Flow Through Shares - What Are Flow Through Shares Really Worth
When Canadian listed resource companies from the mining & oil and gas industry turn to the markets in
order to raise capital, investors should always be cautious when they do this by offering Flow Through
Resource companies typically have enormous upfront exploration costs and little or no revenue. Therefore they
don't need the tax deductions they would normally incur as income-generating companies.
In order to finance the exploration, they will issue shares and allow the tax deductions to "flow through" to
investors as long as these resource companies qualify for the Canadian Exploration Expense (CEE).
For more information about the CEE, I refer you to the report: "Guidelines for Determining the Tax Treatment of Certain Exploration Expenses" which can be
found by clicking on the link provided.
The CEE includes certain expenses incurred to determine the existence, location, extent or quality of a mineral
resource or of an accumulation of petroleum or natural gas in Canada. In addition, certain
expenses incurred to bring these projects into production may also qualify as CEE. The definition of CEE also
includes Canadian Renewable and Conservation Expenses (CRCE). Thus, the money raised by flow-trough shares
may not be used for day-to-day activities like the payment of salaries!
As the tax deduction derived from spending the exploration costs 'flow through' to investors participating in a
FTS-offering, these investors have a lower Break-Even-Sell-Price than the price which had been
paid at the time the FTS were issued. The Break-Even-Sell-Price differs from one investor to another, depending on
their specific tax bracket.
On the website of QIS Capital you will find a great article: Flow-Through Shares Offerings Explained. This article describes in detail what the
consequences are for Canadian investors, who want to participate in FTS-offerings. Of course you should only
participate in a flow-through share offering if you are willing to invest in the company anyway!
To inform you about the real worth of the shares to the investor who participates in a FTS Offering, I have
included the following table from the article mentioned above:
What Are Flow-Through Shares Really Worth?
Break-Even-Point to FTS Price
Example FTS Price
Break-Even Sell Price
You should always assume that investors participating in FTS offerings are in the highest tax bracket of 50%.
Therefore always make a quick calculation (FTS Price x 0.66) and pay attention to the holding
period as FTS often are issued under the obligation of a certain holding period. Don't be surprised to see
the stock price decline to the Break-Even-Sell-Price-level shortly after the holding period has expired. When you
take a closer look at the picture at the top of this article, the Break-Even-Sell-Price can even be lower, as it
differs from province to province.
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