Mining Association of Canada – Pre-Budget Submission – President and CEO Gordon R. Peeling

December 18, 2008
The Honourable James Flaherty
Minister of Finance
Finance Canada
L’Esplanade Laurier
140 O’Connor Street
Ottawa, ON K1A 0G5

Dear Minister Flaherty:

I would like to take this opportunity to provide you with the views of the Canadian mining industry in light of the significant turbulence that has affected our sector and the broader global economy in recent months. This follows from our earlier letter, sent to you on August 15th.

The Mining Association of Canada (MAC) is the national organization of the Canadian mining industry, comprising companies engaged in mineral exploration, mining, smelting, refining and semi-fabrication. As detailed in our earlier letter, the industry contributed $42 billion to Canada’s GDP in 2007, employed 363,000 workers in the four phases and paid approximately $10 billion in taxes and royalties. While important in remote and northern communities, the industry also generates prosperity in our cities – for example, Toronto features a hub of expertise in mining finance, Vancouver in exploration, Montreal in aluminium and iron ore, Edmonton in oil sands and Saskatoon in uranium and potash. Over 3000 suppliers draw benefit from the industry, including engineering and environmental firms, railroads, ports, and equipment companies.

The mining industry has been severely impacted by the major dislocations seen in the global economy since September. The global nickel price has fallen from over $16 per pound in 2007 to less than $5 at present. Uranium has fallen from $99 to $55, aluminum from $1.20 to $0.80, and copper from $3.20 to $1.70 per pound. US market demand has plummeted and Chinese market demand shows negative signals. Canadian operating mines have been closed, planned mine expansions have been deferred or cancelled, and investment in processing facilities has been postponed. Many important companies have seen stock price declines exceeding 50% and in some cases over 90% – all firms are engaged in serious cost-control measures.

In terms of a public policy response to these challenges, the industry does not seek government involvement in controlling production output, trade or prices, or in sustaining uneconomic operations – the market mechanism continues to be the best regulator of these variables. However, there are a number of measures that we believe should be given serious consideration in the lead-up to the government’s January 27th budget. Some of these, as itemized below, can be viewed within a short-term stimulus lens, while others are best seen as important contributors to our longer-term global competitiveness. Many of these requests are common to a broader range of industry sectors.

1) Stay the Course on Recent Commitments

The federal government has contributed positively to the competitiveness of the mining industry in recent years. In early-2008, the government announced the Geo-mapping for Energy and Minerals (GEM) program – a five-year, $100 million re-investment in geological mapping that should also trigger provincial spending. There have also been recent improvements on the tax front, particularly the October 2007 commitment to reduce the federal corporate income tax rate from 21% in 2007 to 15% by 2012. These are both positive commitments for the long-term competitiveness of the industry and the government must keep to the planned timelines. The government must also continue to improve the project review climate through enhanced efforts of the Major Projects Management Office, among other measures.

2) Innovation: Support the R&D Needs of the Industry

The Canadian mining industry has long been at the forefront of developments worldwide in process technologies and related technologies and innovations. The industry must continue to increase investments in these areas and it is important that the public policy environment facilitate and encourage these investments.

One important tool is the Scientific Research and Experimental Development (SR&ED) program, which provides a tax credit for the qualifying expenses and capital expenditures associated with basic research, applied research, and experimental development conducted in Canada. The mining industry, along with many other sectors, is of the view that the SR&ED application, review and administrative processes require a lot of business effort for relatively little return. We encourage the government to continue working to make the system simpler, quicker and more consistent. We believe the federal government should also give serious consideration to broadening the refundability provisions of this program, which are presently generally available only to small business. Many larger companies may not be in a profitable position through the near and medium term – enhancing refundability would facilitate better access to this program in hard times.

Related to this theme, the Canadian Mining Innovation Council (CMIC) is a proposed network of industry, government and academic leaders that would be tasked with improving the cooperation, communications, strategy and human resources supporting research and innovation in the Canadian mining sector. This is an important initiative. As companies attempt to weather the economic and financial storm over the coming months, we would ask the federal government to consider funding this initiative until a more balanced funding partnership becomes possible in the future.

