1 The Exploration & Mining Industry in Canada Mining is a strategic industry for Canada It generates revenue and stimulates growth across the length and breadth of the country, from Vancouver Island to Newfoundland, from Southern Ontario s salt mines to the metal and diamond mines of the Far North. Mining has a substantial economic impact on our nation s north and on Aboriginal communities. In fact, it s a powerhouse of Canada s economy. Of the world s public mining companies, 58% are listed in Canada. There are nearly 1700 listed mining companies on the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV); in 2011 The Mineral Exploration Tax Credit & the Future of the Mining Industry in Canada 1
these two exchanges were responsible for approximately 90% of the world s mining equity financings by number and nearly 40% by value. In the same year, Canada led all countries in mining exploration, with 18% of the world s exploration spending, according to the Metals Economics Group (MEG). Based on these numbers MEG predicted that Canadians will have the opportunity to capitalize on an estimated $140 billion of new mining investments over the next decade. It s a critical time for the industry, however. In 2012 Canada s share dropped to 15.9%. A thriving mining industry helps sustain other sectors, & bolsters the Canadian economy Mining is an entrepreneurial business comprised of companies involved in exploration only (juniors) and others involved in both mining and exploration (seniors). The Canadian companies providing geological, engineering, legal and capital markets financing services to the mining industry are regarded as among the best in the world. In fact, many sectors of the Canadian economy depend on mining. The mineral and metal processing, steel, and semi-fabrication industries add value to mining products and employ thousands of highly-skilled workers. Mining is the largest customer of Canada s transportation sector, for example, requiring a high-functioning, responsive transportation network for both shipping and exploration. A full 60% of all rail traffic in Canada is employed in shipping mining material. Indirectly, mining employs thousands of truck drivers, rail and port workers, pilots, mechanics, and others, who in turn support other sectors, such as the restaurant and hospitality industry. As a result, mining and the sectors that benefit from it contribute billions annually to Canada s GDP, and generate significant tax revenues for all levels of government. Mining sustains & develops communities in rural & northern regions Mining activity in rural and northern regions builds local infrastructure like roads and community centres, provides much-needed jobs, training, and new business opportunities, and supports local trade. The mining spinoff effect that boosts the Canadian economy as a whole also makes a significant difference in the day-to-day lives of people who live in these regions. In 2010 alone, Nunavut s GDP increased by more than 11%, with Statistics Canada pointing to Agnico-Eagle s Meadowbank gold mine as the major contributor to this. Exploration projects are the headwaters of the mining industry New mining plays, such as iron ore in the Labrador Trough region and chromite development in Northern Ontario are expected to bring significant economic benefits to Canada. Both of these sites were found through extensive exploration activities. Many geologists believe Canada still has a great deal of untapped mineral potential, especially considering that the mix of commodities that companies are looking for continues to change over time. Nevertheless, the mineral stocks in our current mines are finite. To sustain and grow the industry in the future, exploration must be undertaken at a constant, continuous rate. 2 In 2010 alone, Nunavut s GDP increased by more than 11%, with Statistics Canada pointing to Agnico-Eagle s Meadowbank gold mine as the major contributor to this. A full 60% of all rail traffic in Canada is employed in shipping mining material. Of the world s public mining companies, 58% are listed in Canada.
