March 13, 2013

 

Industry braces to fight royalty increases

 Quebec government floats new mining royalty rate ideas at forum

 

by Peter Diekmeyer

 

Quebec’s mining industry is sitting on pins and needles in the wake of the recent Forum sur les Redevances Minieres, which sounded out public opinion regarding possible increases in sector taxes and royalties. Strong raw materials prices have increased pressure from many of the Parti Québécois government’s constituent groups [hm1] to[u2]  boost the public sector’s take.

 

Two main proposals were floated in the weeks leading up to the forum, held in mid-March at HEC Montreal. The first option would be a royalty based on a flat percentage of total production value, with a 5 per cent level suggested. The second would be an excess profits tax, which would reflect rising resource values.[hm3]  Currently, Quebec mining companies pay a 16 per cent royalty on profits[u4] .

 

“Mining royalty and tax regimes are being reviewed everywhere,” says Yvan Allaire, chair of the Institute for Governance of Private and Public Organizations, who has been advising the province on this issue. “(The challenge) is balancing maximization of fiscal receipts, durable economic benefits for citizens and the state, with the rights of companies to a fair return.”

 

Industry reaction to the proposed changes was almost uniformly negative. “Adding new taxes in this way is not a good idea,” said Chuck Jeannes, president and chief executive officer of Goldcorp, which is in the midst of a massive $1.7 billion development near Bay James. “Such a move would harm the province’s interests over time, as businesses reassess mine expansion decisions and make new comparisons regarding competitive investment locales.”

 

“The proposed new taxes would make Quebec the highest tax place that we do business, ahead of Ontario, Mexico and even Argentina,” added Jeannes. “My message to the government would be: “Don’t kill the next Éléonore project.””

 

Nochane Rousseau, a tax expert from Pricewaterhouse Coopers, said ranking Quebec in comparison with other jurisdictions’ tax regimes was difficult, [hm5] but added new measures could hamper investment..“We are definitely heading into the higher end, where investors will be demanding increasingly significant risk premiums[u6] .”

 

Bryan Coates, vice-president of finance at Osisko, which operates a gold mining operation in Malarctic, Quebec, said increasing royalties could potentially reduce Quebec’s mining revenues indirectly. “Governments need to be careful about making changes, because if they do, they could actually lose revenues,” says Coates. “Royalties are just a small percentage of what Quebec collects from mining companies, which also includes significant payroll and corporate taxes. However if they grab too much on one end, they could end hampering investment and thus losing even more overall.”

 

Ironically, although the government’s consultation document Le Régime d’Impot Minier du Quebec, calls for a long-term deal with industry, this is not the first time that the rules of the game were changed. In 2010, the Charest Government raised the mining royalties tax that Quebec mining companies pay from 12 per cent to 16 per cent of profits. Experts say the fact that government is returning so soon to the trough creates an additional challenge, uncertainty, which many investors cite as a key bugbear.

 

The proposed tax increases come at a bad time. Mining sector stakeholders have been under considerable pressure lately, with juniors in particular seeing considerable capital access challenges. That said most were sanguine in their proposed responses, [hm7] noting that increased public education is key.

 

For example, while a certain percentage of public opinion clearly believes that government can levy taxes ad infinitum, industry officials point out, that even when mining infrastructure has been set up and paid for, there is no guarantee that it will be optimized. The example of Agnico-Eagle’s LaRonde mine, which underwent numerous expansions, was repeatedly cited. Extending ore bodies requires consistent new investments; however ever-changing rules make it hard to gauge how profitable they will be.

 

Another key challenge is explaining the existing taxation structure. Few realize that the 16 per cent tax that companies pay on mining profits, comes on top of existing federal and provincial taxes that all companies pay. [hm8] Furthermore, this tax is calculated on a mine-by-mine basis. That means that if a company is losing money in the initial development stages of one mine, but making money on another, it cannot use the loss from the first to offset profits from the second. This means that mine operators can be losing money but still be forced to pay taxes.

 

 



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