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The ongoing downturn in commodity prices due to slowing economic activity in China and India is not good for the short-term growth prospects of Quebec’s Plan Nord. Under the circumstances, the Parti Québécois government needs to rethink its plan to extract dramatically higher royalty revenues from mining companies operating in this province.
As metal prices have fallen (down 6.7 per cent in March alone), investment by mining companies in Quebec has fallen by $700 million, the first drop in 10 years. Such is the backdrop against which the Marois government is preparing to table new legislation for the mining industry this spring. The government needs to be careful not to do anything in the bill that will discourage investment and job creation; that necessarily means more flexibility on the issue of royalties.
Throughout most of the last decade, mining royalties in Quebec were very low by international standards, bringing in only $40 million a year on average. On the other hand, those low royalties attracted investment, and are one reason why Quebec now has 23 large active mines, and an industry that employs 17,000 people whose annual wages can be in the $95,000 to $110,000 range.
Toward the end of the dramatic two-year rise in commodity prices in 2009 and 2010, the former Liberal government in late 2010 introduced a new 12-per-cent royalty on profits. And before last year’s provincial election, it raised that same royalty to 16 per cent, so that by last year, royalties had started to bring in some $190 million annually.
During last summer’s election campaign, the PQ ridiculed the royalty regime, notably through advertising showing a giant truck backing up and dumping a mere few pebbles into the Quebec treasury. The PQ promised a new royalty regime that would bring in an extra $380 million annually, double the current amount, over the next 10 years. The government put some numbers to this promise in March, when it proposed the imposition of a 5-per-cent royalty on every tonne of ore extracted, plus another 30-per-cent royalty on profits above a certain level.
But as The Gazette’s National Assembly reporter Kevin Dougherty reported this week, falling commodity prices combined with proposed higher royalty charges and other regulatory uncertainty associated with the proposed new legislation have created “major obstacles” for new mining investment in Quebec. That puts the whole Plan Nord strategy into uncertainty.
Quebec has been slow to produce its new mining legislation. And the delay, to be sure, hasn’t been helpful in terms of encouraging investment. The industry wants regulatory certainty. But indications are that the reason for the delay is that the government is coming to a more realistic view of the royalty issue.
For while royalties are a form of revenue for the public treasury, they are a cost to producers — and just one of many. As mining producers explained at Objectif Nord, a two-day conference this week in Quebec City, payroll taxes are higher in Quebec than elsewhere, while transportations costs to prime markets in China and India are higher for Quebec operators than they are for mines in, say Australia and eastern Africa. Royalty charges, then, have the potential to tip the balance when it comes to final investment decisions.
On Monday, there is to be a news conference in Chibougamau to announce the creation of a new government secretariat for northern economic development. It’s possible there will be announcement related to royalties, as well. If so, the new proposal should be one that helps encourage investment and job creation, and maintains Plan Nord momentum. Investment and jobs can’t be taken for granted. The Plan Nord isn’t a royalty faucet simply waiting to be turned on.
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