INDUSTRY FAST FACTS Canada s current global ranking for number of mining companies 1 Number of listed mining companies on the TSX and TSX Venture exchanges 2 Number of workers employed in the sector 3 Number of ancillary companies (estimated) 4 Explorers are big businesses that can absorb the risks and high capital costs of exploration. Roughly half of all exploration activities in Canada are undertaken by small companies. Sustaining exploration activity, in turn, requires just the right mix of ingredients, including a promising geology, public investment in geoscience, transportation infrastructure and ready access to financial capital. Unlike mining companies, which generate revenue from production, exploration companies raise the bulk of their exploration budgets from investors, primarily through issuing shares on the stock market. Only a small percentage of investors will participate in the high stakes exploration game, however. Out of a thousand exploration projects, only one might eventually turn into an operating mine. Creating incentives for investors to allocate scarce financial capital is a critical ingredient in sustaining the exploration activity upon which mining companies (and the remote communities in which they operate) depend. This is particularly the case in challenging economic times. The junior companies that conduct exploration in Canada are small, risk-taking entrepreneurial businesses Unlike in the United States, where mining is dominated by a handful of multinational conglomerates, Canada s unique mining ecosystem is largely comprised of thousands of small-to medium-sized enterprises. Metals Economics Group noted in March 2012 5 that junior companies have accounted for close to half of annual mineral exploration spending in recent years, often shouldering the biggest exploration risks in conducting greenfield exploration, scouring the countryside for minerals in often far-flung, hard-to-reach places. Having discovered a viable project, a junior will often sell it to a larger company for development and, potentially, for mining though a minority of juniors will decide to raise capital to develop a site themselves. This subcontracting of risk from big mining companies to entrepreneurial small businesses is part of the unique system that keeps Canada s mining pipeline full. Unlike large companies, however, juniors cannot rely on revenues or on bank loans for financing their development sites are not yet proven, and they are working with a potential for profit, not the certainty of one. As such, they rely heavily on equity investors who must weigh the possibility of high reward against the risk that nothing valuable may be found. The METC & flow-through shares system is globally unique No other country has such a sophisticated, forward-thinking policy infrastructure in place to encourage investments in grassroots mining exploration, which in turn sustains its mining industry. The METC and flow-through shares system only applies to the grassroots exploration expenditures that junior companies undertake, and acts as an investment incentive. Because junior companies conducting exploration are performing an activity akin to a technology company s research and development stage, they are not yet earning revenues, turning a profit, or paying corporate taxes, and are therefore in a position to renounce their expenditures to shareholders. Flow-through shares are a type of common share that permits the initial investor to claim a deduction up to the amount of the share subscription price against any income in respect to resource expenses renounced by a publicly-traded issuer. The METC exists on top of that deduction, offering an additional 15% tax The Mineral Exploration Tax Credit & the Future of the Mining Industry in Canada 3
The METC only benefits investors. The METC supports junior companies by acting as an incentive to help raise muchneeded capital for exploration activities. As of June 29 last year the top 100 mining companies on the TSXV had raised 41% less in equity financing than by the same point in 2011. Investor risk tolerance is down. Exploration risks are increasing. Capital needs are increasing. credit as an incentive to fund exploration activities essential to the mining industry. A tax credit is more valuable than a tax deduction as it is deducted from taxes owed rather than from income, so the METC is equivalent to a tax deduction of more than 30%. The METC is leveraged by additional tax incentives in the main mining provinces that generally use the same eligibility rules. BC, Manitoba, Saskatchewan, and Ontario have tax credits linked to METC eligibility criteria, while Quebec has a separate super-deduction. If the METC were no longer available, the provinces might very well phase out their tax credits as well. 2 Challenges Currently Facing the Mining Industry Setback 1: Investor risk tolerance is down in today s economic climate Junior exploration companies rely on equity funding. Canadian investors are usually risk-averse and conservative with their money except when it comes to the mining industry. There s an aura of excitement, romance, and history surrounding mining investments, and the idea of generating large potential returns with the right mining investment adds to the allure. The sector s relatively sophisticated investment base encompasses the entire country, and includes many industry contacts with regional investors not just with those in-the-know on Bay Street. Today, however, even the most die-hard dreamers are holding back, reluctant to back exploration companies in a time of great economic uncertainty. In fact, as PwC recently noted in its 2012 Junior Mine report, as of June 29 last year the top 100 mining companies on the TSXV most of them explorers had raised 41% less in equity financing than they had by the same point in 2011 a development that will almost certainly have a significant impact on exploration spending in coming years. At the same time, overall investor confidence continues to erode as a result of multiple global economic factors, including: Continued fallout from the commodity crisis of 2008. Many investors have not yet returned to the markets after their wealth was significantly reduced, and others remain wary of high risk investments. Fear the economic situation in Europe will pull global markets down. Slowing global markets in China and India. Concern about the economic situation in the U.S. 4
