TORONTO (miningweekly.com) – Like others across Canada, exploration and mining companies operating in Québec are suffering fierce economic headwinds and depressed metal prices, particularly so for gold. However, the gloom is doubly deep as concern mounts over the province’s newly proposed mining tax and Mining Act, both unveiled in May.
Under the current system, mining operations pay a 16% tax on net profits. The rate was pushed up from 12% during the previous Liberal government’s tenure. But for the Parti Québécois (PQ), led by Premier Pauline Marois, the increase was not extensive enough – it went on to call for a 5% tax on all mining activity and a 30% supertax on companies achieving profit margins over 8%.
“I think the PQ was looking towards the Australian model of increasing taxes on the mining sector, reasoning it could be applied to Québec . . . But most of our mines are smaller-scale operations. While some might have made good money, almost all reinvested profits into upgrading or expanding existing operations,” Institut de la statistique de Québec mining and natural resources specialist Raymond Beullac tells Mining Weekly.
“KPMG fairly recently released a report on Québec’s mining sector, highlighting the number of small-scale mines in production but unable to produce a taxable profit under the current mining tax regime,” Norton Rose Fulbright partner with specialist knowledge of the mining, oil and gas sectors Jean-Philippe Buteau tells Mining Weekly. “However, it’s worth noting that they still play an important role, employing local people both directly and indirectly. They also pay other corporate taxes and pay their workers excellent wages.”
The PQ formed a minority government in September 2012, after winning 32% of the popular vote in the provincial elections.
“Their subsequent learning curve has been steep. It’s easy when you’re in opposition – you can disagree all day long. But when you come to power, suddenly you have to think differently,” Beullac says. “I think they quickly realised that increasing tax rates could prove the difference between continued operations and closures.”
“An increased tax burden can reduce the value of an investment and can shorten mine life on a marginal asset. In a worst-case scenario, it can precipitate a closure decision,” QMX Gold president and CEO François Perron tells Mining Weekly. “Tax hikes also impact on exploration [and development], as they can change the viability of a project’s economic prospects.”
THE TAXMAN COMETH
The PQ unveiled its new tax proposals on May 6, tabling a hybrid regime whereby companies either pay a fixed tax on output or a tax on profit, whichever proves the greatest sum.
The fixed tax will stand at 1% for companies whose output at the shaft head is under $80-million in value. The rate increases to 4% if the output is over $80-million in value. The profit tax will be progressive, starting at 16% on mines with profit margins below 35% and rising to 22% for profit margins between 35% and 50%. A top bracket of 28% will be imposed if profit margins exceed 50%.
In its first full year, the government believes the new regime will return $370-million, compared with $320-million if the current regime was to remain in place. Supporters of the new tax regime also argue it puts mechanisms in place that will ensure a greater return if another mining boom occurs.
The proposals were greeted by the mining sector with a mixture of resignation and guarded relief. “When the new tax regime was proposed, there was a general expression of relief – not because the industry thought it was a good thing, but simply because it avoided what many thought would result in a complete nightmare,” Buteau says.
“The government has come up with a regime that makes everyone pay something, although it falls short of what the government originally thought it could get from the industry,” he says. “It was a case of the PQ trying to keep its word, while discovering it has to protect a fragile but important industry.”
“It’s not as bad as it could have been, although that’s probably the only good thing one can say,” Perron says. “We already have the highest tax jurisdiction in Canada . . . It’s delusional to think this will have no broader consequences, particularly on investment.”
Depending on legislative procedure and approval, the new tax regime will come into effect on January 1, 2014, although modifications may occur in the interim as government seeks support for its passage.
“I’m sure there are ongoing discussions between the different political parties in Québec,” Buteau says. “They’ll probably be discussing what compromises have to be made in order to obtain the votes to secure majority passage.”
But companies should still prepare for potential change, he stresses. “We’re telling our clients to think about the possibilities of the new regime. They need to address the potential impact on proposed revenue or on the proposed [capital expenditure] for ongoing projects,” he says.
“Many will now be looking at numbers, carefully considering decisions on whether to expand current activities or put development on hold,” he adds.
ACT TWO
On May 29, Québec’s Minister of Natural Resources, Martine Ouellet, tabled Bill 43 that will, if approved, put into effect a new Mining Act.
Unsurprisingly, many changes are proposed. For example, companies seeking to make a mining claim will have to notify the owners of the land and, if applicable, those leasing it, within 60 days of registering the claim. Companies making a claim within municipal territory must inform the local governing body at least 90 days before work starts. In addition, certain claims could become subject to auction under the Mining Minister’s auspices.
Municipalities will be afforded the power to demarcate territory considered ‘incompatible’ with mining. However, these powers are limited within the framework of ‘government policy direction’. Ultimate power to determine the approval or the rescinding of mining activity on any particular territory will rest with the Minister of Natural Resources.
This is really no change from the current state of affairs, argues Beullac, adding that the additional municipal powers have been rendered unnecessary by realities on the ground. “Today, it’s impossible for a mining company to simply push ahead with a project if a local population opposes it,” he says. “Certainly, this is the case with aboriginal communities.”
Only one provision in Bill 43 specifically relates to the First Nations. It states that the Mining Act must be “construed in a manner consistent with the obligation to consult Native communities”. In addition, the Bill proposes that the Minister “must consult Native communities separately, having regard to all the circumstances”. It does not stipulate what these “circumstances” are.
Bill 43 has subsequently faced First Nations criticism for failing to fully delineate aboriginal rights with respect to mining. There is also the concern that First Nations territorial rights could be circumvented.
“The current Bill on mining is another missed opportunity,” Chief of the Assembly of the First Nations of Québec and Labrador Ghislain Picard said on May 30. “The Canadian Constitution recognises the rights of the Aboriginal peoples . . . Whether it likes it or not, the provincial government must comply with [the Constitution] and fulfil its obligations.”
The Bill also proposes that companies guarantee 100% of costs associated with rehabilitating a mine site. The current level is 70%.
In addition, it seeks to engender more processing of ore within Québec. “Government sees that as a good thing for the province but, remember, it may only apply to certain minerals in specific economic conditions,” Buteau says.
“Politicians need to appreciate that the province is competing on an international stage and that companies will always consider the bottom line. Even with the proposed government breaks, the processing fees are likely to remain higher than in other jurisdictions. So, why would anyone still choose Québec when there will always be another, cheaper option abroad?” he asks.
“On a wider level, it will always come down to cost and benefits,” he adds. “A company, particularly a major, will always have one overriding question in mind: Does production in Québec make economic sense or is there somewhere else that offers far greater opportunities?”
Considering the disquiet, one might be tempted to argue that the provincial government has made the answer to this question seem increasingly obvious.