Québec Mining Industry Gets New Royalty Regime; General Consensus Is Mixed

(Kitco News) - The long-awaited and hotly contested royalty increases and other additional taxes for miners that the current Québec provincial government said it would table in spring have arrived, and most are still displeased with it.

In early March, Québec Finance Minister Nicolas Marceau announced that Parti Québecois would indeed be going through with a royalty hike and additional taxes, which were used as a platform during provincial elections in 2012.

The hikes will take effect in 2014, and, according to Joseé Methot, president and chief executive officer of the Québec Mining Association, this will hurt miners currently operating in the province at a time when costs are already high.

“We’re disappointed because we just went through this,” said Methot in a telephone interview with Kitco News. “There will be some negative effects for certain miners currently in Québec.

“Those that are operating with already slim margins, and some that are in more precarious situations, an added cost in these times of high costs is damaging.”

It breaks down into two scenarios for companies operating in the province.

Royalties on company profits will be set at a basic rate of 16% but will increase based on a company’s profit margins or the government can charge a 1% tax on the first $80 million, depending on the value of the metal coming out of the ground, which can increase to 4% after the initial $80 million.

Québec went through a royalty hike in 2010, from 12% to 16% under the Jean Charest-led Liberal government at the time, which makes this the second substantial royalty jump in three years.

“We always said that if Québec is to stay competitive as a mining jurisdiction, we needed to keep the tax and royalty regime that was already in place,” Methot said. “We are the most taxed province in Canada at the mining level and we’re a small market.”

With this new hike coming in, Methot sees it as a disconcerting message that the province is sending out to current and potential investors.

“So, aside from raising royalties and taxes for miners currently in Quebec, we’re also telling them that the capital they invested under certain conditions is subject to change,” Methot said. “Now they have to recalculate their figures based on another change so it raises the question for future investors -- will I have to deal with another change in the royalty system in Quebec in a few short years?”

After the new royalty regime was tabled, both the Liberal and CAQ parties, both opposition parties to the PQ government, voiced their displeasure late Monday.

The cuts were expected to bring in an additional $388 million annually for the province over five years but that number has fallen to $200 million a year with lower metals prices.

Most mining companies contacted today either refused comment or did not immediately return emails or phone calls.

Not all miners were staying out of the conversation as Bryan Coates, chief financial officer of Osisko Gold Corp. (TSX:OSK) spoke to Kitco News over the phone.

“Well it’s obviously never a great day when governments increase taxes but overall I think the increase in taxes is something we can live with,” Coates said. “In the current price environment, it has some impact on us, but, it is something we can live with.”

Stornoway Diamond Corp. (TSX:SWY), which is slated to become Québec’s first diamond mine, welcomed the news.

"We welcome the confirmation given by the government of Madame Pauline Marois today that it recognizes the important place of mining in the Québec economy,” said Matt Manson, president and chief executive officer of Stornoway. “The new system of mining taxation that is being proposed is a reasonable balance between maximizing both taxation revenue and the type of returns that are expected by investors and lenders in an increasingly competitive world for mining capital allocation.”

Québec’s standing in the eye of the mining world has taken a bit of a fall in recent years. The Fraser Institute, an independent non-partisan research and educational organization based in Canada, releases an annual survey of the best mining jurisdictions in the world.

Québec ranked first from 2007 to 2010 but has now fallen out of the top 10 in the 2013 survey. This was before any royalty hike was taken into account.

“On an international scale, it doesn’t give Québec a very positive image in terms of stability with the mining industry,” said Methot. “Québec is losing its attractiveness as a premier mining jurisdiction.

“Investors have a choice to come to Quebec or other jurisdictions, this just adds fragility to the industry in our province,” she added.

Coates doesn’t see the new hikes as an investor deterrent, but he does see companies trying to get an operation going struggling in the early stages.

“What it is going to do with the minimum tax is that it will require you to seek additional funding in the initial phases,” Coates said. “I think that’s the danger with this minimum tax, but I think the government did try to make it acceptable to all parties.”

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