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Buying shares on the TSX and TSX Venture
By: Bernie Doyle - Investment Advisor, Flow-through investing specialist
June 17, 2010
So far we know that the government loves our natural resources so much that they give the biggest tax breaks available to those who invest in them (this is a fact).
We also know that it is possible for you to enjoy the “flow-through” tax deductions by investing in the industry. But here’s the big question. How do you select which mining companies to invest in? Well, the Toronto Stock Exchange (TSX) and the smaller but still vibrant Toronto Venture Exchange (TSX-V) is full of exciting stories and is continuously bubbling with opportunities to ride a smaller company into fantastic success.
There are strict rules that each company listed on the Venture exchange needs to satisfy to be able to maintain good standing on the exchange. Specifically in regards to mining there is a high level of professionalism that is required in regards to the portrayal of opportunity vs. risk. For example a few grab samples by an exploration company off the surface of the ground that happen to be rich in precious metal content are not enough to warrant a glowing press release. There needs to be specific third party analysis of all samples before any news gets to the market. The government rules for this are called “National Instrument 43 101” and they lay out the rigorous standards that need to be met before any “news” may be released to potential investors.
So what we are saying here is that the operation of the TSX and its Venture exchange (TSX-V), where many mining companies are listed is “best in class” and reliable. It doesn’t tell us how to pick a stock but it at least provides a comfort knowing that this niche market has international credibility and renown.
Picking mining stocks is an art, part science, part intelligence, part gut instinct. It comes down to this, there are teams of bright experienced geologists and mining professionals armed to the teeth with the most technically advanced instrumentation available, and they are tirelessly working to discover new resources, expand existing ones and to optimize current operations. Admittedly they are definitely a specific breed.
If you would allow me to digress personally for a moment. My grandfather Peter Roche was a prospector of some renown in Northern Ontario. In his time he was known to head off each year into the wilderness of Ontario kitted out with food rations, shovels, pick-axes, dynamite, and a gun or two to keep the bears at bay. He was well known in many remote regions and learned to speak Ojibwa. Prospecting, staking and raising capital were his main actives. Although the basic activities are the same today, the available technologies to execute them with have certainly evolved. Peter Roche died a wealthy man and his properties continued to produce for years after his death making their own contribution to the growth of Canada.
Needless to say that the mining industry, especially the exploration sector is a congregation of rugged and earnest professionals, with more than a tail or two that would regale you by the fireside for hours. They are acutely aware of the meaning of a hard days work and are profoundly cognizant of the need to make decisions wisely. As a nation we have a lot to be grateful for and this small group makes for a chapter in our countries legacy that we can all be proud of.
I’m not evading the question as to how to choose a mining stock, I’m simply trying to context part of the calculations that a wise investor should consider. The bottom line is when you invest in a mining company you are investing firstly in people and their ability to find, discover and process natural resources. What we are saying here is not new. Its people who find and develop resources, so it follows, know the management of the mining company, to some extent, it will take you a long way.
The TSX has 356 mining companies listed and the TSX-V has 1071 mining companies. Just over 1400 in all, that makes for more research and data to dwell over than most people would be interested to.
To choose a mining company one needs to have an ear to the ground for what is going on, additionally it would behoove an investor to be certain that their shares in a mining company are flow-through eligible. Not all investments in the mining industry provide the tax advantages of flow-through shares, so it’s best to make sure before you buy.
There are other variables to consider for example, proximity of exploration to existing finds and innovative survey techniques. We will look at those in the coming weeks.
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Bernie Doyle is an Investment Advisor specializing in Flow-through shares and Flow-through Limited Partnerships.
You can contact him at TaxDeductions@FlowThroughCanada.com
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