It’s hard to reconcile the fact that these companies make no money, have very low prospects of ever making money and yet people invest in them – usually a lot – while management is able to pull down 6 figure salaries. Here’s how this happens.
Junior mining companies need cash because they don’t generate any revenue. They probably won’t for at least a few years. Unfortunately, it’s hard to convince people to invest in something that can’t generate a return. To create an incentive, the government created flow through shares. These allow companies to “flow-through” their expenses to each investor who in turn use them as deductions on their tax returns (to read more about flow through shares read ITA S.66). It’s a huge incentive.
That’s the investor side. The management side is pretty sweet too. If you’re managing a junior mining company, it doesn’t have to be profitable for you to walk away with lots of cash. When people sign on to these companies as CEOs or whatever, they tend to get lots of options. It’s not unheard of for management to receive over 1 million options as compensation – and then making over 5 million when they’re exercised. These companies also don’t have a lot of transactions. So you can act as CFO for a bunch of them, effectively diversifying the risk of picking a dud.
There’s nothing wrong with this. I don’t want to make it seem like this is a scam. Even though it looks like that, this is how mining companies start out.