Royalty hikes could dethrone Quebec’s mining sector

Canada is a king among mining nations, and until recently Quebec was the brightest jewel in its crown. In 2011 alone, the global mining sector invested $17 billion in Canadian operations and was directly responsible for $63 billion (3.9 per cent) of Canada’s GDP. The mining sector is also an important contributor to the economy of Quebec, with mining and mineral manufacturing adding $10.2 billion (3.4 per cent) to provincial GDP in 2011. Quebec was ranked as the most attractive Canadian province for mining in recent years, but its edge is fading fast. And recently announced changes to the royalty regime in Quebec could threaten the mining sector’s future at a time when mining investors are already fleeing the province.

On May 6, Quebec announced long-awaited changes to its mining royalty regime. These changes will raise Quebec’s mining royalties to the highest in Canada and will introduce a host of factors that decrease Quebec’s attractiveness for mining investment. The first difference is in how the royalty is calculated: Instead of taxing profits, as is currently the case in Quebec, the new royalty regime will be based on the value of the ore being produced at a mine. In addition, a minimum royalty of one per cent of the ore value will be introduced for the first $80 million in output and four per cent for excess amounts. These changes will result in companies paying royalties, regardless of whether or not they are profitable, and will compound problems during economic downturns and periods of low commodity prices.

A new three-tiered tax on profits will also be introduced with rates based on the profit margin: 16 per cent on up to 35 per cent profit, 22 per cent for profit between 35 and 50 per cent, and 28 per cent for profit above 50 per cent. The proposed changes, scheduled to come into force in 2014, will require miners to pay the greater amount of either the minimum royalty or profit tax.

However, these changes will put Quebec at a competitive disadvantage for attracting investment since mining companies base investment decisions on the full life-cycle of the mine, over which time mineral prices can fluctuate considerably. Miners will be hit harder by minimum royalties when prices are low and will be hit again by increasing profit taxes when prices are high, limiting their ability to compensate for downturns. Quebec is already a high-cost jurisdiction for mining due to its distance from emerging markets in Asia, variable climate, and mineral deposits that are generally less concentrated. Changes to the royalty regime can only increase risks for mining development in Quebec and could result in mine closures for less profitable mines and during periods of lower prices.

Royalty regimes and taxation have a clear impact on the province’s attractiveness for mining investment, a fact demonstrated through the Fraser Institute’s annual Survey of Mining Companies. Our survey shows that Quebec’s taxation regime is already discouraging investment, even without the new royalty structure. The 2012/2013 mining survey revealed that 38 per cent of mining managers are mildly or strongly deterred from investing due to Quebec’s taxation regime, the highest percentage of investment deterred due to this factor in Canada.  Changes to the royalty regime could further decrease the attractiveness of Quebec to mining investment, thus continuing its decline from the most attractive jurisdiction for mining investment in 2009/2010 to 11th in the global rankings in 2012/2013.

Quebec’s plummeting hospitality to mining is already resulting in less money invested in exploration needed to discover and develop future mines. Spending on exploration declined in Quebec in 2012 and is expected to decline further in 2013. Quebec’s share of Canada’s total exploration investment is also declining, suggesting that miners are shifting their exploration to other provinces and territories. None of this is likely to benefit the people of Quebec.

What governments tend to forget is that mining capital, like any other type of capital, is finite and free to flow to jurisdictions most likely to generate returns on investment. If Quebec wants to continue to attract mining investment, then the proposed changes should be reconsidered. If not, the estimated $1.8 billion in additional royalties expected over the next 12 years from the royalty hike may fail to materialize as investment  shifts from Quebec to more attractive jurisdictions.