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Exploration losses, investment wins
The Prime Minister’s announcement of the Junior Mineral Exploration Tax Credit (JMETC) on 2 September 2017 and an increase in sophisticated investor activity have provided further impetus to the generally positive junior energy and resources market. In light of this, we have put together some brief considerations for junior miners this reporting season.
Prime Minister Malcolm Turnbull announced on 2 September 2017 that the JMETC would replace the existing Exploration Development Incentive (EDI) with effect from this 2017/18 financial year. It is hoped that the JMETC will boost institutional investment in greenfield mineral explorers, however whether this eventuates will depend on the design of the scheme, including the definition of a “junior” company – many of which are unlikely to be targeted by institutional investors in any event, in the absence of real liquidity and an attractive risk profile.
The JMETC will allow eligible explorers to renounce a portion of their exploration expenditure losses to their investors. A tax credit will then be available to those investors in the income year after the expenditure is incurred (similar to the franking system). See the Gilbert + Tobin Insight from 2 September 2017 for an overview of the JMETC eligibility criteria and our understanding of how the credit will work.
The scheme will operate on first-in-best-dressed approach and will be capped initially at $100 million. The announcement of the scheme was light on detail and there are still a number of unanswered questions for the Commonwealth Government and Treasury. However, Gilbert + Tobin is currently advising junior miners how to position capital raisings in the best possible way to take advantage of the JMETC, when it is implemented.
Gilbert + Tobin has been in discussions with Treasury since the announcement of the JMETC, and at this stage it is unclear whether capital raises before the relevant legislation passes will fall within the JMETC scheme. This is one amongst many unknowns regarding the scheme.
There are also potential practical issues regarding the implementation of the scheme, for example the issue of multiple classes of ordinary shares (i.e. JMETC participatory shares and others). All shares on the ASX are supposed to be fungible, so this has the potential to cause difficulties in practice. Treasury will need to liaise with the ASX on this question.
Companies raising money need to be careful about their ability to meet eligibility criteria, the accuracy of their representations regarding the JMETC, and their structuring solutions, until the mechanics of the scheme are finalised by the Government. Watch this space.
Previously, super funds have been reluctant to invest in the mining sector until entities began production and started paying dividends (in particular, franked dividends). The JMETC may provide the necessary stimulus to encourage super funds to become more involved in the junior mining space, since they may be eligible to obtain a tax refund for JMETC credits from a junior miner still in the exploration phase.
Super funds are sophisticated investors, and provide both depth to a register and a third party vote of confidence in the project. While the JMETC could make an investment in the junior resources sector more attractive to a super fund, super funds will always be subject to the risk profile and liquidity requirements of their investment mandate.
In the two month period from 1 June 2017 to 31 July 2017, over $300 million in equity raisings were announced by resources companies. Of that, some 85% was raised through share placements. By contrast, only $60 million was announced in the same period in 2016. We suspect the introduction of the JMETC will only continue this trend, as placees look to take advantage of any flow through tax losses.
Timing of Equity Raise
These events, together with the close of reporting season and looming AGMs, may create an opportunity for junior miners and explorers to consider raising equity. Companies will have recently lodged their financial statements, meaning there should be few (if any) new financial matters to disclose to the market in the capital raising context. However, companies will still need to adopt an appropriate due diligence process before issuing shares to new investors.
With AGM season fast approaching, investors in the junior exploration space have reason to be optimistic. The current quarter may be an active one for fundraising. The introduction of the JMETC in particular may entice investment from super funds and other institutions, who were previously reluctant to engage in the risk of greenfield exploration. Please contact the authors for more information.