A look at Australia’s Junior Minerals Exploration Incentive 

Warren Pearce.Image courtesy of AMEC

What the JMEI does is convert tax losses in an exploration company into either franking credit [an entitlement to a reduction in personal income tax payable to the Australian Taxation Office] for corporate investors or a refundable tax offset for other investors.

Therefore, if someone purchases new shares in an exploration company, that is not also a mining company, they can receive a tax loss passed on through the firm. This means they receive an immediate benefit, on top of the value of the purchased shares.

It has been vital over the last three years because greenfield exploration is much higher risk and therefore difficult to attract private investment for.

Alongside the JMEI, each state government has a formal incentive that matches exploration dollar investment - so if a company has AUD250,000 in private investment the state will award it the same. Both these schemes have made it easier to attract private investment away from brownfield sites into greenfield ones.

As we are only two to three years into it, it is too soon to see the consequence of the investments. However, similar schemes like the EIS have been in place for over 15 years in Australia and they have shown, via independent studies, to provide return on investment of about 20-1. So, for the small amounts of money the state government put in or what the federal government is forgoing in the JMEI, it gets a very substantial return. Furthermore, greenfield exploration is very important for the discovery of future mines

The major difference is with the JMEI the full amount of tax loss in the first year can be claimed. With the EDI investors didn’t know how much of the tax loss could be claimed because it was scaled, therefore the government could set a scale at point-five, meaning only half the tax loss would be passed onto the investor.

One of the challenges with the EDI was that it was reviewed in the first year, which was too short a time frame to see any actual return. Furthermore, because of the way it was set up, it hadn’t attracted the kind of interest expected.

Exploration needs to be viewed on long time frames, as it is usually many years before commercial discoveries are made and acted on, even then there is a further period before they are developed into a working mine.

If it proved difficult to get private investment from Australian shareholders or investors then I would be very open to the scheme being accessed by foreign investors. But I can understand why it has been narrowed to Australian resident companies and shareholders only, to insure Australian investors receive the benefit from Australian Government money.

I’d like to see the scheme renewed; while there might be some moderate changes that could be made, if it was simply continued for another four years our industry would be very happy.

We’d also encourage an increase in the amount of funding available to AUD200m over another four year period.

I think there is a good chance the programme will be renewed, but how successful we are in increasing the funding - I don’t know. There will be a review over the four years to measure its success so there will be more understanding about how that greenfield exploration has been returned.

It has been difficult getting a balance between greenfield and brownfield site exploration because companies recognise a more likely return from brownfield exploration.

Those large resources under shallow cover that are relatively easy to mine have mostly already been discovered. Greenfield exploration is about exploring areas where there might be some more cover, which requires drilling at depth to find resources, meaning significant deposits need to be found to make them commercially viable.

It’s a more challenging exploration environment overall, which makes it more difficult and expensive and so harder to attract investment.

However, we are starting to see a more collaborative approach between the major miners and smaller exploration companies. Many miners that were previously investing in brownfield exploration are now recognising they need new projects to come into the market and are looking at different ways to achieve this. Those companies are looking to invest in joint ventures or to buy into farm-in agreements with smaller exploration companies, sometimes they are doing the exploration themselves or supporting the company to do it.

I think that’s really encouraging and great for the industry but we also need to make sure a small amount of investment is being made by governments to encourage the private capital investments into the greenfield space.