Setback 2: Risks inherent in the exploration process are increasing Mineral exploration has always carried substantial risk. The rate of success is very low even more so than with oil and gas and the vast majority of exploration projects don t proceed to mine development. Yet junior companies now grapple with additional risks, as minerals become both harder to find and less accessible. These risks include: Reduced access to land, as more remote areas are reserved as parkland. Increased need for extensive community consultations as part of the exploration phase, before anything is even proven viable. The historic decline of geological mapping, the lack of surface expressions of mineralization, and the increasing depth of potential discoveries. Setback 3: Capital needs for exploration are increasing As with risk, exploration is inherently an expensive and time-intensive process. Junior companies must dedicate significant resources to proving that their discoveries are viable and demonstrating the extent of a mineral discovery. But costs are going up: Companies are exploring in increasingly remote areas that are more expensive to access and often have more extreme climates. Exploration requires highly-qualified (and increasingly expensive) employees. Costs associated with equipment, drilling, and fuel are up. Exploration costs are higher for more complex ore bodies and deeper-lying deposits with lower grades. Costs associated with consultation and permits are up. Junior companies are in a challenging position today. As investor risk tolerance is decreasing, the costs of exploration are rising explorers, in other words, need to raise more capital than ever before at a time when it s more difficult to do so. 3 The Mineral Exploration Tax Credit: A Proven & Effective Solution The 15% tax credit, re-named METC in 2006, was first implemented in 2000, at a time when it was very difficult for junior companies to raise financing for mineral exploration, even using the flow-through shares system. The need for continued coverage has been proven, time and again, with annual renewals since then. The only gap in coverage since 2000 was very brief (five months) and occurred during the government transition in early 2006. The METC is intended to assist junior mining companies in raising equity through flow-through shares. It enables exploration companies to raise the capital they need to maintain or increase grassroots exploration activities in Canada. As such, it is a fundamental component of the policy infrastructure that keeps this strategic industry strong and competitive internationally. The Mineral Exploration Tax Credit & the Future of the Mining Industry in Canada 5
The METC is effective. It spurs exploration. In 2000, before the program began, mineral prices were weak and exploration was down. Data from the Metals Economics Group shows that after the METC was implemented, Canadian exploration recovered faster than in other competing jurisdictions. Exploration and deposit appraisal expenditures in Canada rose to $3.1 billion in 2008 from about $300 million annually in the late 1990s 6. It stimulates the flow of much-needed capital to the junior companies that conduct exploration, and helps them to grow. Of the top 10 mining companies on the TSX Venture Exchange, most did not exist a decade ago, or were very small. Since 1999/2000, 236 mining companies graduated from the TSXV to the TSX. Strong junior companies create employment opportunities. Rural and northern communities and also suppliers and service providers all benefit from exploration activity. It has resulted in important mineral discoveries, which have already or may soon become mines. Although pre-dating the METC, the initial discovery of the kimberlite pipes that led to the Ekati mine and to Canada s diamond industry an industry that has transformed the economy of Canada s north was financed in part by flow-through shares; more recently, the early delineation of the GDP-boosting Meadowbank gold deposit in Nunavut was financed in a similar manner. Nowhere is the importance of mining exploration greater than in Canada s north, where mining and oil and gas provide the most important opportunities for economic development. The METC is also a cost effective program. The Canada Revenue Agency estimated in the March 2012 federal budget that the impact of the extension of the METC into 2013 would be a net reduction of revenues of $100 million over the periods 2012-2013 and 2013-2014. In an average year, METC investors collectively provide junior companies with $500-800 million in new financing to be spent on grassroots exploration in Canada. Financed junior companies generate employment opportunities and economic growth, and when profitable new mines are discovered, governments benefit from tax revenues. In 2010 the mining industry paid $8.4 billion in taxes and royalties to F/P/T governments 7. The ancillary companies, suppliers and service providers supporting the mining industry also generate tax revenues. The METC s $100 million net revenue reduction over two years is a small fraction of overall taxes collected from the mining industry and related companies. The mining industry is cyclical and affected by both commodity prices and investor risk tolerance. The METC is flexible and works accross industry cycles to provide stability and build confidence. The global economic situation and commodity prices are unpredictable and can shift quickly. The mining industry benefits from the presence of stable investment incentives to help keep capital flowing at all times, not just during a downturn. The METC is more than a counter-cyclical tool. It is an effective way to promote investor confidence and keep capital flowing to the exploration sector both during boom times and economic downturns. As such it functions best as a continuous, stabilizing tool. 6
