From Vancouver in the west to the Maritimes in the east and far up into the icy extremities of the territories, Canada, like South Africa, can trace much of its economic development and identity to the roller-coaster businesses of exploration and mining.

Today, mining remains a key sector for the vast nation, with natural resources accounting for 25% of total investment in Canada in 2007, and more than 60% of foreign direct investment in the country, according to the Ministry of Natural Resources.

Canada is the biggest producer of potash, and the world’s largest uranium- and gold-miners both have their headquarters in the country. It is also the third- biggest diamond producing nation and the seventh-largest producer of gold.

In 2007, more than 360 000 people were employed in the mining and mineral processing industries, mineral production exceeded C$40-billion a year, and the mining industry was supporting more than 115 rural communities across the country, according to Natural Resources Canada.

“There is no question that the sector makes an enormous contribution to the Canadian economy,” the department adds.

However, like their peers around the world, miners and explorers in Canada are having to come up with answers to some difficult questions, as low commodity prices, reluctant lenders and low market valuations take their toll on balance sheets.

As conditions get decidedly frosty, mines are being closed, thousands of workers have been laid off, projects are being delayed and exploration has all but dried up.

Still, it is not all doom and gloom. Cash costs, at least, are generally better than they were six months ago, thanks to declining demand for input materials and equipment, coupled with a declining ‘loonie’, as the Canadian currency is known.

Also, while the industry at large is battling to raise cash or repay debt, gold-miners are finding themselves sitting quite comfortably, as investors seeking safe havens keep bullion prices buoyant.
As a result, producers of the yellow metal, including Toronto- nians Kinross Gold, Yanama Gold and fast-growing Agnico-Eagle Mines, have managed to successfully access equity markets to fund project deve- lopment or acquisitions, or to pay down debt.

However, for most Canadian miners and explorers, it has become a matter of shuttering up the windows and waiting for sunnier days.

“Over the short term, at least, Canadian resource companies can do little but weather the storm,” agrees Natural Resources Minister Lisa Raitt, who is herself a coal-miner’s daughter.

Oiling the Wheels

Of course, Canadian mining firms are by no means feeling the effects of the downturn to a greater extent than their fellows in the US, Australia or South Africa.

But while other sectors like automakers or foresters look to Ottawa and the provincial governments for bail-outs as the nation sinks into recession, miners are, by and large, having to mend their own leaking ships.

Industry veteran Peter Munk, who chairs and founded the world’s largest gold-miner, Toronto-based Barrick Gold, agreed in January that the problems facing the mining industry could not be mended by any kind of government action.

Miners shouldn’t expect any support from the country’s government, he commented.

That said, there are some steps that the country can take, and is taking, to try to ensure continued investment in exploration and mining.

When he tabled his Federal budget on January 27, Finance Minister Jim Flaherty announced that the government would extend the temporary 15% mineral exploration tax credit, aimed at helping companies raise capital for mining exploration, by another year.

The credit is scheduled to expire on March 31, but “in light of global financial conditions and the important role of the mining sector in Canada”, Flaherty proposes to extend it until March 31, 2010.

The ‘super flow-through’ share programme has been largely credited with keeping the junior exploration sector afloat in Canada after the last commodity- price slump.

The extension of the super flow-through credit, plus other measures proposed by Flaherty, will be good for the industry, says Mining Association of Canada (MAC) vice-president: economic affairs Paul Stothart.

He tells Mining Weekly that plans to spend heavily on infrastructure development, particularly in the north, and improve access to finance will be positive for the country’s mining industry. The budget includes plans to make up to C$200-billion available through an Extraordinary Financing Framework to improve access to credit for businesses and consumers.

“We have also extended the accelerated capital cost allowance for business investments in machinery and equipment for two years,” Natural Resources Canada points out.

“This measure will help businesses continue to restructure and retool their operations to remain competitive in the global economy.”

The infrastructure spending will hopefully help boost demand for commodities, Stothart comments, while improving access to the far north, where much of the exploration and mining activity takes place.

Still, while the measures proposed will be positive, the industry would also have liked to see the inclusion of tax incentives to encourage capital spending, especially on projects like improving efficiencies at smelters and refineries.

