure locally-sourced materials, we can expect to see them show increased interest in Ontario’s upstream in the years to come, providing a new financial lifeline for many project developers. “OEMs continue to expand into the mining space to gain access to commodities. We have seen toehold investments to full-blown JV partnerships this past year. It has been a learning curve for both OEMs and mining companies as they try to collaborate effectively to bring products to the market,” said Alexander Pizale, partner, Cassels Brock & Blackwell LLP.
Article header image courtesy of Agnico Eagle