August 2009

Benefits of the mining industry

An opinion letter by former QMA chairman

By Y. Harvey

The report of the Vérificateur général du Québec, the province’s auditor general, questions certain activities of the ministère des Ressources naturelles et de la Faune du Québec (Quebec’s ministry of natural resources) and, thereby, the activities of mining companies. On the eve of its annual general meeting in June, the Quebec Mining Association (QMA), whose member societies represent a majority of Quebec’s metal and industrial mineral producers, would like to respond to certain elements of the report, and especially to the comments of politicians and lobby groups who would have people wrongly believe that the mining industry offers virtually no benefits to Quebec and its regions. Such comments betray a great lack of knowledge of the mining industry.

The recommendations of the Vérificateur essentially cover five aspects: (1) the followup and examination of requirements pertaining to mine site rehabilitation plans; (2) the acquisition and diffusion of information on the mining sector; (3) the development of a mineral strategy that respects the principles of sustainable development; (4) financial guarantees for mine site rehabilitation; and (5) the mining rights issue.

The deficiencies identified in the examination of requirements and in the acquisition and diffusion of mining sector information are the consequences of a policy of gradual budget and personnel constraints at the ministère des Ressources naturelles et de la Faune that date back more than 12 years. The QMA believes that the budgets and the manpower of this ministry should be augmented.

Regarding a mineral strategy for Quebec, the association has already proposed a number of measures to the government to support the long-term development of Quebec’s mining industry, the protection of the environment and the harmonious integration of mining activities in the community. On the question of financial guarantees to ensure the full coverage of rehabilitation costs, the QMA has already informed the authorities that it is in favour of a 100 per cent increase in the level of this coverage, a broadening of the scope of the guarantees, a revision of the time period of such a guarantee, and the close scrutiny of the financial condition of the purchaser when the transfer of environmental responsibility for a mining property occurs.

The royalty issue

The report of the Vérificateur du Québec mentions that for the six-year period from 2002 to 2008, cumulatively, 14 mining companies amassed a gross annual production of $4.2 billion without paying royalties. In this regard, certain clarifications are in order.

First of all, the current royalties’ structure legislated by the government is based on the notion of profit and not on production value, as stated in the report. Such a blunder is significant, as it incorrectly suggests to the reader that the mining industry creates few benefits wherever it operates.

Moreover, certain statements in the report are confusing. They suggest that 14 companies paid no royalties over six years. In reality, there were 14 companies that were not required to pay royalties at one time or another during this period, which is very different and entirely explicable.

A company must invest a great deal of money to develop a non-renewable resource. This high capitalization cost ($700 million for Xstrata’s Raglan mine and $1 billion spent by Osisko Mining Corporation) and the high operating costs must be amortized over the life of the mine. This impacts the revenues, the annual deductions permitted, the profits and, consequently, the royalties it must pay on these profits each year.

As an illustrative example, consider any 10 people, each with an annual income of $40,000, living in a given neighbourhood. Because they have dependant children, they are entitled to tax deductions. Thus, over a period of 10 years, even if they have a combined income of $4 million, they may not always pay income tax, given their allowable annual deductions. This analogy can explain how a company, at a given time during a given period, does not pay royalties. For a mining company, the tax and royalty issue must therefore be examined over a period of several years. Above all, it must be understood that the benefits of the mining industry go well beyond royalties.

In all honesty, it must be said that at one juncture in the report (Article 2.35), the Auditor General touches upon the benefits of mining for Quebec society. Without quantifying them, the report notes that these benefits can take many forms — job creation, commercial international relationships, fiscal revenues, duties and taxes, community organization, etc. In reality, though, the report is restricted only to royalties.

Some politicians and pressure groups have widely used the royalty issue to vilify the activities of the mining industry. Their comments, largely echoed by the media, leave the incorrect impression that the benefits of the mining industry have been practically nil for Quebec and its regions. Sections of the media have described the industry’s royalty contributions as “scraps,” and as being “less than a restaurant tip” — statements that reveal poor knowledge of the mining sector.

The mining industry creates jobs and wealth for Quebec and its regions. It represents more than 50,000 jobs in the province, 18,000 of which are very highly paid jobs directly related to the extraction phase.

In addition to solidly establishing its role as a driver of the regional economy through job creation, the mining sector also generates significant annual benefits that are worth bearing in mind. In 2006 alone, QMA members invested $2 billion in purchasing goods and services, 66 per cent of which was spent locally and regionally. $307 million was spent on transport; $69 million on environmental quality initiatives; $836 million in salaries; $278 million on levies; $215 million on income taxes; and $239 million on social benefit programs. In addition, $18 million was disbursed through various donations to community activities, training centres, hospitals and community centres. The mining sector also opens up considerable opportunities for Aboriginal Peoples through agreements that contribute to the economic prosperity and the well-being of their communities. Regardless of what its detractors say, the mining industry is not at all embarrassed.

It is also well known that in addition to having a tangible impact on regional consumption, the presence of the mining industry fosters the ongoing development of expertise in sub-contracting, processing, manufacturing and specialized services, in addition to encouraging the development of better municipal and commercial infrastructure.

The mining industry also has positive impacts on regions not generally associated with mining. In Montreal, Quebec, Valleyfield, Sorel-Tracy and elsewhere, there are research and development establishments, training institutions, financial service organizations and large copper, zinc, iron and titanium processing facilities. The mining industry thus benefits all of Quebec’s regions.

At the heart of our daily activities

Finally, if deposits are developed and mined, it is because the mining industry works to extract the metals and minerals that our society needs for agriculture, housing, music, telecommunications, the environmental industry, construction, space exploration, medicine, and leisure.

The next time you attend a concert and listen to the guitars or violins, you probably won’t think that the strings of these instruments are made from a gamut of metals such as copper, zinc, iron and steel. At the heart of our daily activities, the mining industry is also at the heart of an orchestra.

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