The location of an orebody should be given a lot of attention when you go out looking for a mine. Development and operationg costs are different in each Canadian region.
The philosophy of mineral exploration has always been: “find the orebody; figure out how to mine it later.” Ask almost any geologist and you’ll be told geology comes first, access to infrastructure second and anticipated mining costs, a distant third. Not a bad way to think, since orebodies are such rare things that we can’t really afford to be choosy about where we look for them. Or can we?
A half-million-ton gold deposit grading a quarter ounce may be economic in Halifax County but not outside of Kamloops. While both are in high-unemployment areas close to infrastructures, labor rates, taxation structures, electricity costs and a plethora of other factors have drastic impacts on mining costs. And they vary greatly from province to province. Those geologists wise enough to realize that your chances of finding a mine in Quebec are just as great as British Columbia or Newfoundland are beginning to target their exploration bets in regions where the ultimate mining costs and taxes will be lowest.
Realizing the regional cost discrepencies that exist in Canada, the Kingston-based Centre for Resource Studies (crs) conducted a study last year which was published as Effects of Location on the Competitive Position of Mineral Exploration and Development Opportunities in Canada. As this rather verbose title suggests, the location is worth paying attention to when you go out looking for a mine — assuming, of course, that chances of finding a deposit are equal in the various regions.*
Discrepancies in income and mining taxation between regions can be hard to discern, especially when governments want to attract (or appear to want to attract) mining investment into a specific area. In fact they usually only come to light when a mining company makes a discovery and it goes into the final feasibility stage. As Gary MacDonald, controller for Blackdome, near Clinton, B.C., notes: “effective tax rates on viable mining operations become blurred when the numerous depletion and other allowable writeoffs are introduced.”
In the crs study, these factors are identified as labor (wages), power, transportation and infrastructure (road, powerline and townsite) expenses as well as differences in non- profit provincial taxes. Among the taxes are those on sales, corporation capital and property. Worker compensation payments are also a factor.
Using a 200-ton-per-day gold mine as a model, the study investigated the variation in costs across three regions of Canada: east (the Maritimes), central (Quebec, Ontario, Manitoba and Saskatchewan) and west (British Columbia). Analysing the results for the model, it appeared that the eastern region provided the lowest costs for development and operating while the west was the most costly. The central region was marginally more expensive than the east. (The study also looked at a 10,000-tpd tungsten mine which is not considered here, owing to lack of space. The general trends were the same as the gold mine, the only major cost differentials being transportation of final product, which is costly in the more remote areas.)
In the study, it is apparent that the main non-tax cause of regional cost- variations was wages. Labor costs paid during the mine construction phase were estimated to be 20% higher in the central region and 55% higher in the western region when compared to the east. Operating wages were again the lowest in the east, with the central region coming in at 9% higher and the west costing 26% higher.
When Statistics Canada reports on wages and income for the mining sector are considered (see table shown above), these differences, compared to the average for each province, become obvious. Exceptions to the model’s regional segregation are found in Newfoundland and Saskatchewan, which are, respectively, higher and lower than other provinces within their regions.
The effect on the annual operating costs of these wage differentials is offset in part by lower electrical power rates in central and western Canada. The regional segregation of the study masks the provincial variations which show Manitoba and British Columbia with the lowest power rates and the Northwest Territories, Nova Scotia, New Brunswick and Saskatchewan with the highest electricity costs.
But provincial power rates do not always apply to mining operations. “Having the lowest power rates is incidental when you have an orebody in a remote area,” says Bill Price, Blackdome Mining Corp.’s general manager. His mine generates its own power, as do many other mines across the country. In the study, remote sites in the central and western regions were estimated to add 15% and 18%, respectively, to overall costs.
As Peter Guthrie of Cominco Ltd. notes: “most mine wages in B.C. have slight variations and are relatively equal to those in the Northwest Territories. The higher employee cost in the N.W.T. results in many additional benefits such as subsidized housing, twice-annual flights out and, in really remote areas, rotation shifts.” These additional costs could add about 15%-20% to the total wage costs.
Power costs for Cominco in B.C. also become incidental (the company has its own dam) and relatively acceptable for those operations in the N.W.T. which can easily connect to the established power grids. The higher costs of remote locations are compounded in the N.W.T. by the cost of transporting fuel and other supplies.
“For many remote locations air service during the summer can add 100% to the cost of supplies although winter ice roads can be utilized for many of the larger and inventory items,” Guthrie says.
With the exception of Newfoundland, most potential mining locations in the Maritimes are close to infrastructure even if they are not in mining communities. As Seabright Resources Mine Manager Patrick Keolane acknowledged: “Nova Scotia has the second highest power rates in the country (after Prince Edward Island) and these are estimated to make up about 10% of our operating costs. We do seem to have an advantage of about 20% over central Canada with regards to our wage scales, and road access to almost anywhere in the province is quite good.”
Anton Adancik of Agnico-Eagle Mines says that, in Quebec, the company’s power costs are responsible for about 6%-7% of its operating costs; and although the company requires bilingual personnel it does not seem to add significantly to the wage scales, he says. Adancik attributes a slight wage premium in the Abitibi region to the high level of activity and shortage of qualified people. He adds that, in Quebec, the mines assist the schools by providing equipment and time for the training of potential mine workers.
“With few Nova Scotia hardrock mines,” explains Keolane, “we are faced with a major training program for one third of our workforce. The other two thirds will come from local, experienced, hardrock miners as well as experienced miners who have left Nova Scotia and will be returning.”
Charles Morsey of Durham Resources, in New Brunswick, reports that his company has had to train most of its local workforce but has a fairly experienced general labor force to draw on.
The operating cost difference between the various regions was estimated to be $155,000 and $675,000 (east, centre west) on a base operating cost of $4.41 million for the 200-tpd operation. Most of the variation in cost was attributed to the labor-rate and electrical-power-rate differential. For the gold mine, the relative cost per ounce was $220, $228 and $254 going from east to west.
The study also identified differing infrastructure and working capital costs as a result of wage differentials. The eastern gold model was estimated at $11.2 million while the central cost would be $12 million. In the west the same facility would come in at $14 million. This works out to an “investment opportunity” cost per ounce of $62, $66 and $77, again from east to west. One of the offsetting factors, however, i
s the more limited availability of both equipment and mine services in the east.
The non-profit taxes also vary widely between provinces. These are estimated to add, over the life of a mine, between $1.6 million in Manitoba to $5.3 million in both B.C. and Newfoundland. In Ontario and Quebec, this component is almost entirely made up of worker compensation payments. This cost is the largest single non-profit tax in all other provinces except Nova Scotia and New Brunswick. In the model the costs ranged from 2%-7% on an operating basis.
The effect of income taxation varies significantly between the provinces. The tax and royalty rates vary from province to province, as detailed in the table on page 21. British Columbia recently revised its tax regime which has, according to the study, marginally improved the corporate return in that province.
Quebec, Nova Scotia and Saskatchewan appear to support their government’s contentions that they are promoting mining investment. British Columbia and Newfoundland appear to be the least supportive.
There appears to be a significant regional variation in the break-even ore grade, owing to regional costs and taxation policies. The impact on the level of exploration activity is probably not as great as would appear logical to an outsider, mainly because many explorationists continue to go where the deposits can be found, irrespective of future operating costs. By nature, geologists are always looking for “the Big One” — the Hemlo or Red Dog that could be mined profitably almost anywhere on the planet.
Laurence G. Stephenson is a Toronto based geological and financial consultant.
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