— The following is an edited version of a brief submitted to the 62nd annual Energy & Mines Ministers’ Conference held recently in St. Andrews, N.B., on behalf of the Toronto-based Prospectors and Developers Association of Canada.
Canada is richly endowed with natural resources and mineral potential. This provides the foundation for a strong mineral industry, which has contributed significantly to this country’s economy and standard of living — particularly in its northern and rural regions. This endowment has also enabled Canada to be at the forefront of mineral exploration and development and to establish a vibrant junior exploration sector.
Burgeoning economic growth in China, India and Brazil is driving an almost unprecedented demand for mining products. While the greatest demand is for base metals, there is also increasing demand for products such as coal, iron ore and uranium. The expectation is that this demand will continue for 20 to 30 years.
Canada is well positioned to benefit from this global commodity boom. However, to reap the full benefits, the country’s reserves of key commodities, particularly base metals, need to be replenished. Unfortunately, this is not happening. Natural Resources Canada’s statistics show a steep decline in proven and probable base metals reserves over the previous quarter century. To reverse this trend, the discovery of new deposits is vital and will require an increased level of investment.
Globally, the mineral industry has recovered after a severe downturn between 1997 and 2002. In Canada, exploration expenditures more than doubled from an estimated $1.1 billion in 2004 to $504.4 million in 1999. Canada has also been able to attract a greater share of exploration investment, from 11.6% of total world spending in 1997 to 19.6% in 2004.
The role of the junior exploration sector has become increasingly important in mineral exploration. In 2004, junior company spending on exploration in Canada overtook senior company spending. There is evidence, too, that junior companies are shifting their focus to base metal targets, given strong demand and continuing strength in commodity prices.
However, there are signs that the recent high levels of exploration activity by the junior sector may not be sustainable and that the peak of the current cycle may have been reached. This is cause for concern. Total exploration expenditures have not reached the levels attained at the peak of the last cycle in 1996, and there has been a longer than normal lag between exploration investment and the rate of mineral discoveries. This lag is attributable to the downturn in exploration activity and low levels of investment between 1997 and 2002. A prolonged period of exploration investment is required to catch up.
The following recommendations are designed to remedy the concerns outlined above and keep Canada’s mineral sector healthy for years to come.
Extension of the ITCE
The Investment Tax Credit for Exploration (ITCE) program should be extended in a series of rolling 3-year phases, supplemented with annual reviews outlining the program’s benefits.
The ITCE program, introduced in late 2000 as a temporary measure to revitalize the mineral industry in Canada, expires at the end of 2005. The program has been effective in maintaining and even increasing Canada’s share of the exploration investment available worldwide — from 15% in 2000 to 21% in 2003. The program has also been an important incentive program for the junior exploration sector. The ITCE has proven its worth and is ideally suited to address the new challenges now facing the industry and Canada. It keeps exploration investment in Canada, increasing the possibility of new discoveries, and focuses on the junior exploration sector, which is the foundation of the exploration industry.
Costs treated as CEE
The costs of community consultation, baseline environmental studies, and feasibility studies should be treated as Canadian Exploration Expenses (CEE).
Most junior exploration companies, having no production revenue, fund their exploration activities by issuing flow-through shares. The costs of community consultation, baseline environmental studies, and feasibility studies are not currently considered CEE, and junior exploration companies must cover them with hard dollars, which are difficult to raise. Community consultations and environmental baseline studies are realities of today’s exploration business, and the CEE should be changed to reflect these realities. Feasibility studies are a fundamental part of assessing the quality of a mineral deposit, and the costs of these studies should also qualify for CEE.
Expense exploration
Exploration for base metals in the vicinity of previously producing or operating mines should be treated as CEE to encourage exploration for base metals.
Canada’s need to replenish its base metal reserves requires special measures. Treating exploration for base metals in the vicinity of former producing or operating mines as CEE, rather than a Canadian Development Expense, would encourage junior companies, financed through flow-through shares, to explore in areas of high prospectivity. Base metal discoveries close to existing mines provide new feed for nearby smelters and refineries and jobs for local residents.
Tax credit for drilling
A 20% federal investment tax credit for deep drilling should be introduced to encourage exploration below 300 metres. This would spur the discovery of deep ore reserves and extend reserve life around existing communities.
The PDAC supports this Mining Association of Canada recommendation on the basis that it would serve as an incentive for companies to make the large investments necessary to search for deeper mineral deposits and to replenish reserves (particularly those of base metals).
Funding for CGMS
A commitment to fund the Cooperative Geological Mapping Strategy (CGMS) is needed to ensure that this valuable program improves the quality and extent of Canada’s geoscientific knowledge base.
In 2000, all of Canada’s mines ministers approved CGMS but there has been an absence of financial commitment, notably in the last federal budget. The CGMS implementation plan involves a regional approach to public geoscience that promotes co-operation among existing geological surveys, universities, and industry. The resulting research would contribute towards securing Canada’s energy supplies, sustaining resource-based communities and identifying new economic development opportunities, particularly those in Canada’s North. Implementing the CGMS program would involve an annual investment (federal, provincial and territorial) of $50 million over 10 years.
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