RE: Any wonder why this is a $0.60 stock ?I think that the present share price has less to do with the seemingly delayed results of the T-1 drilling and more to do with the tax advantages of those fortunate investors (of which I was not fortunately one) who were able to purchase the flow-through shares of the last Private Purchase.
The Private Placement had 10,570,571 flow-through shares. The tax advantage offered by the flow-through shares puts the break-even value of the shares at about 71% of their purchase price, which was $0.70.
That works out to a hair under 50 cents. In other words, a shareholder could sell shares that he already holds for down to near 50 cents and use that money to pay for the flow-through shares and still be cash positive.
Since the hold period expires on August 29, 2006, I doubt that these low share prices will last past that date or that the price will drop lower that 50 cents. Of course if news from T-1 comes out sooner, that could change the whole picture.
Below is the NR explaining the Private Placement and an explanation on the tax advantages of flow-through shares by a BMO Nesbitt Burns Advisor.
P10
-----------------------------------------------------------------------
" BC-Metalex-priv.-placmnt 05-03 0244
News release via Canada NewsWire, Vancouver 604-669-7764 -ME-
Attention Business Editors:
^Metalex Ventures Ltd. - Private Placement, April 28, 2006@
KELOWNA, BC, May 2 /CNW/ - METALEX VENTURES LTD. ("MTX"-TSX.V) (the
"Company").
The Company is pleased to announce that on April 28, 2006, subject to
final TSX Venture Exchange approval, it has closed its previously-announced non-brokered private placement for gross proceeds of $12,991,899.20. The offering consisted of 10,570,571 flow-through shares and 7,987,285 non low-through units, both securities priced at $0.70 per security, with each unit comprised of one common share and one-half of one share purchase warrant and each whole warrant exercisable for the purchase of one common share of the Company at a price of $0.88 per share until April 28, 2007. All securities are
subject to a hold period expiring on August 29, 2006. The Company has agreed to pay certain finder's fees in accordance with the policies of the TSX Venture Exchange.
Proceeds from the private placement will be used to advance the bulk
sampling of T1 and exploration in Ontario and Quebec as well as exploration in Angola and other overseas projects.
ON BEHALF OF THE BOARD OF DIRECTORS
"Peter Gregory"
Peter Gregory, President
METALEX VENTURES LTD.
--------------------------------------------------------------------------------------------------------------------------------
Understanding the Tax Advantages of Flow-Through Shares
Flow-Through shares are one of the few remaining tax-assisted investment vehicles available to investors in Canada. Flow-Through Limited Partnerships are tax-advantaged vehicles designed to invest in a portfolio of flow-through shares, usually issued by resource-based companies. Since the introduction of the tax system in 1954, the Canadian government has been working on additional ways to encourage exploration and development in the resource sector. In the 1993 Federal budget, the government allowed certain investors to deduct exploration expenses against income. Since that time there has been a dramatic increase in exploration activity.
Flow-through shares do not exist to circumvent any tax rules or to take advantage of any loopholes in the Tax Act. These flow-through shares benefit from certain provisions within the Tax Act that were explicitly created by government, as mentioned above.
There are actually three advantages created by flow-through shares, with respect to taxation. The primary benefit of flow-through share investing is the ability of the investment to convert income, in the current year, into capital gains in future years. With the preferential tax treatment of capital gains over income, there is an immediate benefit to the investor. The second is that a tax deferral is created.
It is assumed, unless in a highly inflationary environment, that if one can defer the payment of taxes to a later date, that individual has gained a definite advantage. The third advantage created is through tax efficiency. The purchase and subsequent tax credit creates an ACB or adjusted cost base of zero. This is part of the first advantage, whereby income is converted into capital gains. However, there is an added advantage with this conversion. It allows an individual to benefit from capital losses, those losses that have accumulated from past investments in non-registered accounts, by creating capital gains that can be partially or fully offset by those losses.
In evaluating tax shelters, it is important to evaluate the tax shelter in the same way as a non-tax shelter investment. That is to say legal and accounting advisers should be consulted and the investment should be examined from a business risk and return point of view. For example, with a real estate investment, the real estate market in the target area should be examined. It may not make a lot of sense to acquire real estate, even if tax sheltered, in a market which is declining.
Flow-Through LP prospectuses contain detailed disclosure of the estimated tax benefits that investors should receive. The following chart will review the tax benefits of a recent Flow-through, Canadian Dominion LP and describe in detail the tax calculations that underpin the estimated tax benefits. This table shows the initial investment of $10,000, an anticipated total tax benefit of $4500 and a capital gain realized upon disposition of $2000.
Financial Calculations
2002 2003 & Beyond Total
Assumed Marginal Tax Rate 45% 45%
Investment $10,000 $0 $10,000
Income Tax Savings from Deductions ($4,083) ($417) ($4,500)
Capital Gains Tax $0 $2,000 $2,000
Total Income tax expense (savings) ($4,083) $1,583 $2,500
Break-even proceeds of disposition of Flow-Through Savings $7,097
Downside Protection 29%
Money at Risk $5,500
Assumptions:
- The marginal tax rate is 45%, with 50% capital gains inclusion.
- The portfolio experiences no gain or loss net of fees over the term of the LP.
- The investor is an Ontario resident. Tax rates differ b/w provinces.
Money at risk is a term used to define the amount of capital that an investor will have exposed to risk once the value of the tax benefits are taken into consideration. As shown in the table above, a $10,000 investment yields a $4,500 tax benefit, leaving $5,500 of capital exposed to risk.
Once the Money at risk is determined, the breakeven disposition value can be calculated. The cost base of the portfolio is zero, resulting in a capital gain of the entire proceeds. For an individual to net $5,500 from the disposition of the LP, that person would require $7,097 of investment proceeds. (50% of $7,097 times 45% tax rate plus $5,500-money at risk)
The downside protection calculation compares the breakeven proceeds to the amount invested. In this case the difference is $2,903 or 29% of the original investment.
When the Flow-Through LP matures, usually 2 years from the date of issue, investors have a choice to make. The investor can either choose to exchange the partnership shares for shares of a mutual fund, which is a front-end load fund, or they can simply redeem the partnership shares for cash. This cash can be used to re-purchase partnership shares, in which case the whole tax benefit process begins again.
Flow-Through LP’s are a tax-advantaged equity investment that offer investors a unique method of investing in resource based companies. As with any complex tax produce, investors should consult their tax advisors in order to determine whether the tax features have been described are appropriate for them. While taxation is an important issue for most investors, the tax-advantaged characteristics of flow-through LP’s should not be an investor’s primary consideration.
More important is the investors risk tolerance, in particular their willingness and ability to include small-cap resource-based companies in their portfolio. For those investors with a higher tolerance for risk and an interest in the resource sector of the equity market, the inclusion of a flow-through LP as part of a well-diversified portfolio may warrant consideration.
This article provided by:
Michael Jones
Investment Advisor
BMO Nesbitt Burns