March/April 2011

MAC Economic Commentary

Mining: from “old economy” in the 1990s to “sexy and strategic” in the 2010s

By Paul Stothart

It is unlikely that any sector in Canada has undergone a transition in recent decades comparable to that seen within the mining industry.

The mining sector in the 1980s and 1990s was an afterthought. Mineral prices worldwide were in the dumps. Exploration and prospecting (in effect, a form of R&D aimed at finding tomorrow’s stream of commodities) were neglected and investments in them were piddling. Effort in attracting new talent to the industry was minimal and university mining programs closed. The sector was shunned by Canadian politicians and policymakers as “old school,” dark and dirty, and non-technological; economists and financiers held similar views. Even the leading companies at the time, such as Inco and Noranda, were viewed as complacent and staid despite being viewed as world leaders in many respects.

The contrast with Canada’s shining beacons of the day was stark. The information technology sector was booming, as every desk in the nation became equipped with personal computers. Canada’s telecom industry invested billions in research, routinely paid millions in bonuses and equipped countries around the world with telecommunications systems. The biotechnology sector began marking its presence in pharmaceuticals, agriculture and other cross-cutting applications. The hydrogen economy and fuel cells were on the cusp of a much-hyped global impact and politicians raced each other to visit facilities and cut ribbons.

My, how times have changed

Today, the mining industry is arguably the most strategic of any Canadian sector. Merger and acquisition activity is measured in the tens of billions of dollars. The sector is the backbone of the nation’s stock exchanges, accounting for a large proportion of Toronto Stock Exchange (TSX) value through over 1,400 issuing companies. The sector’s linkage to the worldwide clean energy revolution is direct and fundamental – hybrid engines, long-life batteries, wind turbines, solar cells and lightweight materials are all dependent on the mining industry. Seemingly mundane products such as potash have become strategic for economic and political reasons and have attracted mammoth takeover interest. The mining industry, including oil sands mining, directs revenues to Canadian governments measured in the tens of billions that are in turn directed to support health care and education.

Base metal export restraints in China have provoked sensitive World Trade Organization battles affecting Canada and other Western countries. Chinese policies in the area or rare earths have caused strategic concerns and responses at the highest levels of Western governments and defense technology companies. Finally, the mining industry in Canada has become the largest private employer of Aboriginal Canadians, a mutually beneficial relationship that should expand further – yet another point of high importance to governments.

The main drivers of this transition have been numerous, although the emergence of the Chinese economy has been the most significant. China has had annual economic growth ranging from eight to 15 per cent every year since 1982, with the exception of 1989-90 when growth was four per cent. This virtually uninterrupted double-digit annual growth over three decades, predicated around building its infrastructure and becoming the “world’s factory,” has transformed China into the leading driver of global mineral prices. Where China consumed only five per cent of the world’s metals in the 1980s, it now consumes over 30 per cent. Mineral prices during the past ten years, the decade when Chinese growth had the most impact, have grown anywhere from five to 40 times faster than inflation, depending on the commodity. As leading stewards and producers of many minerals, Canadian companies and taxpayers have been the main beneficiaries of this price growth and wealth generation.

Beyond the China story, it should also be stated that successive federal governments – Liberals and Conservatives – have built a strong and competitive investment environment in Canada. The flow-through share federal tax provisions and enhanced credits at the federal and provincial levels have served to strengthen Canada’s exploration investment. Partly linked to this, the TSX has developed innovative and efficient techniques for raising capital to fund the industry’s initiatives here and abroad. The ability to deduct capital investment costs is also relatively attractive in Canada, as are overall corporate tax rates. While challenges remain in areas such as government support for industry innovation and infrastructure, the overall Canadian investment environment is attractive.

The progressive nature of individual Canadian companies in managing and benefitting from good Aboriginal relations is also impressive. The technological skills of industry in building and operating mines in extreme weather conditions, and the growing number of potential mines in the North, meshes well with a Canadian priority on responsible northern economic development. Finally, in the clean energy sphere, it is anticipated that global investment will reach some $450 billion per year by 2012 – with the associated demand for minerals and metals.

All of these factors have enhanced the strategic importance of the Canadian mining industry. And it is unlikely that this “strategic and sexy” characteristic will diminish anytime soon. The staggering statistic that the world will produce and use more metals in the next 25 years than in all world history to date will see to this.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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