The METC keeps Canadian investment dollars in the Canadian industry. Flow-through share and METC funding must be spent in Canada, and is credited with attracting exploration investment to Canada in the face of intense international competition. Flow-through shares and the METC significantly improve returns on high-risk mining investments and thus make it more likely for investors to back Canadian projects than comparable international ones. The METC is an incentive to keep Canadian investment dollars in Canada, which in turn keeps Canadian juniors exploring. Exploration is the mining industry s R&D. Exploration is crucial to the mining industry, and effectively functions as its research and development phase. Investors who back exploration projects at their earliest stages play a role similar to angel investors who provide venture financing to start-up technology companies. The federal government continues to provide tax credits on a permanent program basis for research and development in industries like manufacturing and technology. The METC is the main incentive for mining investors to support high-risk exploration by Canadian junior companies. In our opinion, without the METC, the exploration & mining industries in Canada would be at risk Mining is a strategic industry for Canada, and exploration, as its research and development phase, is its driving force. A number of financial challenges currently facing the industry are impacting the ability of the junior companies that conduct exploration to raise the capital their projects require. The METC is a proven, effective incentive to stimulate investments in exploration projects by junior companies.. Without the METC there would be a critical investment gap in the mining industry. Reduced investment in junior companies would result in fewer exploration projects, which in turn would impact negatively on ancillary companies, suppliers and service providers. Reduced or cancelled field projects would also negatively affect rural, northern and Aboriginal communities. Fewer potential projects in the pipeline would mean significant decreases in future wealth creation from mining operations, and decreased tax revenues from the industry. Job losses would mount, and Canada would risk losing highly qualified workers to other countries, which would severely limit Canada s longterm ability to retain its competitive position as a global leader. Finally, without sufficient investment in the high-risk greenfield exploration that juniors undertake, the sustainable replacement of Canada s mineral reserves would be put at risk. The Mineral Exploration Tax Credit & the Future of the Mining Industry in Canada 7
4 Our Recommendation: Provide Longer-Term Stability for the Industry We believe the 15% Mineral Exploration Tax Credit should be renewed. We also believe the mining industry would benefit from longer-term stability, which can be achieved at this time by lengthening the METC approval period from its current one-year time frame to three years. METC has become the life-blood of the exploration industry. It has been in place for twelve years, and has become an integral part of the Super Flow-Through system for grassroots exploration which supports the junior mining industry. Investors have come to expect a net tax deduction equivalent to at least 130%, not merely the 100% offered by ordinary flow-through shares. Ordinary flow-through is available for much lower-risk and competing investments in mining pre-production development, oil and gas exploration, and Canadian Renewable and Conservation Expenses. If METC were not renewed there would be a sharp reduction in investment in higher-risk grassroots exploration. A longer approval time frame, meanwhile, would provide all players with more confidence at a time when the global economic future is very uncertain. A longer approval time frame would provide stability for junior companies, and would assist them in making commitments to new projects. In particular, it would enable them to more effectively plan the financing of multi-year exploration programs, and to better market their programs to new investors. A longer approval time frame would also provide a better sense of predictability for investors, and would boost investor confidence in Canadian projects. It would also provide a sense of stability in the overall marketplace for ancillary companies, suppliers, and service providers, as well as peace of mind for the rural and northern communities that depend on exploration and mining for growth, employment opportunities, and local trade. The Canadian exploration and mining industry can weather economic uncertainty and remain a world leader so long as a supportive regulatory and investment environment exists. As a pivotal part of the Canadian policy framework, the METC should be renewed and maintained for a minimum of three years. About the Prospectors & Developers Association of Canada The Prospectors and Developers Association of Canada (PDAC) represents the interests of the mineral and development industry. The association is a national organization with 9,000 individual members, including prospectors, developers, geoscientists, consultants, mining executives and students, as well as those involved in the drilling, financial, investment, legal and other support fields. Our 1,254 corporate members include senior, mid-size and junior mining companies and organizations providing services to the mineral industry. 1 Risk? Bring it on, Canadian miners say. The Globe and Mail, November 22, 2012, and Support Future Mineral Exploration and Mining in Canada, PDAC. 2 TMX website (http://www.tmx.com/en/listings/sector_profiles/mining. html), datum current as of October 31, 2012. 3 Bringing the Opportunity Home. PDAC, September 2012. 4 Bringing the Opportunity Home. PDAC, September 2012. 5 SNL Metals Economics Group, World Exploration Trends, March 2012; cited in Support Future Mineral Exploration and Mining in Canada, PDAC. 6 Super Flow-Through Shares: Mineral Exploration Tax Credit, PDAC brochure, September 2010. 7 Bringing the Opportunity Home, PDAC, September 2012. 8