Flow through shares that allow investors with higher marginal tax rates to reduce their income through the receipt of tax credits, have played a key role in permitting resource companies to fund huge discoveries in the past 25 years.
But in more recent times, carnage in the resource sector has made life difficult for managers of limited partnerships set up to invest in flow through shares of junior mining and oil and gas companies.
“The herd has been chasing opportunities elsewhere,’’ said Jason Mayer, a portfolio manager with Sprott Asset Management, during a speech to the Vancouver Club.
As a result, he estimate that amounts raised by the industry fell to around $350 million last year from around the $1 billion mark in 2011. Amounts raised this year are still tracking between 30% and 40% below year ago levels, he said.
Mayer was in Vancouver this week as part of an effort to generate interest in the Sprott 2014 Flow-through Limited Partnership, one that aims to raise around $15 million.
While admitting that the industry continues to battle a severe case of “investor fatigue,” Mayer says there are good reasons to feel optimistic.
He is taking the view that a synchronized global economic expansion should be good for resource demand and resource equities.
It is why the Sprott 2014 flow-through partnership is focused on companies that are engaged in exploration and development of natural gas, oil and precious metals.
Mayer says he tends to take a conservative approach to portfolio management by focusing on relatively larger companies that are producing, generating cash flow or have a reasonable time horizon to production/cash flow.
The fund’s top ten holdings are Tourmaline Oil Corp. (TSX: T.TOU, Stock Forum), Paramount Resources Ltd. (TSX: T.POU, Stock Forum), Pretium Resources Ltd. (TSX: T.PVG, Stock Forum), Artek Exploration Ltd. (TSX: T.RTK, Stock Forum), Strategic Oil & Gas Ltd. (TSX: V.SOG, Stock Forum), NuVista Energy Ltd. (TSX: T.NVA, Stock Forum), Trevali Mining Corp. (TSX: T.TV, Stock Forum), CrocottaEnergy Inc. (TSX: T.CTA, Stock Forum), Sabina Gold & Silver Corp. (TSX: T.SBB, Stock Forum), and Denison Mines Corp. (TSX: T.DML, Stock Forum).
Speaking to Stockhouse, Mayer said the industry has struggled because in his view investment advisors have not excelled at positioning this type of product with clients. “Advisors do a poor job of explaining it and managing expectations,’’ he said.
As a result, he thinks investors may not understand how this type of vehicle might work for them.
A flow-through share is simply a common share of an oil and gas or mineral exploration company.
The name “flow through” is attached because the resource company enters into an agreement with the shareholder to ‘flow through’ to the shareholder the tax credits that the resource company has created from exploration.
These are tax deductions that are generated from the company’s capital expenditure program (CEE-Canadian Exploration Expense).
Typically, a flow-through share has the following characteristics:
- Up to 100% tax deductable;
- Typically, a flow-through share distribution is conducted as a private placement, which is only eligible for “accredited investors” and subject to re-sale restrictions for a period of at least four months;
- An agreement that covers the resource company’s obligations to ensure the expenditures are made in according with the Canadian Income Tax Act.
Sprott Flow-through limited partnerships have a life span of approximately two years, at which time the limited partnership units are exchanged for shares of one of Sprott's open-ended mutual funds.