Canada's Positive Investment Climate for Mineral Capital

CANADA'S POSITIVE INVESTMENT CLIMATE FOR MINERAL CAPITAL INFORMATION BULLETIN, JANUARY 2013

Mineral Potential

Canadais geographically the second largest country in the world. Its diversified geological terranes provide a rich variety of mineral resources. Canada currently produces some 60 minerals and metals. It is the world’s leader in the production of potash, and is a major producer of primary aluminum, cadmium, cobalt, diamonds, molybdenum, nickel, platinum group metals, salt, titanium concentrate, tungsten, and zinc. As a result of recent discoveries in northern Ontario’s Ring of Fire, Canada could become a major chromite producer. Growing interest in rare earth elements has spurred significant exploration efforts across the country, adding to Canada’s already considerable list of promising prospective targets.

The provision of geoscience data has long been an important role of the governments of Canada through the Geological Survey of Canada and the provincial geological surveys. Data produced by the geological surveys are available to individuals and corporations in digital, cartographic, and report format. Canadian and foreign companies alike have equal access to this information.

Regulatory Environment for Mineral Development

Fundamental to Canada’s attractiveness as a destination for mineral investment capital is its stable federal-provincial/territorial political system with clear roles and responsibilities at each level. The provinces have responsibility for the ownership and management of natural resources, exploration and mineral permitting, and land access and security of tenure. The federal government has authority with respect to such areas as fisheries, international and interprovincial trade and commerce, banking, the environment (shared with the provinces), nuclear issues (including uranium mining), and taxation.

Mineral rights are owned by the provincial governments, and the territorial government in the case of the Yukon, and by the federal government for Nunavut, the Northwest Territories, and the offshore. Mineral rights can be leased by individuals or companies, and these leases are fully transferable without government intervention or review. A basic principle of the Canadian system is “use it or lose it.” To keep a claim in good standing, a company must undertake a minimum level of work each year. This ensures that companies do not hold large blocks of land indefinitely. Within the Canadian system, there is a clear and defined process by which a proponent moves a project from discovery to production.

Rules and regulations are known in advance and are applied in a non-discriminatory fashion to both domestic and foreign companies alike. Foreign investors wishing to establish a new enterprise are generally free to do so; there are no restrictions on foreign exchange or on the repatriation of capital or profits, withholding tax rates are low, and equity capital can be repatriated tax free.

Environmental assessments of mining projects can be conducted at both the federal and provincial/territorial levels. The purpose of these assessments is to determine whether significant adverse environmental impacts may result from a project’s development and, if there are impacts, to ensure they will be mitigated. To improve the coordination of federal environmental-related activities, the federal government has recently established the Major Projects Management Office and the Northern Project Management Office.

In Canada, many mineral deposits have been found on lands that belong to, or are claimed by, Aboriginal peoples. Companies operating in Canada recognize the importance of dealing directly with Aboriginal peoples, and consult with these communities on their exploration and development plans. To ensure that the company and Aboriginal communities understand their respective roles and obligations with respect to mineral development, formal instruments (e.g., Impact and Benefits Agreements) may be negotiated. These contractual agreements help ensure long-term harmonious relations between mining companies and nearby communities.

The Fraser Institute, in its 2011-12 Survey of Mining Companies, ranked 93 mining jurisdictions based on the opinions of mining executives representing 802 mineral exploration and development companies. Nine of the top twenty jurisdictions identified were found in Canada (New Brunswick, Alberta, Quebec, Saskatchewan, the Yukon, Ontario, Nova Scotia, Newfoundland and Labrador, and Manitoba), indicating that Canada’s regulatory environment is not an impediment to mineral development. This belief is further reinforced by the fact that Canada, according to the Metals Economics Group, has been the most preferred target in the world for mineral exploration over the past decade.

Foreign Investment Regulations

Canada is open to foreign investment and does not restrict foreign involvement in the development of its mineral resources based on deposit size, minimum government equity participation, or commodity (except for uranium). Under the 1987 Non-Resident Ownership Policy, foreign companies are free to explore for uranium but, once a property starts to produce uranium, it must be 51% Canadian-owned. This majority requirement may be waived by the federal government if no Canadian investor can be found.