While the extension of a 50% accelerated capital cost allowance rate for investment in machinery and equipment would provide some incentives for new spending of capital, the MAC believes more “aggressive” measures could be taken to encourage major investments in capital spending and innovation.

The mining association had also wanted more support for research and development, and for government to lower the threshold for a tax deduction on investment in new or expanded mine assets, president and CEO Gordon Peeling told Flaherty in December.

Overall, while there may be no Detroit-style rescues in the offing, there are several State-led programmes that are aimed at luring investors and removing potential obstacles for miners and prospectors.

For one, Raitt points out that the government is investing heavily in geoscience and mapping, which it hopes will stimulate investment in explo- ration, especially in the north.

“In fact, every dollar invested in public geoscience attracts five dollars in exploration investment and the discovery of $125 in new resources,” she says.

In 2002 Canada overtook Australia, to become the second most popular region for explora- tion spending, after Latin America, according to the Metals Economics Group.

Compared with other indivi- dual nations, Canada remained the top destination for exploration expenditure, with 19% of the total exploration budget in 2007.

The government also opened a new Major Projects Management Office in 2008, which is aimed at streamlining the permitting process for large resource projects by acting as a single point of entry.

However, the MAC’s Stothart says the jury is still out on how effective the initiative will prove.

“At the end of the day, it depends on whether they have the ability or the power to ride herd over the dozen other entities that are involved in the large projects – fisheries, environment or transport Canada, or whatever other agencies are involved,” he comments.

The Three Cs

The general response of the mining industry to the difficult market conditions of the last six months or so can be summed up in three words: curtailments, closures and consolidation.

Base-metals producers, in particular, have moved swiftly to cut back production amid weak prices, and thousands of workers have been laid off as a result.

While some firms have been content to curtail throughput levels, companies such as divers- sified giant Teck Cominco and coal-miner Western Canadian Coal have gone as far as halting output altogether at some unprofitable operations.

However, for those miners fortunate (or wise) enough to possess a strong balance sheet, the low values of their less-favoured peers make them easy pickings for companies in search of production or resource growth.

“There are lots of opportu- nities out there for companies with cash in their hands,” KPMG global mining chairperson Lee Hodgkinson said in a speech in Toronto in January.

He believes that merger and acquisition activity should, and will, gain pace, as well-capitalised firms go in search of bargains and less fortunate ones put themselves up for sale to ensure survival.

Barrick, for one, has made it clear that it is looking to snap up some of its smaller rivals, and new CEO Aaron Regent said in January that the group’s corporate activity team is “very active” on the merger and acquisition side, looking at several potential deals.

Iamgold announced in December that it would buy Orezone Resources, a cash-strapped junior with a lucrative gold project in Burkina Faso, and there is speculation that Kinross CEO Tye Burt will use the money raised in a January share sale for acquisitions.

Agnico-Eagle CEO Sean Boyd, however, is more circumspect.

His company continues to look at potential buys, but “just because they are cheap doesn’t mean they are going to become mines”, he points out.

It should also be noted that it was a move to consolidation, while markets were still booming in 2008, that landed firms like Teck Cominco in the unfortunate position of having to refinance and repay large amounts of debt as commodity prices continue to head south.

Vancouver-based Teck took on almost $10-billion in debt to buy Fording Canadian Coal, and has had to suspend dividends, curtail zinc output, sell assets and slash capital expenditure to free up cash for debt repayments.

Skills Paradox

Lastly, a weighty problem on the minds of both private and government stakeholders is the widespread mining job losses that were being announced on an almost daily basis during the first few weeks of this year.

The issue is particularly acute in towns that are reliant on a single mine or employer, and an increasing number of formerly booming communities, like nickel-rich Sudbury, for example, are starting to feel the effects of the shutdowns and closures.

Raitt has said that support for these communities will be one of her top priorities and, in his budget speech, Flaherty announced a plan to set aside C$1-billion over two years for a fund that will help mitigate the short-term impacts of restructuring in communities that depend on a single company or industry.

Unfortunately, there is a certain irony to the mass retrenchments taking place, given that a year ago the biggest gripe in the industry was a shortage of skilled workers.

To subscribe to Mining Weekly's print magazine email subscriptions@creamermedia.co.za or buy now.