In jurisdictions with depleting reserves, mining exploration can be the catalyst for future economic growth, employment creation and business opportunity. Yet whenever the mining industry experiences a downturn, exploration spending usually plummets. A jurisdiction which could best illustrate the foregoing is South Africa, whose exploration budget, according to data from S&P Global Market Intelligence, decreased from US$404 million in 2007 to US$87 million in 2017.
From a global perspective, there are signs that the financial performance of the mining industry is improving and a comparative analysis by S&P Global Market Intelligence of exploration expenditure for 2018, 2017 and 2016 yields a similar upward trend. If this trend continues, how is South Africa, as a jurisdiction best known for its large scale mining operations, supporting junior mining through an enabling regulatory framework?
Tax Concessions for Investors
In 2009 South Africa introduced concessions on its tax legislation aimed at venture capital companies (VCCs), financing early stage businesses including junior mining companies. These concessions are encapsulated in section 12J of the South African Income Tax Act (ITA). This section is akin to the UK’s venture capital trust regime. It allows for investors to benefit from tax concessions, namely a 100% deduction of the amount invested, arising from their investment in a mining company in the period before it generates sufficient taxable income from production.
In order to qualify for this tax benefit, VCCs must invest in companies with a book value not exceeding R50 million or R500 million in the case of a “junior mining company” (being an unlisted mining company or mining company listed on AltX). Although this initiative was intended to encourage exploration funding, it is unfortunate that from a mining perspective it has rarely been utilised with only one VCC operating in the mining space. Reasons for this may be the inability to trade the shares in a VCC (investors are required to hold the shares for a period of 5 years, failing which the tax benefit is lost), the limit on the investment amount and restrictions on the amount of shareholding. In any event, the VCC regime is a temporary measure ending in June 2021 unless extended.
In Canada, a jurisdiction in which exploration expenditure has significantly increased since 2015, ‘flow-through shares’ are an established source of financing targeted specifically at exploration activities. The holders of flow-through shares are entitled to certain tax benefits and therefore such shares are typically issued at a premium to ordinary shares. They become ordinary tradable shares of the issuer once bought by an investor and the tax benefits are conferred. In contrast to the VCC regime, the flow-through share regime allows a mining company to obtain funding for expenditures on exploration and pre-mining development. The company is able to renounce or flow through certain expenses to the holder of the shares. Therefore, the expenses are deemed to be incurred by the investor and not the company and accordingly reduce the investor’s taxable income. Furthermore, the Canadian flow-through regime is complemented by the additional 15% mineral exploration tax credit available to individual investors for grassroots exploration.
The flow-through share regime is specifically tailored for junior mining companies and ensures that such companies have a consistent flow of capital during their initial phase of exploration, when there is no taxable income accrued. The Prospectors & Developers Association of Canada (PDAC) believes that the ‘flow-through shares’ concession has propelled Canada to be a global leader in mineral exploration and mining. PDAC bases this assertion on information provided by the TMX Group and S&P Global Market Intelligence which shows that on average, between 2011 and 2017, 68% of the funds raised on the TSX and the TSX-V were raised through flow through shares. This percentage is even higher for smaller transactions.
Stock Exchange Participation
The JSE has sought to support the growth of small and medium sized businesses and junior mining exploration entities by relaxing its requirements relating to the appointment of a designated adviser for VCCs. A VCC applicant issuer listed on the AltX of the JSE may either appoint a designated adviser or VCC adviser. However, in the event of a VCC seeking a listing on the Main Board of the JSE, it will be required to appoint a sponsor and not a VCC adviser. The JSE has further recently indicated its willingness to engage with the junior mining industry to unpack its listing requirements and consider other barriers to entry into the market. Capital markets activity could also potentially be enhanced through suitable tax incentive structures for junior miners.
2018 Mining Charter
An argument could be made that the Department of Mineral Resources and Energy (DMR), under its new leadership, has recognised the plight of the junior mining sector in South Africa by dispensing with the empowerment requirements entrenched in the earlier 2017 “Zwane Charter”. This Charter would have required the holder of a new prospecting right to have a minimum of 50% + 1 black person shareholding. Notwithstanding this milestone, the 2018 Mining Charter has received criticism for failing to engage with the junior miners and deal with the more specific challenges of exploration in order to create an enabling legal framework for this sector.
Additional Supportive Measures
Other encouraging developments to emerge in South Africa to support exploration funding are initiatives by the DMR and Minerals Council, namely the DMR’s junior miners’ programme and Junior and Emerging Miners’ Desk to assist new entrants in the junior mining sector.
Minister Gwede Mantashe also dedicated a national investment of R20 billion to an integrated and multidisciplinary mapping programme to boost global investment in local exploration. The R20 billion dedicated by the Minister is expected to be made available over the next 10 years. It is envisaged that the programme will assist South Africa in securing new resources for development, employment creation, economic growth and accelerate transformation. The mining industry has in the past fulfilled a significant role for employment creation on a large scale. If the junior mining industry can attract investment as it does in Canada and Australia, it may play a significant role in addressing President Cyril Ramaphosa’s recent call for 2 million jobs in the next 10 years.
According to a survey conducted on members of the Junior and Emerging Miner’s Desk of the Minerals Council during April and May 2019, 64% of participants identified the South African regulatory environment as a key challenge to doing business. Despite the measures contemplated above, it would appear that further work needs to be done so as to create an enabling regulatory framework for junior miners in South Africa and that some lessons can be learned from jurisdictions with a thriving junior mining sector such as Canada in achieving this objective.