Arie Papernick: A New Mining Investment Landscape Explained – Interviewed by Brian Sylvester (The Metals Report – April 9, 2013)

Life is difficult for junior resource companies. Not only are stocks and commodity prices moving sideways, but tax changes in Canada may signal less friendly treatment for exploration investment. But not all is grim, according to Arie Papernick, the head of equity capital markets at Secutor Capital Management Corp. in Toronto.

In this interview with The Metals Report, Papernick says investors can still make money if they focus on companies that are producing or near production with an attractive capital structure and strong balance sheets. Royalty plays are another favorite. He reveals that the next big opportunity may be coming in the energy metals space.

The Metals Report: Arie, the Canadian government recently introduced a new budget that contains changes to the tax code that are expected to affect mining companies with producing mines. John Gravelle, a mining expert for PricewaterhouseCoopers, recently called this legislation “a form of stealth resource nationalism.” What’s your view?

Arie Papernick: The budget proposes reductions to some of the tax benefits that can be passed to flow-through shareholders. The major impact is that some traditional pre-production expenses, also called Canadian exploration expenses (CEE), which previously could be 100% written off in the year incurred, will be phased out over the next few years. Starting in 2018, only 30% of these expenses can be deducted on a declining basis as Canadian development expenses (CDE). This will potentially hurt resource companies’ ability to raise capital through flow-through shares as the flow-through investor community generally insists on receiving only CEE deductions.

The changes will also be troublesome for junior companies that are developing new mines, because they will have to start paying taxes much sooner if CEE can no longer be used to reduce taxable income on a 100% deduction basis.

TMR: Do the budget changes suggest Canada is becoming a less viable place to start a mine?

AP: Not at all. Of course, any time you mess around with tax benefits or the deduction rates on capital equipment, it affects cash flows and makes capital investment less attractive. But at the same time, Canada is a pretty safe jurisdiction. And flow-through shares are a terrific way of raising capital that is unique to Canada. On the positive side, the budget extended the investment tax credit for flow-through shares in respect of certain grassroots mining expenses. The combination of federal and provincial tax credits provides powerful incentives. It’s unfortunate that Canada is proposing tweaks in this budget that may make flow-through investment a bit less attractive.

TMR: How would Arie Papernick fix what is happening? Could this be done by legislation?

AP: I think maintaining the benefits of flow-through investment for the Canadian resource market is key. If anything, the government should be going the other way. In certain areas that are more remote, there should be additional tax benefits for investing in these projects. Experts believe the proposed budget changes are trying to align the mining industry with the oil and gas industry, but there are significant differences between the two, and, if anything, the mining space needs more tax incentives to motivate investment.

TMR: Funding for exploration is very difficult right now. What fallout do you see in the market if this dearth of financing persists?

AP: I see a future with a lot fewer mining companies. We’ll see more mergers and acquisitions (M&A) as well as property acquisitions due to interest from Asian and South American companies. You’re also going to see a lot of a junior exploration companies looking for opportunistic property acquisitions. I’m getting a lot of calls from clients on that. Smaller companies that have good balance sheets are looking for opportunities. You’re going to see a lot of combinations of smaller companies to create a new company with more assets. Combining companies is a good reason to restructure and make companies more attractive as investments. In the current market, the capital structure of many junior miners won’t attract institutional investment capital and that has to be fixed.

TMR: Recently we’ve been seeing more royalty companies than we’ve ever seen before especially in the junior side of the precious metals business. What’s your view of royalty companies and which ones do you like?

For the rest of this interview, click here:



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