Despite the international calamity spurred on by COVID-19, the acquisitions and exploration by mining companies, particularly junior mining companies, has not been deterred. In fact, if anything, it has increased.
“Overall, the industry really has seen an uptick in the last two years, with significant amounts of capital going in,” says Waseem Javed, CPA, CA and partner at Manning Elliot LLP in Vancouver, B.C. “The junior mining space is pretty active, the most active it has been in the last ten years, in my opinion.”
Javed specializes in assurance and advisory services for both private and publicly listed entities in Canada and the United States, with a focus on junior mining, life sciences, technology and more.
Saved capital fuels new exploration trends
According to Javed, the amount of money that has moved into the mining industry, especially over the last two years has been staggering, and believes it could be due to saved capital incurred over global lockdowns and restrictions, both personally and professionally.
“Because we have been so restricted in what we can do, as well as injected government funding, there has been an increase in money that has been saved,” says Javed. “And where is it all going? People are putting it into the stock market – we have seen such an increase in general financing for the mining industry along with other industries.”
The traditional interests in Gold and Uranium remain but the real interest, as anybody would tell you, is in battery metals.
“Battery metals like Lithium are taking off,” says Javed. “There is a big shortage of these things as well – supply chain issues persist but also just supply issues for things like Lithium Ion, causing significant money to go into these companies so they can raise funds to advance the sector. This is driven by the increased demand for electric cars which many see as being environment friendly”
Keeping all your ducks in a row
All this activity is good and well but it has also created challenges from an accounting perspective.
“The significant rise in the activity, like flow through funds or just general funding is enabling [companies] to do a lot more acquisitions of either existing companies or new properties,” explains Javed. “What we are seeing is regulators such as the securities commissions scrutinizing many of these transactions more closely due to the large amounts involved, mainly the junior ones.”
They get flagged and are then subject to regulatory and compliance review because the companies behind the acquisitions are not providing sufficient consideration to the nature of these transactions or the documentation to support the values used.”
With these oversights and the resulting regulatory or compliance review come significant costs as well as time spent addressing the issues, which is why Javed stresses vigilance for all mining companies from the get-go.
“It is important to nail down the appropriate accounting treatment on day one, when [companies] do these acquisitions so that the companies are not subject to cease trade orders and the long and costly process of undergoing the regulatory or compliance reviews. Extra care also needs to be taken when companies address their tax compliance obligations” says Javed.
Flow-through and the mineral exploration tax credit
In addition to all the changes in the industry, Javed has also noticed an increase in flow-through financing, which also requires extra care and attention when filing taxes.
A Flow-Through Share (FTS) is a tax-based financing incentive that is available to, among others, the mining sector. The corporation raises the financing and then spends the money on eligible expenditures that are renounced to the investors to use as a tax deduction and/or credits.
Although the filing process can be tedious, Javed believes these credits are providing the industry with the necessary breaks to fuel growth and innovation, particularly as the world turns electric and battery production becomes paramount.
“What we have seen overall in the industry has been great but there are a lot of small details you can miss,” says Javed. “Ensuring structure and obtaining the proper consultations before you proceed with the transactions, things that are very important to the issuance of FTS.”
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