A New Strategy with 40%–90% ROI in Year 1  – 03 Improved Model

Author: James L

This is the first series contributed by our fans, after we gave the shout-out to our community to submit niche passive income strategies – I hope you find this one insightful as usual!😁 The author of this series is James L.

Continuing from the last post, now let’s analyze why traditional flow-through shares aren’t suitable for most people (it makes sense that only accredited investors qualify—those who understand risk and can afford potential losses). Traditional flow-through shares have two major problems. First, the stock’s gains and losses are uncontrollable, and the success rate for mining exploration is less than 10%. So even with the tax benefits, the risk-to-reward ratio isn’t necessarily attractive. Second, it ties up your cash flow—your money is locked in those shares for months or even years.

These were my immediate concerns when I first heard about this method. Without solving these issues, there’s no point in considering such a strategy. After three posts of the context, I can finally reveal the true star of this series  – the improved flow-through share strategy. I think this terminology conveys the idea clearly and elegantly.

Some clever thinkers have proposed targeted solutions to the risks mentioned above. The risk itself can’t be eliminated entirely, but can we find a workaround? For example, get someone else to take the risks with certain level of compensation? And so the improved flow-through share model was born.

By introducing a third party, the investor sells the shares immediately on the day they buy them—of course at a discount, since no one would pay full price. In the end, it’s a win-win-win. The mining company raises cash by selling stock; the investor gets the tax deduction without the stock price risk and frees up cash without holding the stock for months or years; and the third party buys discounted shares.

Some may ask: is the third party crazy? Why buy these shares instead of Nvidia or something else? The thing is, maintaining balanced portfolios is a mandate for certain insitituions. For example, big banks, insurance companies, and other financial institutions have mutual funds, segregation funds, and various products—some focused on oil and gas, some on mining. They need to hold a portion of mining stocks anyway. Getting them at a discount through investors is a good deal. Plus, these institutions are usually long-term holders who believe in the industry or at least in the companies they invest in. Long-term institutional holding stabilizes the stock price, preventing wild swings. Institutions tolerate temporary losses better than many individual investors. So, it’s no surprise these flow-through shares get snapped up quickly as soon as they hit the market.

My next question naturally was: how much of the “compensation” do you need to give to the institutions? This isn’t fixed—it’s always negotiated case by case. First, understand that flow-through shares aren’t something you can just buy anytime. They have to be issued by mining companies, and we purchase them through service/brokerage companies (traditional flow-through shares can be bought directly from mining companies). There is a premium: for example, if the stock trades at $1 on the market, we pay the company $1.10. On the same day, we sell the shares to the liquidity provider at $0.70. The service company charges a fee, roughly 8–12% of the purchase amount. They handle all paperwork, find the issuing mining companies and third-party liquidity providers, and negotiate the prices. After all this, roughly the split is three-tenths, three-tenths, and one-tenth left for the investor. After all of this is said and done, the investor can expect about 50% returns in the first year. If you don’t reinvest in flow-through shares the next year, some of the government’s investment tax credits (ITC) become taxable, reducing total returns. The tax-adjusted yield might drop from 50% the first year to about 20% after two years. However, if you continue to invest, you can defer that tax.

I’ve done some research. Because this niche business is so specialized, there are only about three service/brokerage companies in all of Canada. Their clients are mostly longtime customers, and when deals come up, they sell out within hours. So fast decision-making is crucial. Or you can just tell your broker: if the yield reaches a certain level, invest tens of thousands immediately—no need to check with me.

My next question is: does this mean there’s no risk at all? That can’t be true, right? This sounds too good to be true. They told me, there is still some risk. But that’s a lot of info for today. We’ll talk about it next time.