Mining needs to attract capital

With all of those factors in the industry’s favor, the investment mood for mining is still dismal at best. There’s just no excitement.

Part of the reason is that Canadian investors are simply more averse to risk than they were in the 1950s or 1960s. Individuals are less prone to take risks on the stock market, and institutions, which play a much larger part in the market today, are nothing if not cautious. The result is that the risk-reward ratio of mining stocks just doesn’t measure up compared to treasury bills at 12%.

The stock market crash of 1987 and a weak gold price are also partly at fault. Nevertheless, even at $377(US) per ounce, the gold price is far from a disaster and the fortunes of other commodities such as nickel, copper and zinc are exceptionally healthy compared to 1980-87.

A large part of the blame for the shift away from the stock market in general and away from mining stocks in particular has to fall on the federal government and the measures it has taken to reduce the potential rewards that mining investment once held.

The proposed federal sales tax, a new large corporation tax and the amended 3% surtax unveiled in the latest federal budget are several recent examples. They make it less attractive to increase assets, reinvest profits or, indeed, even to show a profit.

Mining is a capital intensive business, so the imposition of the large corporation tax is particularly frightening. It is a tax on capital that really amounts to a minimum tax on corporations. While the tax is a modest one — the rate is 0.175% of taxable capital employed in Canada and is not applicable to small business with less than $10 million of taxable capital — it is the thin end of the wedge that could lead to much more onerous tax levels.

It is, in short, a disincentive to invest in Canada.

While it may not impede other sectors to a great extent, mining could begin to feel this tax quite readily. Mining has to spend billions of dollars annually if it wants to sustain its current level of production. Exploration takes up a lot of that, but investment in fixed assets also takes a considerable portion.

And where is that money supposed to come from? If not those risk averse institutional investors, then from offshore private- sector investors. And how will this tax look to them?

Mining is a global enterprise. Placer Dome, Inco, Falconbridge, Noranda and others move internationally seeking the best return on the investment of their capital and their expertise. Several recent developments illustrate the worldwide nature of the business: the purchase by RTZ Inc. for all but the Canadian properties of BP Minerals, the purchase by Canada’s Curragh Resources of a 20% interest in a Spanish zinc smelter and the almost successful efforts of Minorco to acquire Consoldiated Goldfields.

The BP sale shows how easily Canada can be carved out of the main market. The Curragh deal, by marrying mines in the Canadian Yukon to a smelter in Spain, shows just how small the world has become. The Minorco bid shows how government regulations and judicial systems increasingly have to keep up with the international marketplace.

Rather than putting roadblocks in the way of further investment in Canada’s capital intensive industries, the government should be trying to encourage investors to put their money here. And it should be trying to channel money into those industries that need it the most, not penalizing those that require more capital investment than others.

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