3) Exploration: Support the Revitalization of Canadian Mineral Exploration

Investment in mineral exploration is a precursor to long-term success for the mining industry. Exploration can lead to an economically viable mine development project and in turn to activity in processing and transportation, among other areas. Canada has long featured world-leading exploration expertise – our country also attracts the largest share of exploration spending of any country in the world. The super flow through share incentive plays an important financing role in this regard and this should be maintained, as committed to in the recent federal Conservative election platform. It is important to note that an extension of this incentive, for three years or more, would greatly increase the certainty of the tax treatment for multi-year exploration programs.

Like other aspects of the industry, the exploration component has been severely impacted by recent global economic events. In response, certain measures should be considered by the government in order to position Canada for continued long-term strength in this area. As one quantitative rule, we believe that Canadian Exploration Expense (CEE) treatment should be accorded to exploration spending at former mine sites that have been abandoned or inactive for five or more years. Such a rule would bring greater clarity to the situation while not precluding companies from seeking shorter times frames through case-specific discussions with the Canada Revenue Agency.

The industry also believes that the tax treatment accorded to exploration-like expenditures in the vicinity of an existing mine should be improved and that the simplest approach would be to eliminate the Canadian Development Expense treatment and treat these expenses as operating expenses. Such a change would encourage more exploration at-depth in the vicinity of existing mines, while reducing administrative burden and leveling the playing field between greenfields exploration and high-risk brownfields exploration.

4) Oil Sands: Encourage Oil Sands Processing and Environmental Improvements

The oil and gas industry, including the oil sands mining segment, employs tens of thousands of Canadians and pays multiple billions of dollars worth of royalties and taxes each year. However, this industry has been significantly affected by the economic turbulence of recent months and by the 70% decline in world oil prices. The buoyant conditions that surrounded this segment in 2007, when the federal government proposed to eliminate the accelerated capital cost allowance (ACCA) deduction for investment in oil sands projects, have been reversed. A number of companies in the industry have recently announced major delays and reductions in capital expenditures. Given the current economic climate, we believe that the proposed phase-out of this deduction should also be reversed.

We understand that the Government of Alberta is supportive of the retention of the accelerated capital cost allowance for oil sands projects, and is seeking enhancements to the deduction in order to promote the upgrading of bitumen in Canada. Retention of this ACCA measure and enhancements with respect to the tax treatment of upgraders would generate new investment in leading edge technologies and processes – helping oil sands producers improve the efficiency and greenhouse gas (GHG) intensity performance of their extraction and processing operations.

5) Capital Spending: Encourage Investment in Mine Development

The ability to immediately deduct investments in new or expanded mine assets up to 100% of project income is an important tool to encourage mineral development in Canada. However, the leading Canadian mining companies are of the view that the two thresholds which guide this tax treatment are overly restrictive, particularly given the new financial and economic realities surrounding the industry. As such, it is suggested that the 25% capacity expansion threshold be reduced to 15% and that the 5% annual project revenues threshold be reduced to 2%. The effect of such a change would be to position this measure as more realistic in present times and to stimulate greater investment in mine development projects. It is important to note that these changes would also encourage expenditures on cleaner production and environmental improvements.

6) The Environment: Encourage Investment in Environmental Process Improvements

As with most industrial sectors, there are environmental effects associated with mining – related in particular to air pollutants, water and tailings management, and greenhouse gas emissions.

The clean air and climate change plans of the federal government, as presently defined, will affect metals smelters, refineries, oil sands operations, and iron ore pellet plants. In light of the importance of continuous improvement in areas such as energy efficiency and greenhouse gas intensity, we believe it is timely for the federal government to design an incentive to assist companies in achieving emissions targets via innovation and process improvements at large facilities. We propose that an investment tax credit of 20% and/or an accelerated capital cost allowance of 50% would be worthy of consideration.

Such an incentive would have the added benefit of helping to modernize and enhance long-term competitiveness of Canadian mineral processing facilities, better positioning them vis-à-vis competing investment regimes in Australia, China, Brazil, the US and elsewhere. An incentive could conceivably be tied (with a time lag) to performance improvement measures such as those that could be gauged through the annual reporting of greenhouse gas emissions data to the federal government.

