Canada’s goal to achieve net-zero emissions by 2050 is an ambitious one. And one of the ways the government plans to meet this target is by offering incentives to encourage investment in sectors which include green metal junior mining companies. 

And when it comes to your portfolio, green metals aren’t just an environmentally and socially responsible investment opportunity – they also offer considerable tax savings. 

We spoke with Caravel Lawyer, Glen Harder, to look at the benefits of investing in green metal mining through the government’s flow-through share program and what due-diligence steps you need to take before becoming a shareholder. 

What are green metals? 

Green metals – or green energy metals – are metals like lithium, cobalt, copper, nickel, graphite, and magnesium that are required to produce the batteries used in zero-emissions vehicles. 

These metals are called ‘green’ because using them to power electric vehicles will reduce our reliance on fossil fuels which produce harmful greenhouse gas emissions. 

This group of green minerals has not traditionally been the focus of commercial exploration and mining previously in Canada, which is another reason why the government is incentivizing investment in this sector. 

What is a junior mining company? 

A junior mining company is a small, early-stage mining company in the development and exploration phase of the search for deposits of metals, minerals and other natural resources. These companies are generally new to the market, with low market caps and a small asset bases. But they also offer strong profit potential. 

On the other hand, major mining companies are established businesses with years of experience that often operate producing mines on a global scale. They tend to have proven methods of exploration and mining with a consistent output and cash flow year over year. 

Given how rich Canada is in natural resources, we have a significant number of junior mining companies. These ‘boots on the ground’ organizations are in the field, prospecting for highly sought-after green metals and in need of capital.  

How flow-through shares finance junior mining companies and benefit investors 

Flow-through shares are a popular financing tool in the junior mining industry that allow companies to pass on tax deductions to investors. These flow-through shares enable investors to claim a tax deduction equal to the amount they’ve invested. 

This financing mechanism, which is unique to the resource sector in Canada, is a ‘sweetener’ for the industry and helps attract investors who may not otherwise have invested in a junior company. Flow-through shares are also a critical tool for junior mining companies as it enables them to raise capital to fund their exploration and development.  

The Liberal Government’s recently unveiled 2022 budget proposed an enhanced alternative to the flow-through share program launched in 2000 called the Mineral Exploration Tax Credit (or METC). 

The new Canadian Mineral Exploration Tax Credit (or CMETC) is an additional benefit that can be claimed by inventors of flow-through shares issued by mining companies that incur expenses related to the exploration of the green metals. 

What are the risks of investing in a junior mining company? 

As with any investment, there’s always a degree of risk. Junior mining companies can offer high leveraged returns when investing at the exploration stage, but only a few companies make it through to the development or production phase.

Flow-through investments help to mitigate this risk by providing an immediate tax savings for investors.

The junior mining sector is also affected by several external factors, including geopolitical issues, permitting issues, lack of resources, etc. 

On top of that, one rule of flow-through shares states that companies have 36 months from the date the flow-through share agreement is entered into to spend the funds.

As part of the look-back rule for investors, they receive the expense deduction the year they invest, even though the company may not have spent the money. 

However, the investor’s deduction may be reduced if the company does not meet their spending commitment within the 36-month timeline. This could lead to their personal tax returns being amended and additional balances owing.

Why you should do your due diligence 

Given the volatility of the junior mining sector, investment in these businesses requires significant research and due diligence. There are many variables and unknowns at play here, especially when dealing with a relatively new company. 

Before making any potential investment, it’s always worth speaking with trusted advisors and – when it comes to leveraging flow-through shares – your accountant as well. 

But the most crucial step to take before investing in a junior mining company is to do your research on the organization to establish its assets and liabilities and evaluate its commercial potential. 

There are publicly available databases, like the System for Electronic Document Analysis and Retrieval (SEDAR), which provides access to public securities documents and information filed by issuers in Canada.  These key documents include financial statements, MDNAs, disclosure documents, press releases and more. 

There is also a wide range of information and resources available online that allow potential investors to perform their own deeper dives into individual companies.

In our view, one of the best ways to eliminate potentially low-performing companies and select the best opportunities for capital gains is to carefully review key management and individual histories of success. It may seem simple, but your best chance for a return on your investment in mineral exploration is to follow previous successful explorers.

And while you can perform these audits yourself, it’s always advisable to engage a professional to help with the due diligence process. They’ll know what documents to retrieve, what information to look for and can also help flag any potential risks (including those you may not have considered or be aware of). 

Investing in green metals through junior mining companies can result in high returns, but like any investment, it comes with risks as well so it’s important to do your research first. 

If you need help with due diligence, we can help. Caravel has over 70 qualified lawyers, including those with securities experience. Get in touch with our team to find out more.