January 11, 2000
Canada’s mining industry knows how to strike it rich, but it closely guards its secrets, for fear others will jump its claims. Now, the secret’s out. Here’s how it’s done.
Get federal and provincial governments to pick up the cost of geological surveys, infrastructure such as mining roads, and other preparatory work – all told, governments pony up $300-million to $400-million a year this way. Then, to part gullible investors from their money, hype your product on stock markets – the fast-and-loose Vancouver Stock Exchange was hard to beat, although BRE-X showed the TSE’s potential, too. Next, talk governments into selling you cut-rate power from their Crown-owned utilities. Better yet, tie the power payments to future profits that you know may never materialize. If the utility has no power to spare, convince it to build or expand a plant just for you – when was the last time a hydro passed up an opportunity to expand?
Tax holidays in the early years are not enough. Neither is a corporate income tax rate the banks would die for. Defer your taxes, too, and hey – why not also ask the government to waive your royalty payments?
Run your mine for a while – this business is cyclical, so you’re bound to have a string of good years, during which you’re entitled to scoop out profits. When the bad times come, why be sentimental? Go bankrupt, leaving creditors in the lurch, shareholders empty-handed, and taxpayers to clean up the contamination.
Then reorganize and start again. Or give someone else a chance. The bankrupt mining company will have hefty tax losses worth something to a new operator. Either way, the government will agree to give the new mine operator a fresh start by absolving it of back taxes and clean-up responsibility.
This is a composite of Canada’s mining industry, the companies that take metals, coal and structural materials such as stone out of the ground. The industry’s lobby group, the Mining Association of Canada, misses no opportunity to boast of its contribution in jobs and GDP to the economy. In fact, this entire mining sector – the Incos, Falconbridges and Norandas, as well as the Joe’s Gravel Pits that pockmark the countryside – represents but a thin 1% slice of the country’s GDP. Worse, that slice is one of the country’s least profitable, according to StatsCan’s quarterly evaluation of the industry. All of Canada’s mining companies combined earn only $1.2-billion in an average year – an amount exceeded by the tab mining companies leave behind for taxpayers to pick up.
Industry darling Peggy Witte, until recently the CEO of Royal Oak Mines Inc. and its fabled Giant gold mine in Yellowknife, ran a textbook operation after she acquired Giant in 1990 from a bankrupt Australian firm. Ms. Witte amassed an impressive collection of grants, cheap loans and tax incentives during the 1990s, saw several good years during which few questioned her $1-million-plus annual compensation, then led her company to bankruptcy in 1999, leaving behind $600-million in debts. She also left behind 270,000 tonnes of arsenic trioxide – that’s Agatha Christie-grade arsenic – for taxpayers to deal with in a cleanup estimated to cost between $250-million and $1.5-billion. On the plus side – for the next generation of polluters – she also left behind $200-million (US) in tax losses that justify restructuring the company. Royal Oak Mines Inc.’s new incarnation, ROM Inc., will soon be listed on the TSE.
Reckless tax and environmental rules like these, made by governments who confuse economic activity with true wealth creation, make much of Canada the destination of choice for big-time mining polluters skilled at extracting incentives from governments. The Vancouver-based Fraser Institute, in its annual survey of mining companies, found New Brunswick, Manitoba and Quebec ranked first, second and third among dozens of jurisdictions in having government policies pleasurable to mining companies. Alberta ranked fifth, Ontario seventh, and Saskatchewan eighth. Only Chile, Australia, Nevada and Arizona interrupted Canada’s dominance of the top 10 spots.
One Fraser Institute respondent, a vice-president of a junior mining company, gushed over the mining-friendly policies of Manitoba, Saskatchewan, Ontario and Quebec: “These provinces actively support mining and provide incentives, favourable regulations, etc. Most importantly, the government is openly supportive and will back mining through difficult public challenges.”
No respondent called taxation a strong deterrent to exploration in New Brunswick and Alberta, and the percentage was almost as low for Quebec (2%), Manitoba (3%) and Ontario and Saskatchewan (5%). When it came to environmental regulation, no respondent complained of the rules in New Brunswick, Saskatchewan and Manitoba; 2% complained about Alberta and Quebec; and 4% about Ontario. In contrast, mining companies’ complaints about taxes and environmental regulations ran as high as 60% to 80% in other jurisdictions.
Little wonder that, under the rules of the game to date, mining company executives have been getting the gold, and the rest of us have been getting the shaft.
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