March/April 2015

Electric fence

Miners say power costs limiting investment in the province

By Ian Ewing

Special Report: Ontario Despite operating in a well-respected and politically stable jurisdiction, miners in Ontario continue to struggle to compete on costs. Energy costs, and in particular electricity costs, are the second-largest expenditure for most mines, after labour. Despite the key role mining plays in the industrial output of the province, Ontario’s advertised electricity rate – the price before rebate and incentive programs are factored in – ranks among the highest in North America, affecting both profitability and new investment.

The Association of Major Power Consumers in Ontario (AMPCO) estimates that an average transmission-connected class A industrial user pays more than any other comparable North American customer. In 2012 AMPCO’s methodology found an average cost of 7.6 cents per kilowatt-hour in Ontario compared to 7.3 cents in Alberta, 4.9 cents in British Columbia, and 4.5 cents in Quebec. Jennifer Beaudry, a spokesperson for the provincial minister of energy, contests these figures; comparisons made by her office put Ontario ahead of some provinces and U.S. states. [For more on the global energy market see our feature “Live wire act”]

But the competitiveness of Ontario’s electricity pricing depends on a number of industrial energy rebate and incentive programs – among them, the Industrial Electricity Incentive (IEI), the Industrial Conservation Initiative (ICI), and the Northern Industrial Electricity Rate Program (NIER), in which seven mining companies participate. These help lower the price most miners pay but are not a long-term solution, industry leaders say.

“The challenge you’ve got is that anybody that wants to invest new capital for a 20-year mine life can’t base their economics on a three-year, temporary program,” says Ontario Mining Association president Chris Hodgson, “or a year-to-year program, in some cases.”

Clarity around the long-term price is a problem, agrees John Mullally, director of corporate affairs at Goldcorp. “We have to have certainty of supply and some sense of what the electricity rate is going to look like in five or 10 or 15 years.”

Exclusionary principles

For some companies, the government’s rebate programs create a competitive disadvantage. Wesdome Gold for example does not qualify for NIER because the company uses too little electricity. At its mine and mill facilities, which produced a total of 58,230 ounces of gold in 2014, Wesdome paid an all-in (net of taxes) effective rate of 7.84 cents per kilowatt-hour (kWh) last year and more than 10 cents per kWh for its assay laboratory facility in Wawa.

According to Wesdome COO Philip Ng, the company uses less power to produce an ounce of gold than almost anyone else in the province but is not rewarded for its efficiency. “We actually get penalized. If we used seven per cent more electricity, we could drop our unit costs, because we’d get a 16 to 17 per cent reduction in our unit cost for electricity through NIER.

“They should create a level playing field, whether you’re a 50,000-ounce producer or a 500,000-ounce producer.”

And more than that, Ng says the paperwork to prove that a company qualifies for any incentive program is burdensome. Mullally agrees: “It takes major producers considerable effort to understand and to apply to the Independent Electricity System Operator to take advantage, and then to implement these programs, and then manage and report as required, and the teams you need,” he says. “I would guess that this would be very challenging for a smaller operation with less manpower. They’re also not easily accounted for when considering long-term investment in the province. ”

What infrastructure investment?

Another ongoing issue is getting power to mine sites. Other provinces have recently invested in upgrading and extending their electricity infrastructures. British Columbia last summer finished the $746-million Northwest Transmission Line project that will power Imperial Metals’ new Red Chris copper and gold mine. The new line extends low-cost, hydroelectricity 344 kilometres further north in the province than the previously existing network, opening up the economic development of a mineral-rich area and linking nearby communities to the grid.

Ontario does have similar projects in the works, according to Beaudry. “We have made it a priority to ensure there continues to be a stable, reliable and cost-effective supply of electricity,” she says. “Northwestern Ontario is going to get the power it needs, including the power required for economic expansion.” She cites several upcoming projects in northwestern Ontario, including the Thunder Bay Generating Station conversion, the East-West Tie Transmission Line, and the proposed Northwest Bulk Transmission Line.

However, a closer look suggests that none of these options will improve the situation for miners any time soon. The Thunder Bay Generating Station conversion aims merely to replace some of the generating capacity that was lost when Ontario closed the old plant while phasing out coal, according to Ontario’s Long-Term Energy Plan. The East-West Tie, meanwhile, will add redundancy and reliability, but without significantly boosting capacity or grid coverage. Neither will help lower costs for existing or new mines. The Northwest Bulk Transmission Line could eventually add significant transmission capacity and open up opportunities to connect currently isolated northwestern communities and mines to the grid, but the line remains in early planning stages.

Historically, Ontario has also provided tax credits for companies that take on the upfront risk of capital investment. Hodgson considers this preferable to the approach taken in Quebec and British Columbia, where the province makes the capital expenditures. “If the company can borrow the money, they can build the road, or they can build the hydro line,” he explains. “Over the life of the mine, the government gives them tax credits back, so that there’s no risk to the taxpayer. We’re basically funding that infrastructure but without taking the risk.”

But with no guarantee of cheap electricity even if they do build the infrastructure, investors have avoided undertaking any such projects in Ontario. As Hodgson points out, there is no way to quantify the amount of investment the province has missed out on because of high energy prices.

Some companies count electricity among the reasons for moving or cancelling projects. The rising cost figured into Xstrata’s 2010 decision to move its smelting operations – and 670 jobs – from Timmins to Quebec. Uncertainty about the future of the massive Ring of Fire development hinges on infrastructure issues, including electricity.

It always comes back to the cost of producing metal. “Gold is produced around the world, and it’s sold at the exact same price, a fixed price,” says Mullally. “We have no control over our customers either. So, in mining, one of the most critical concerns is managing your production costs. Ontario must compete and remain economic compared to other jurisdictions in order to continue to attract investments from a finite pool of capital.”

Fundamentally, miners and potential investors in Ontario want to see the price that most of them already pay reflected in the advertised sticker price of electricity. “We’re fairly competitive if you can get into these programs, but they’re just short-term programs,” says Hodgson. “You can’t blow a billion dollars on a 15- to-20-year payback based on a three-year program.”

Ng adds: “To create jobs and make Ontario competitive, to be the business engine of Canada, Ontario needs a competitive energy infrastructure.”

Next: Beyond the backyard
Northern Ontario mining suppliers outgrow their traditional customers

Go to Cover Story: Kirkland Lake

Go to Feature: Live wire Act

Go to Upfront: Projects & Construction

Go to Travel: Sudbury, ON
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