EDI finally a reality

ROADHOUSE COMMENT: There is much speculation at present on the exploration side of the resources sector, especially with the recent passing of the Abbott Government’s Exploration Development Incentive Scheme.

The Exploration Development Incentive has been passed – Hurrah, I hear you all cheer, but is it the answer to all our exploration funding dilemmas?

With its recent passage of its Exploration Development Incentive scheme reforms, the Abbott Government may feel it has placed a full stop on the last sentence of the final chapter of a long drawn-out saga.

The scheme gained traction in the collective psyche of the exploration sector when in 2007, then aspiring Prime Minister, Kevin Rudd, firmly laid out a ‘Flow-Through Share Scheme’ on the Labor Party election platform.

However, after storming down the straight to greet the electoral judges, by what history may deem to have been too many lengths, the Rudd Labor Government’s first budget delivered by its Treasurer, Wayne Swan, gave Flow-Through Shares the liquid paper treatment and it disappeared from view.

Of course many industry-types had not forgotten what had been promised and it was up to then Mining Minister Martin Ferguson to appease the torch-bearing masses, by telling them it would definitely be looked at in the next budget.

Instead we were presented with the Resource Super Profits Tax, which enraged Twiggy so much he unwrapped a new set of hi-vis gear from its packaging and jumped on the back of a flatbed truck with Gina for some good, old fashioned speechifyin’.

However, time moves on.

Announcing the passage of the reforms the Abbott Government said it would, “provide incentives for mineral exploration and remove punitive tax rates on excess superannuation contributions.

“The Exploration Development Incentive supports junior and mid-sized mining companies by encouraging greenfields mineral exploration.

“It is a catalyst for new exploration, new investment and new opportunities in the resources sector.

“The Exploration Development Incentive delivers on our election commitment and helps encourage investment for new minerals exploration in the junior exploration sector.”

But, what does it do? This is a pretty wild ride, so hang on and I’ll try to make it simple. If I can understand it, then you should.

The basic principal of the EDI is to encourage investors to invest in junior exploration companies.

The rationale is that by allowing them to issue ‘exploration credits’ to their investors it will make investing in these junior explorers a much more attractive proposition when they are out rattling the tin to raise capital.

To be eligible to participate in the scheme, companies will need to be conducting greenfield exploration.

By doing so they will be allowed to pass on a proportion of their eligible exploration expenditure through a refundable tax offset or a franking credit to investors (depending on the type of investor).
 
According to accounting firm, HLB Mann Judd, under the new scheme, “exploration credits can be created and distributed in an income year by an entity that was a greenfields minerals explorer in the prior income year.”

The credits are generated from the prior year’s expenditure as follows:

Source: HLB Mann Judd

In the final wash-up the EDI is undoubtedly a good idea if the end result is that it assists genuine explorers.

One affect the Global Financial Crisis (you remember) was supposed to have was the flushing out of the ASX-listed companies that had taken advantage of the boom and to focus on maintaining a lifestyle for their directors rather than the development of projects, and therefore, shareholder wealth.

These companies have possibly contributed more to the reluctance of investors to support small raisings, which are generally just to keep the office doors open and the lights switched on.

“The best thing for the industry would be if the majority of these companies disappeared in order to provide ‘clear air’ for the better companies,” Minelife founding director & senior resource analyst Gavin Wendt told The Roadhouse.

“I’m not sure how this scheme compares with what’s operational in Canada, but the incentives there haven’t really helped their market (not in the tough times anyway).

“Their market is worse off than ours!”