Brighter and Shinier Future for Asbestos?

25 01 2011

The town of Asbestos that is. I told you about the town’s struggle to revive its asbestos industry this summer when an Australian TV show sought to brand it as a lovely touristic destination. The provincial government is considering providing a guarantee for a CAD $58 million loan to a joint venture (Balcorp LTD) wishing to restart the Jeffrey asbestos mine as underground operations. Physicians, unions, foreign delegations and a lone MP have vehemently opposed this project which could lead to 200,000 tonnes of asbestos being exported to Asia per year. Amid this ruckus, exploration activities in the region are ongoing and, if fruitful, could substitute asbestos by gold.

Bowmore Exploration (TSX-V: BOW) is undertaking exploration activities on a 700 square km area in South-East Québec as part of its St-Victor project. A portion of this area is located only 20 km away from the town of Asbestos and exploration activities have shown discoveries of higher concentrations of gold than usual in that area. Bowmore’s St-Victor project is based on a very large low-grade sediment-hosted gold deposit similarly to Kinross Paracatu mine in Brazil or even Osisko’s Canadian Malartic Project. In fact, Osisko (TSX: OSK) has a 39% stake in Bowmore Exploration. The discovery of higher gold concentration in a small area of Bowmore’s leases has even encouraged Diamond Discoveries International to expand its caribou project by acquiring more mining claims in the region. This company is exploring for gold, chromite and PGMs.

Due to its mining background, the region is prêt-à-miner as miners have access to a network of paved roads and local private trails. Local resources include abundant electricity, water supply, work force and the mining facilities in the cities of Asbestos and Thetford Mines. Neighbouring communities are reportedly favourable to those projects – a rare occurrence since most extractive projects (shale gas, uranium and asbestos) have faced strong opposition from citizens in the past year.

Other junior miners active in the region include Nevado Resources whose Nicolet copper and gold properties are located within 30 km of Thetford Mines. Amseco Exploration could also be involved in the region, yet the firm’s web site is not all that clear.


La chasse est ouverte. M&A season is just starting.

30 09 2010

Hunting Season


 On August 18th, BHP Billiton announced its intent to proceed with the hostile acquisition of PotashCorp as discussions earlier in August regarding a tie-up in more consensual terms have been inconclusive. BHP Billiton is thus making an all cash offer of $130 a share to PotashCorp, assumed to be a premium of 20 per cent. The bid totals roughly $40 billion.  PotashCorp considers this deal: “wholly inadequate and is not in the best interests of the company” and has already filed a lawsuit which BHP quickly dismissed as foolish but was nevertheless allowed to proceed by a U.S federal judge.

To go through with the transaction, BHP would have to obtain approval of Canadian and US competition authorities as well as to be granted authorization under the Investment Canada Act. I’d like to focus on the latter, as this time could be different.

Investment Canada Act: Net Benefits, National Security and Political Mood of the Day.

Under the Investment Canada Act, an enterprise wishing to acquire a Canadian firm will have to go through a review process to prove that its investment is of benefit to Canada’s economy (and security!), usually by entering into a confidential agreement in which it commits itself to continuity by way of maintaining a certain workforce level, investment levels and training programmes. Of the over 1500 reviews undertaken under the Investment Canada Act since 1985, only one proposal has been disallowed.

In this process, the Canadian firm being acquired, government agencies and provinces likely to be affected may submit documentation to inform the review.

Federal Government

As mentioned above, the federal government has a habit of not interfering with foreign direct investment although these reviews have usually taken place in relatively good economic periods where benefits can more easily be foreseen. Yet since 2008, the Government has had to deal with firms’ inability to stick to their commitments under the Act.

The most prominent example of this is US Steel, which is been sued by the government for not respecting the terms of the agreement it entered into when acquiring Stelco. One might argue that with the “restructuring” and its long labour conflict, Vale Inco has de justesse avoided legal troubles.

Considering these unfortunate experiences, the variable speed economic recovery and fears that super majors may be on a spending spree that they later on find not to be worth it, I am guessing that there is an imperative to be extra cautious with upcoming reviews. BHP has hired a team a top lobbyists to make representations in Ottawa.

Provincial Government

Saskatchewan has an important stake in the well-being of the potash industry. The premier met with BHP Billiton, on Sept 20th, and concluded that “My views may change … but as of today, I don’t know how we are better off if this takeover or any other subsequent change happens,” Mr. Wall told reporters. “I don’t see how Saskatchewan or Canada is better of.” Of benefit does not necessarily mean better of. The intention of BHP to pull out of Canpotex may have something to do with the premier’s unease as it could lower potash prices and in turn depress its own royalty revenue.

Potash Corp and Shareholders

PotashCorp thinks 130$ a share undervalues the company. Shareholders believe that too and are probably the fiercest opponents to the transaction. Stephen Jarilowsky from Jarilowsky Fraser referred that at some point the stock was worth 200$ (but that was in June 2008 at the peak of the commodities boom). I guess many shareholders are nostalgic of the old normal.

Potash Corp definitely wants to provide shareholder with other and better alternatives to BHP Billiton. Some options include putting together a management buyout with backing from China, pension funds, sovereign wealth funds and possibly Mosaic.

Tales of Concensus

8 07 2010

None of those two developments can be considered happy endings, but they’re certainly good compromises. On our plate today: two things. First, with a new PM and a new attitude, Australia seemed to have agreed on the shape of its upcoming new tax on super profits. Second, Vale Inco has finally reached a deal with its workers, after roughly a year-long labour conflict.

