COMMENTARY — Mining opportunities abroad

During the past five years, government policies have made it increasingly unattractive for mining companies to explore for and develop deposits in Canada, according to a brokerage firm based in the United Kingdom.

The combination of bureaucratic indecisiveness, native rights and environmental legislation have made it difficult for any but the largest mining companies to develop mines in the country — and even they are often heavily taxed.

Moreover, the likelihood of many major new orebodies being discovered and developed within the country has declined because of the relative maturity of our mining areas, the firm’s report continues, adding that potential developments are also impeded by cost and tax structures.

Environmental policies have had a negative effect on operations in certain provinces in which politics is playing a greater role in the survival of new mines. Such events as the British Columbia government’s decision to create a provincial park — precluding the development of the Windy Craggy copper project — are becoming all too common.

Another roadblock to development at home is the “total tax” burdens of some Canadian jurisdictions which exceed those in effect in other competing jurisdictions. Especially negative are those locations where the interlinked nature of mining tax, provincial tax and federal tax combine to produce extremely high marginal tax rates for large, established mines in Canada. As a result of this uninviting climate and the changing political situations of several underexplored countries, many Canadian companies are becoming international in their approach to mining, investing geological and mineral expertise — as well as the necessary capital — in projects beyond Canadian borders. This infusion of development capital could have positive effects for Canadian mining companies and the people who work for them.

There is a huge amount of Canadian and foreign capital available for viable new Canadian-sourced mining projects. Over many years, Canadian-based commercial and investment banks have developed a strong reputation for providing financing to mining companies. There has recently been an important change in the process and, generally, for the first time in many years, both debt and equity capital are available for mine development in areas outside North America and Australia.

Canadian chartered banks and international banks continue to be prepared to back Canadian-based companies, both at home and abroad, with funds for new mine development. (Funding usually takes the form of conventional loans and innovative, commodity-backed financings.) This has been particularly important in the development of those North American gold mines for which project-based gold loans have been used.

In previous years, project financing was frequently unavailable for mine development in less developed countries — so these projects were instead financed through parent company loan guarantees, with funds made available through inter-corporate loans.

For exploration, development and production, Canadian equity markets have played an essential role in financing new ventures. Investors in these markets are highly knowledgeable, and the mining sector currently represents almost 20% of the Toronto Stock Exchange 300 Index — a far higher weighting for this sector than on any other senior North American or European stock exchange. This ensures a high level of participation from both domestic and international institutions.

There can be no question that highly motivated corporate entrepreneurs and an accommodating capital market make a potent combination, and one that is being increasingly recognized around the world.

— From a speech by Richard Hallisey and John Lydall of First Marathon Securities at a recent conference in Toronto.