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Survival Strategies – Linear and Central Sun
The major exception to that rule is Canadian junior mining companies which are willing to (or forced to for lack of options) accept flow-through financings. Flow-through provides tax incentives for Canadian resident investors who are able to deduct the full amount invested from their income for the year. Companies receiving the investment can only use flow-through funds for “in-the-ground” expense, meaning none can be used for administrative costs.
Only companies with properties in Canada qualify. Excessive flow-though financing places downward pressure on share prices, because there is a strong incentive to blow out flow-through shares at any price, since the Adjusted Cost Base of a flow-through share is essentially $0.
Many investors don’t fully understand that Flow-through financings represent a major disadvantage to other investors in the same company who do not reside in Canada. This is why amalgamation is the only survival path available to some companies who have either already diluted their share structure excessively through flow-through offerings, or whose properties are not in Canada.
Yesterday’s announcement by Linear Gold (LGCFF.PK) and Central Sun Mining Inc. (SMC) describing an agreement by the two companies to merge is exemplary of how companies stagnating due to the tough financing environment will move forward intact.
The new company will provide shareholders with exposure to 45,000 ounces per year in gold production from Central Sun’s Limon mine in northwestern Nicaragua, building to 130,000 annually upon completion of a mill at the Orosi project, also in Nicaragua. The new company will continue under the Linear name, and will have US$20 million in cash. Central Sun shareholders will receive 0.4 of a Linear share which will put Linear’s issued and outstanding to just over 51 million.
