The Pointe-Noire iron ore pellet plant will go silent by next summer, and 165 workers will be out of a job. In the boom town of Sept-Îles, Cliffs Natural Resources Inc.’s decision to idle its plant shouldn’t be a tragedy. But it is an omen of the bad days to come for a Quebec mining industry that has been hit by setbacks.
A month ago, Canadian National Railway Co. shelved the feasibility study it undertook to build a $5-billion railway. The 800-kilometre line would have shipped iron ore from the new mines developed in the Labrador Trough to Sept-Îles and its deep water port on Quebec’s Lower North Shore. The uncertainty surrounding those mining projects has for now killed what was to become one of the province’s biggest infrastructure projects.
Uncertainty is also hanging over Iron Ore Co. of Canada and its Montreal headquarters. Its controlling shareholder, Rio Tinto PLC, is looking to sell its 58.7-per-cent stake in the country’s biggest iron ore producer to lighten the massive debt load it took on when it acquired the ultra-expensive Alcan.
It is against this grim backdrop that the Quebec government will hold a forum on Friday to discuss how to change the province’s mining regime. The Parti Québécois feels that Quebeckers have historically gotten a raw deal – and few people outside the mining industry would dispute this.
The PQ campaigned to increase royalty revenues by $388-million over five years, while reassuring mining producers that the province is still a good place to invest. The two objectives are about as easy to reconcile as having mining executives and environmentalists slow dancing under a disco ball.
Yet the changes that the PQ government is considering, shortly after the royalty hike that the previous Liberal government enacted, look out of sync with the current times.
Years of feverish deals and over-the-top acquisitions have left the mining industry with a legacy of debt and soaring costs. You can blame the CEOs with oversized egos. You can blame slowing growth in China, the recession in Europe and the disappointing recovery in the United States. But with softening metal prices, the never-ending riches promised by Plan Nord (former premier Jean Charest’s signature plan to develop the North) now look as distant and elusive as the lost paradise of El Dorado.
Quebec Finance Minister Nicolas Marceau is not playing ostrich. In his first budget, Mr. Marceau forecast that royalty revenues will fall by 21 per cent over the next five years. Quebec now expects to collect about $1.5-billion by 2017 instead of close to $2-billion.
Still, Mr. Marceau is standing firm on the PQ’s promise to change Quebec’s mining regime. The Liberals increased the royalties on mining profits to 16 per cent from 12 per cent, while making it harder for producers to shift profits between mines. The Péquistes promised to introduce a 5-per-cent royalty on the value of production, coupled with a 30-per-cent “supertax” on any profits above a prescribed rate of return.
“We will live up to our promise,” Mr. Marceau said on Monday as he toured a new derivatives trading firm in downtown Montreal.
But there is now a twist with this promise – like the many others that have been watered down since the PQ took power. “We might take more time to implement the changes to take into account the economy’s current circumstances,” Mr. Marceau added.
So it is that after the ill-fated retroactive tax hikes, Quebec may get royalty changes that would be posthumous to a minority government whose life expectancy is little over two years.
Yet such a compromise would be ineffective. It would only infuriate the greens while threatening the projects that are now on hold. As they ponder long-term investments, mining companies will view any foreseeable change as immediate.
Mr. Marceau will unveil the details of the new mining regime in the spring, after listening to Friday’s debates – though his mind seems already made up, the same way the low tuition fee hike was scripted before Quebec’s education summit.
A supertax on profits is not, in and of itself, a bad idea: Jurisdictions such as Australia have introduced such a tax so that citizens can also profit from non-renewable resources in extraordinary times. But mining royalties on the value of production will deter investments, as such royalties must be paid regardless if a mine is profitable or not. Already, mining investments in Quebec are expected to fall to $4.1-billion this year from an estimated $4.8-billion last year.
Should Mr. Marceau press on with this idea, he would be wise to temper his appetite. At the suggested level of 5 per cent, Quebec’s production royalties would stand out when compared to the rates applied by the other Canadian provinces that reap revenues on production – and not all do, namely Ontario.
Otherwise, Quebec risks killing the industry that lays the golden eggs – and the estimated 34,000 jobs that go with it.Report Typo/Error