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The Blessing and Curse of Flow-Through Shares
Silver Stock Report
Jason Hommel
December 6, 2006
If there are forces in the world that make silver prices too low; that is
both a blessing and a curse. It is a blessing, of course, if you
recognize it, and if you act on what you know, and become a buyer of
silver. It is a curse, of course, if you don't recognize it, and
if you are an owner, or a seller of silver.
I believe silver is too low for many reasons; most importantly, no
nation on earth is using money as money. I mean, using silver as
silver. I mean, using silver as money. When silver is not
used as money, it is not being valued for its main purpose, and with
this lack of demand, it has a low value, and this creates the blessing
of an opportunity for investors.
Flow through shares create something similar in my opinion; this
blessing and curse of low Canadian stock prices.
Flow through shares are issued by Canadian exploration companies to
Canadian investors in private placements, when the companies issue
stock to raise money. The money raised must be spent on drilling
exploration (not underground drilling).
There are several tax incentives for Canadian investors who buy flow
through shares, because the Canadian government is trying to stimulate
the mining sector. But like most things governments do, there is
a drawback. The tax incentives are quite large, and they add up
quickly. If a flow through share costs $1, it really may only
cost the Canadian investor about $.41!
Source:
http://www.goldencapital.com/flowt/traditional.pdf
The reason is that there is a 29% Federal Canadian income tax
reduction, plus a 15% tax incentive, plus about a 15%
Provincial/Territorial personal income tax reduction.
The flow through share program was designed as a temporary measure in
the year 2000 because the mining exploration industry was nearly
destroyed through low metals prices.
As a consequence, the Canadian government decided to motivate Canadians
to explore for minerals when it made the least sense to do so; when
metals prices were low. Fortunately for us, we can now buy
Canadian exploration stocks at a discount, because of this foolish
Government program.
The flow through share program is set to expire in March, 2007.
Source:
http://www.pdac.ca/pdac/advocacy/financial/flow-through.html
Personally, I do not care if the program continues or is
terminated. But since I know how to take particularly strong
advantage of it as an American trader, it would not bother me if it
continues.
The hold times on flow through shares is typically 4 months, and I know
that 4 months after a large flow through financing, we will likely see
a dip in share pries. Why?
The program gives Canadians who buy flow through shares the incentive to
buy stock at $1, but sell at anywhere above $.41, and consider it a
"profit" -- because otherwise, they would have paid all those
taxes. Thus, the Canadian flow through shares are quickly sold,
as they "flow through" directly to the market place, often at a
substantial discount.
This is the blessing, and curse, of flow through shares. They
generally create a wonderful buying opportunity.
The big problem is that there is no upward buying pressure when flow
through shares are issued. Big money can buy into a stock without
moving the price up. However, when the shares come free trading,
the stock price gets hammered downward.
Companies who issue flow through shares can thus end up with much lower
stock prices as a result.
In essence, the Canadian government is making all Canadian exploration
stocks who participate in flow through financings generally much
cheaper than they otherwise would be, than without the flow through
share program.
Since most of the investors in Canadian mining stocks are Canadians, I
wonder if the government is actually doing more harm to Canadians in
general than good. Certainly those who buy flow through shares
benefit, but Canadian exploration companies (and shareholders) must be
very careful.
It's almost like hedging with a guaranteed loss in the long run.
The up front money sounds great, but the pain down the road is
generally not worth it.
A more free market approach, to replace the temporary flow through
share program, would be to lower tax rates to all of Canadians, and to
eliminate capital gains on investments in Canadian natural resource
stocks.
If the temporary flow through share program ended, and if capital gains
were reduced instead, I'm sure Canadian stocks would go up, and the
capital gains tax would be a welcome relief in that event.
But then again, they didn't ask me, did they? And if they did, it
would be to my advantage to tell them to keep it up, since I know how
it works for my advantage.
Just watch out for flow through financings, and be careful on how they
can affect your investments. Consider selling your stocks about 2
weeks or a month before any flow through shares become free trading
(about 4 months after issuing them), and be ready to buy when they come
free trading. It's always helpful to know why a short-term stock
price dip is taking place. (Thanks to the stupidity of the
Canadian government, and short-sightedness of Canadian exploration
company managers.)
In conclusion, this is one way to find freedom in an unfree
world. When you recognize that someone else is not doing things
the free market way, and when you understand the difference between how
things are, and how things should be, it should give you a unique
insight into how to best find that hidden treasure in the field.
And this is why the free market will triumph in the end, and why it is
continuing to gain strength all throughout the world. Because
those who try to subvert free market principles end up hurting
themselves in the long run.
Sincerely,
Jason Hommel
silverstockreport.com
bibleprophesy.org
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