Commentary: Will reason prevail over emotion in Quebec?

After the forum on mining royalties organized by the Quebec government and held in Montreal on March 15, apprehension clearly remains the order of the day.

While the government is demanding higher royalties, industry is warning about a tax burden that could stifle wealth creation.

For each profitable mine in Quebec, a company has to pay the government 16% of its profits.

Although implementing the new mining royalty regime less than two years ago — along with an increase in metal prices — has allowed the government to triple the royalties it collects, the government believes that this new regime does not give Quebec its “fair share,” arguing that “only half of active mining companies paid royalties in 2011.”

The government’s objective is to collect more royalties from the approximately 20 operating mining companies, whether or not they are profitable. It is proposing a fixed royalty equal to 5% of gross annual production, combined with a second, profit-based royalty that could be as high as 30%, when a company’s earnings are what the government considers “exceptional.”

For those involved in the industry, such a regime would sound the death knell for Quebec’s mineral resources sector. They base their argument on serious studies, as well as the observations of Québécois in the upper echelons of mining companies, chambers of commerce and other business organizations who are well placed to gauge how investors will react.

The industry’s main arguments, backed by studies, are:

• Mines that do not pay tax represent less than 20% of gross annual production.

• Economic benefits — including jobs, income and municipal taxes and investments in local infrastructure — must be taken into account.

• A mining project with an internal rate of return less than 15% will not be implemented.

• There is no universal royalty regime. Each regime must take account of structural constraints relating to geography, terrain, climate, mineral characteristics and types of mines. Such constraints can make Quebec’s gold and iron ore mines, for instance, relatively high-cost operations.

• An increase in metal prices does not necessarily lead to an increase in a miner’s profits.

• Continued fiscal uncertainty and the spectre of a regressive royalties regime are affecting the quality of Quebec’s business environment.

• Although mining investments increased by 21.4% on average between 2003 and 2012, they will decline by 12.9% in 2013.
The royalty regimes proposed by the government should be avoided because they lead to distorted investment decisions. Namely, they:

• Don’t take into account an ability to pay.

• Ignore any increase in the cost base.

• Have an adverse impact on high-cost mines.

• Ignore the cyclical nature of mineral markets.

Interested parties had until March 19, 2013, to file their briefs, which are being analyzed by the government. Nonetheless, the government is determined to go ahead with its plans to “correct” the current royalty system.

Let us hope for everyone’s sake that the industry and other stakeholders will come to a consensus based on fact, rather than emotion.

— Emmanuel Sala is a senior associate with Blake, Cassels & Graydon LLP with a practice in tax and mining law. He also lectures on taxation and mining phases at the Master of Laws (taxation option) program jointly sponsored by HEC Montreal and Université de Montreal’s Faculty of Law. He can be reached at emmanuel.sala@blakes.com .