We recognize that such an environmental/process incentive measure would be a major undertaking for the federal government – and that it would potentially be of interest to a range of industrial sectors. We would be pleased to work with other industry sectors and with Finance officials over the coming year in the aim of designing a relevant and effective measure. Such a consultative initiative could be launched through notice in the January 27 budget.

7) Infrastructure: Invest in Infrastructure Needed for Northern Resource Development

Canada’s North hosts a wealth of mineral resources, the development of which plays a major role in improving the economic and social well-being of our northerners, especially those in remote Aboriginal communities. As one example, investment and activity within the northern diamond industry presently contributes over 40% of the GDP of the Northwest Territories. New and improved road infrastructure is required in order to sustain and spread this current level of wealth and benefits. Road access would help extend the life of existing operations, would provide access to areas with important known mineral deposits that are too remote to develop using air access alone, and would support exploration and the discovery of new resources in these areas.

Beyond the contribution of the diamond industry, it is important to note that there is felt to be considerable potential in gold, zinc, copper, uranium and other valuable northern resources. In this regard, MAC proposes three major infrastructure projects. These projects are consistent with the government’s Northern Strategy and generally have the support of relevant governments and Aboriginal groups.

• The NWT Winter Road project ($300 million) would support the re-supply and development of additional resources at the northern diamond mining operations.
• The Bathurst Inlet Port and Road project ($300 million) would connect the Arctic coast at Bathurst Inlet to a resource-rich region near the Nunavut/NWT border.
• The Route des Monts Otish project ($100 million) would provide access to a resource-rich region in north-central Quebec and facilitate development of the Renard diamond project.

In other infrastructure areas, the mining industry would benefit from investments improving product movement through the Port of Vancouver and across the Canada-US border, as well as from the provision of more efficient and cost-competitive service by Canada’s freight railroads.

Help Industry Manage Cash Flow in Exceptional Times

Many Canadian businesses, including in the mining sector, are facing delicate cash-flow management situations and will face these challenges throughout 2009. In this regard, the federal government could provide welcome relief through waiving interest and penalty charges on payments of tax due by a corporation in 2009. Such a measure could be temporary and pertinent to final payment or installments – it would help companies balance tax payment situations such as where the first three-quarters of 2008 featured strong profitability while 2009 is projected to be turbulent and unprofitable. This measure would be comparable to granting a non-interest bearing loan to corporations for 2009 and the effect would be to ease cash flow problems associated with the fact that conditions through 2009 are expected to be exceptionally challenging.

9) Flexibility on Pension Plan Funding Requirements

As a result of the recent disruption in global financial markets, the equity values of many pension funds have decreased, putting them in a deficit position. These deficits will be difficult to finance at a time when borrowing is not possible or is very expensive – and the increase in contributions will come at the expense of investments in core businesses and expansion programs.

We believe there is an urgent need for the federal government to review pension funding regulations so as to allow for a more gradual amortization of new deficits and to make existing policies less onerous. Such improvements would be broadly relevant in that provincial governments (often the lead on pension issues) are cognizant of actions taken at the federal level. At the provincial level, Quebec is expected to announce shortly that it will allow flexibility on the choice of valuation dates and that it will extend the amortization period of solvency deficits from five to 10 years. For its part, Ontario allows the smoothing of asset values.

Based on these innovative approaches, we ask that similar measures be taken by the federal government. These measures would help employers manage their pension plan funding obligations, while allowing the markets time to recover. In the current environment, if contributions are increased and there
is subsequently a recovery of the equity markets, employers would see excess capital stranded in pension plans. These funds would best be invested in core business and expansion projects, thereby protecting and creating jobs.

Thank you for your attention to the recommendations in this submission. The intent of these tax and investment measures would be to help discover new ore deposits including those at-depth, to extend the reserve life of existing mines, to enhance the raw material supply chains for our value added facilities, to encourage capital investment in efficient and sustainable companies and facilities, and to help companies navigate through very challenging times.

Yours sincerely,

Gordon R. Peeling
President and CEO

c.c. : The Honourable Lisa Raitt, Minister of Natural Resources
Clerk/Members of the Standing Committee on Finance
Simon Kennedy, Deputy Secretary, Operations, Privy Council Office
Derek Vanstone, Chief of Staff, Office of the Minister of Finance
Mark Cameron, Director, Priorities, Planning and Research, Office of the Prime Minister