May 2013

MAC Economic Commentary

Mining and Canada’s North: build it and they will come

By Brendan Marshall

Our three northern territories are often touted as Canada’s mining frontier, and the key to unlocking their largely unrealized mineral potential is to address the region’s limited infrastructure. To date, government investment in infrastructure has been modest, and changes to the mining taxation regime in the federal government’s most recent budget introduce further challenges for miners with projects in this region.

Nunavut’s only operational mine, Agnico-Eagle’s Meadowbank, required significant infrastructure investments. A floating dock system was installed in Baker Lake to receive supplies. A tank farm, with an annual resupply capacity of 60 million litres of diesel fuel for power generation and mining fleet supply, was built, along with a 110-kilometre all-weather road (including bridges) – by far the longest road in the territory. Other investments include the construction and maintenance of a 1,500-metre air strip and the acquisition of six large diesel generators. The lack of energy infrastructure – and resulting $70- to $80-million fuel bill for the company’s operations – has helped drive the price of electricity to $0.30KWh. There are also costs for shipping, local transportation and storage of the fuel on site.

For Meadowbank, the scale and the quality of the deposit merited the investment. That is not always the case, however, and the lack of infrastructure is the determining factor that renders the development of some high-quality deposits marginal, or economically unviable.

Targeted and strategic infrastructure investment by the federal government could reverse this, bringing employment benefits to northern communities and royalty revenues to Canada. Infrastructure spending would increase the economic viability of a host of mining projects and reduce the costs for existing operations. For example, building a seasonal overland route for the southernmost 156 kilometres of the N.W.T. winter road to its three diamond operations would lengthen the trucking season and provide more security against changing climate conditions. In Nunavut, the Bathurst Inlet Port and Road project would connect the Arctic coast at Bathurst Inlet to numerous precious and base metal projects, like Xstrata’s Hackett River and MMG’s Izok Corridor, moving toward development.

Already, mining is the largest private sector contributor in the North, contributing 30 per cent of GDP in the N.W.T. and 15 per cent in Nunavut. Other sectors, like real estate, construction and transportation, also benefit from the mining industry, through the purchase of land, the construction and maintenance of roads, and the development of mine sites. These investments translate into significant business and community benefits, including huge growth in aboriginal business and employment, enhancing the overall quality of life for those living in northern communities.

MAC research has identified more than $8 billion in potential projects that could be developed over the next decade. This number is poised to grow due to the global exploration interest in the region. Given the virtually undeveloped terrain, mining companies have largely built, and continue to maintain, much of the infrastructure required to operate. In the Northwest Territories, for example, mining has made valuable and long-lasting infrastructure contributions to the territory’s only railway, all three of its hydroelectric power facilities, and all-weather roads – such infrastructure is simply not factored into capital and operational costs when determining the economic viability of many non-remote mining projects elsewhere in the country. Some taxation measures had incentivized northern infrastructure development. However, the 2013 budget phases out the mining industry’s eligibility for the Accelerated Capital Cost Allowance (ACCA) and changes the eligibility of mining activities for the Canadian Exploration Expense (CEE) and Canadian Development Expense (CDE) programs. These reforms make the development of certain projects more difficult.

Shifting the eligibility of expenses for “clearing, removing overburden, stripping, sinking a mine shaft or constructing an adit or other underground entry” from CEE to the CDE program will reduce the tax deductibility of these expensive activities from 100 per cent to 30 per cent, costing miners an estimated $45 million each year. ACCA enables miners to deduct income for a taxation year of up to 100 per cent of the remaining cost of eligible assets acquired for use in a new mine or a new mine expansion. Although the program was extended for manufacturers for two years, the mining sector’s ACCA will be eliminated, beginning in 2017. Both of these measures will make it more expensive for the development and construction of new mines, pushing potential opportunities for growth, partnership and northern economic development further away.

Brendan Marshall is director of economic affairs at MAC. He works to advance the mining industry’s interests and understanding of key economic issues such as taxation, international trade and investment, transportation, energy and climate change, and innovation.

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