The recent dramatic drop in the prices of oil, natural gas and some other key natural resources hasn’t halted the rush of companies raising capital by way of flow-through share offerings.

Over the past six weeks, a dozen companies have filed prospectuses to raise money that will be invested in diversified energy and resources companies. Of the dozen, about half have already closed their offerings, raising $215 million.

To varying degrees, the issuers with offerings outstanding share an investment objective — to offer investors a tax-assisted investment in a diversified portfolio of the equity securities of resources exploration companies with a view to earning income and achieving capital appreciation.

The outstanding issuers include some that are new to the business of offering a limited partnership interest to investors.

For example, Fairway Capital Management Corp. of Toronto is hoping to raise $40 million via the sale of 1.6 million units of Fairway Energy (06) Flow-Through LP. A minimum investment of $5,000 — or 200 units at $25 a unit — is required.

The fund’s general partner is Fairway Energy (06) Flow Through Management Corp., a Vancouver-based firm that’s 40%-owned by publicly listed Jovian Capital Corp. of Toronto. The issuer has retained Calgary-based Peter Linder as its subadvisor. A long-time oil and gas analyst turned portfolio manager, Linder will invest in a portfolio of flow-through shares issued by resources companies.

Hugh Cartwright, president of Fairway Energy, says flow-through offerings remain popular for one reason: “Most analysts expect the price of oil and natural gas to be higher next year. Even though the prices are off significantly right now, investors look forward, not backward. Investors are saying: ‘Where are the prices going to be when I get liquidity’ with this product. And everybody is thinking prices will be higher than they are now.”

Fairway Energy will convert to a mutual fund in the middle of 2008 to provide investors with liquidity. “Investors have the view that the energy sector, with this correction, is a good place to invest,” Cartwright says.

Even so, he concedes that the lower oil and gas prices make it more difficult for new issuers to gain traction. But he has experience in taking new issues to market. In an earlier career, he ran Vancouver-based Qwest Energy Investment Management Corp.: in all, he completed six flow-through transactions, with the first deal raising a mere $7.8 million and the last, a more respectable $25 million.

Cartwright says the tax deductions afforded flow-through investors are also a huge attraction: “These investors need a good tax deduction and think that a tax deduction combined with the energy sector is not a bad bet.”

Calgary-based Catapult Financial Management Inc. is also a relative newcomer to the flow-through business. It has filed paperwork for Catapult Energy Small Cap FTS LP and is after $20 million. Last year, in its first deal, it raised $15.1 million.

Timing is a huge factor behind the recent infusion of capital into flow-through issues, says Mal Spooner, CEO of Toronto-based Mavrix Funds Management Inc. and a veteran of the flow-through world. “We invest as we go along,” he says. “In this market, with the sell-off in the materials group, we have had the advantage of good pricing. That gave us a great opportunity to buy a lot of the mining companies.”

He argues that the investment merits of flow-throughs should be considered more highly than the generous tax considerations: “We try to invest in companies of which we have known the management team for a long time and that have good properties. We are more concerned with building good portfolios than we are with the tax breaks.”

In a current offering, Mavrix Explore 2006-II FT LP, Mavrix is seeking a maximum of $50 million. If it’s successful — it has already had a first closing with $32 million in the kitty — then the deal will be the firm’s largest ever. Mavrix has done eight previous flow-throughs, raising about $200 million.

Mavrix has another flow-through on the go, one that’s geared toward Quebec investors. Spooner says the tax advantages to Quebec investors, providing the exploration activity occurs in Quebec, are even more attractive than they are for investors in the rest of Canada. The plan is to raise at least $10 million.

@page_break@JUICY TAX DEDUCTIONS

The juicy tax deductions associated with flow-through shares are created because exploration companies aren’t able to use the tax deductions that arise from exploration activity. These companies have little or no revenue and certainly don’t have taxable income.

Rather than waste those deductions, a structure is created in which the companies “flow” those deductions through to their shareholders. As part of the corporate structure, there is a general partner who hires an investment manager to make the decisions and run the business, and numerous limited partners.

The shareholders — the limited partners — can use the deductions against their income, whatever its source. Almost all of the flow-through share purchase price can be deducted by the investors in the year the shares are bought. (The tax breaks for investors apply only for investments held outside an RRSP.) Many flow-through share partnerships offer investors the option of converting their flow-through partnership units into mutual fund units after the partnership unwinds.

Flow-throughs are not suitable for every investor. They are generally viewed as investments that carry a high degree of risk because their potential price appreciation depends on the success of resources exploration programs. Thus, they are investments for those who can deal with a fair degree of risk. And potential investors should take note that the hot resources sector has created a lot of new issue activity, with some shares of dubious quality.

Other flow-through deals recently brought to market include:

> AGS Resources Management Inc. ’s AGS Energy 2006-2 LP raised $30 million.

> The resources unit of Middlefield Resources Group recently wrapped up the sale of MRF 2006 II Resource LP, which raised $50 million.

> Mackenzie Financial Corp. ’s structured product group raised $20 million with its MSP 2006 Resource LP offering. IE