Does a critical minerals push make this tax strategy more attractive?

The case for critical minerals

Aside from their near constant presence in the headlines and remarks made by world leaders, critical minerals represent a growing opportunity for Canada, in Anton’s view. While Canadian production can’t compete with other markets, notably China, on price, Anton explains that certain key markets have shown a preference for “friendshoring” the supply of minerals they can’t produce themselves. The European defence industry, for example, is looking closely at Canadian critical mineral supplies to avoid a critical reliance on China.

Canada also has what capital markets like, strong property rights laws, a strong rule of law, safety regulations, an experienced workforce, and strong environmental standards. The new tailwinds blowing from Ottawa incentivizing capital and new project development further add to this positivity. Under the 2022 CMETC tax incentive, 32 specific minerals have been identified as “critical.”

The utility of flow-through limited partnerships

All that positivity behind critical minerals might invite investors to make the more textbook move: buy mining equities. While Anton believes there can be a strong case for mining stocks right now, he argues that investors in a certain tax bracket can be better served by an investment in a flow-through limited partnership model. Returns from flow-through limited partnerships, he says, are typically not positive on an absolute basis, that is until you look at those returns on a tax-adjusted basis. The tax incentives behind exploration and production endeavours, as well as the additional tax credits incurred when the investment focuses on critical minerals. The Canadian resource company flow-through limited partnerships being offered by Next Edge, Anton explains, are explicitly weighted to critical rather than precious minerals, at a ratio of 75 per cent critical to 25 per cent precious.

Because the primary source of returns from these limited partnerships, over longer periods of time, is in their tax savings, Anton says that they can help investors who want exposure to critical minerals but are concerned that prices are currently elevated. While he believes macro demand for critical minerals driven by defence, technology, clean energy initiatives, and other infrastructure investments should ensure a strong lasting demand for these metals and minerals and potentially  drive prices higher, he notes that tax-based returns should keep overall returns extremely attractive.

While the tax incentives and macro tailwinds may invite interest from advisors, Anton insists that client education is a vital step in any investment decision. The investment vehicle is quite different from what most clients would be used to, and explaining that most flow-through funds lose money before tax is factored in can be challenging. However, for the right client Anton believes that these limited partnerships can provide real value, so long as they understand what they’re getting and why.