The Investment Canada Act reviews foreign investment above an announced asset threshold to determine if it will be of a net benefit to Canada. The threshold for a transaction for investors from World Trade Organization (WTO) member countries is $344 million for 2013 (the figure is adjusted annually). For investors from non-WTO member countries, the review threshold is $5 million for direct investments.

Recently approved foreign takeovers of Canadian mining companies under the Investment Canada Act include: Vale (Inco - 2006), Xstrata plc (Falconbridge - 2006), Rio Tinto plc (Alcan Inc. - 2007), and Walter Energy (Western Coal Corp. - 2010).

Supportive Mining-Related Cluster

Canada has a well-developed mining industry around which a cluster of mining-related equipment and service providers has developed. These equipment and service providers offer domestic and international expertise that can make the difference between a successful and not-so-successful project.

This cluster supports Canadian-based companies in some 125 countries around the world. Areas of expertise include: exploration, exploration financing, investment analysis, due diligence, legal services, geophysics, geology, geochemistry, remote sensing, drilling, analytical laboratories, engineering services, logistical support, and environmental management, to name just a few. It includes over 1200 exploration companies, 2500 equipment and service providers, and 3500 mineral and metal recycling operations.

With the help of Canada’s stock exchanges (TSX and TSX-V), Canadian-listed companies are responsible for between one third and one half of all global equity raised for mineral development. In fact, almost 60% of the world’s publicly listed mining companies list in Canada. Canada’s standing as a world source of equity financing for mineral capital is supported by the governments of Canada through security regulators that impose disclosure standards on firms to provide timely and accurate reporting to investors, helping to ensure fair and efficient capital markets.

This ability to raise equity, along with a strong mining tradition supported by government regulations, has led to the development of a two-tier industry consisting of junior exploration companies (companies with no revenue from an operating mine) and senior companies (corporations with producing mines). Junior exploration companies undertake mineral exploration and deposit appraisal in the hope of finding something significant they can either develop, on their own or through a partnership, or sell to a senior company. Junior exploration companies account for around 50% of all exploration undertaken in Canada, and specialize in high-risk grassroots exploration. Notable successes related to junior exploration companies include the discoveries of the Ekati diamond mine in the Northwest Territories, the Voisey’s Bay nickel-copper mine in Labrador, and the Ring of Fire (chromite-nickel-platinum group metals) exploration camp in northern Ontario.

The existence of this active junior sector enables senior com-panies to focus their exploration activities around their existing operations while out-sourcing, through a variety of financial arrangements, high-risk exploration across Canada. At any one time, Canadian junior companies are evaluating some 4000 properties across Canada at every stage of development. If the price is right, these properties are available to both domestic and foreign investors.

Competitive Fiscal Regimes

Canada’s tax regimes for mining are some of the most competitive in the world and reflect the realities of provincial ownership and royalties, high risk, and capital intensity, as well as a conscious decision by government to encourage this industrial activity. In Canada, companies are subjected to taxes at three levels: federal, provincial or territorial, and municipal. While this may seem complicated, it does ensure that all levels of government benefit when a mine enters production.

Since 2003, Canada’s federal corporate income tax rate has dropped from 29.12% (includes the 1.12% corporate surtax eliminated on January 1, 2008) to 15% in 2012.

Canada’s generous front-end incentives (accelerated capital cost allowance - ACCA, Canadian Exploration Expense - CEE) ensure that an investor pays little or no tax until all capital costs have been recuperated. In addition, for the most part, royalties or mining taxes are profit-based rather than based on tonnage or revenue.

A unique feature of Canada’s tax regimes is flow-through shares (FTS). Flow-through shares enable a company to transfer eligible exploration and development expenses to investors. These expenses or deductions can be used by the investors to reduce their taxable income from Canadian sources. Because the shares carry a tax deduction, they are sold at a premium compared to regular shares, enabling a junior company to raise relatively more funds to continue its exploration activities.

In 2000, the federal government introduced the Mineral Exploration Tax Credit (METC), a 15% income tax credit related to surface or above-surface exploration. The METC works in conjunction with Canada’s FTS mechanism and offers investors a 15% tax credit (reduction of taxes payable) in addition to a 100% write-off of exploration expenses.

Canada has excellent mineral potential, a stable and favourable investment climate for mineral capital, and is open for business.

© Her Majesty the Queen in Right of Canada, 2013