Australia New Super Profit Tax

Australia’s new Prime Minister Julia Gillard has agreed to make concessions on the parameters of the new mining tax.  A week after taking over Kevin Rudd as Prime Minister, she agreed to cut the tax rate of the new mining tax to 30% from 40% as well as to increase the threshold at which the rate will kick in. The 10-year government bond rate (currently 5%), plus 7% will be used as threshold. Moreover the tax will apply only on profits from iron ore and coal extraction. As a result the tax will affect only 320 companies instead of 2,500 under the previous version of the tax.  The projects will also be subject to a 25 per cent extraction allowance which will reduce the miners’ taxable income.

 Following the implementation of the last tax reform proposed by the Henry Review, Australia general corporate income tax rate was to be lowered to 28% from 30%. Considering the tax rate applicable to those super profits is only 2% higher than the general rate, I’m unsure whether this change of course can be called a compromise (nor proper tax policy). It’s full on back-pedalling (for re-election’s sake).  The miners call the new version of the tax a “reasonable framework”. 

Greens in the Australian Parliament have however signalled last week that they would not compromise on the rate and that the 40% rate would have to stay no matter what.  The saga may not be over yet.

Vale Inco has an Agreement with its Workers

A tentative five-year labour contract agreement has been reached by Vale Inco and employees of multiple Canadian operations who went on strike last summer over their dissatisfaction with the company’s offer regarding pensions and bonuses tied to the price of nickel. The Union of the Sudbury workers still has to vote on the proposed contract. Agreement by the Sudbury Union would likely lead to a settlement at Vale’s Voisey’s Bay operations in Newfoundland.

Sudbury and Voisey’s Bay operations collectively account for 4 per cent of the global nickel supply. The strike has thus been a major driver in the physical market in the past months. Andy Home, columnist for Reuters’ Metals Insider, suggested that the impact of a return to production to Vale Inco operations would take some time before being felt in the markets. Once the output of operations is increased, roughly 140, 000 tonnes of annualised nickel supply will hit the market. Home expects oversupply around the fourth quarter.

Asbestos Needs a New Vocation

23 06 2010

There is only so much spin one can infuse to the word toxic. These guys did it with style. The town referred to in the video, Asbestos is home to one of the world’s largest open pit asbestos mine, the Jeffrey Mine. With asbestos being banned in many countries over the important health risks associated to exposure, the town of Asbestos has tried to diversify its economy away from mining but has struggled to find other viable alternatives.

The last business venture of importance for the town of Asbestos was Métallurgie Magnola, a subsidiary of Noranda, produced magnesium from the asbestos mine tailings. The plant has been in operation from 2000 to 2003 and was never profitable throughout this period. The very rapid increase in production capacity in China, unforeseen during the planning of the project, lowered magnesium prices below the plant’s production costs.

After failed attempts to revive Métallurgie Magnola, local stakeholders are now hoping to revive the Jeffrey Mine. It was reported this week that the region had requested a loan from the provincial government to reopen the mine as an underground operation. Since 2004 the mine was under the protection of creditors. I attended a macroeconomic forecasting exercise last spring which stated that the chrysotile industry (that is how it is referred to now) would double in size by 2020. Considering the current size of the industry, tourism may be a more promising avenue.

International Arbitration: Canadian Firms in Troubled Waters

11 06 2010

It seems that lately, Canadian firms have been at the mercy of government’s will to play nice or not. In the last remedy available to protect substantial investments in developing countries’, firms have turned to international arbitration hoping to overturn decisions made by sometimes corrupted domestic courts or abrupt policy shifts.

Africa-First Quantum (TSX: FM, LSE:FQM)

The highest profile case to emerge lately was of course First Quantum whose rights to two mines (Frontier and Lonshi) in the Democratic Republic of Congo were annulled by a court and handed over to a state-owned firm. The Court cancelled a letter giving First Quantum’s the mining rights to the two properties claiming that subsequently to a reform of mining laws, a decree was required to allow First Quantum to exploit the mines. This behaviour from Congolese authorities could be partly explained by the decision of the firm to seek international arbitration in relation to a previous ruling made on its Kolwezi project.

The Kolwezi project is developed by the Kingamyambo Musonoi Tailings SARL (“KMT”), a partnership involving First Quantum (65%), the state-owned Gécamines (12.5%), Industrial Development of South Africa (10%) and the International Finance Corporation (5%). A contract review conducted in September 2009 highlighted contract irregularities and production delays to the project. The review pointed that the constitution of the company resulted of a fraud for which Gécamines and the Mining Registry were seeking compensation of US $7 billion and 5$ billion respectively.

First Quantum explained in a press release that partners in the Kolwezi project were not served and with a proper Notice of Hearing Date for matters related to the Kolwezi project and noted that there were grounds for thinking that the Code of Civil Procedure was not adhered too in the process. The firm began arbitration procedures on February 1, 2010 through the International Chamber of Commerce International Court of Arbitration in Paris which (sadly) does not publish documentation on the case on its web site.

Central America

 Amazingly enough, 61% of the mining cases filed to the International Center for Settlement of Investment Disputes, the most commonly used arbitration court, involved Latin American countries. It seems that Governments have settled previous dilemmas between resource development and environmental protection and have taken swift turns in the latter direction, making some mining projects casualties.   

El Salvador-Pacific Rim (TSE: PMU), a Vancouver-based firm, has seen its El Dorado gold project jeopardized as a result of the government refusing to provide a mining permit for fear of being clobbered by citizens opposing mining. In responding to popular pressure the Government avoided to approve an Environmental Impact Assessment. The company provided its first impact assessment in 2004 and substantially reviewed it, at the Government’s demand until 2006, and then nothing.

 Ironically, it was conveyed in the press that the environmental quality of the project is not the factor preventing the issue of the permit as the final design of the mine is exceeding international standards. The government of then-President Tony Saca acknowledged this by telling the company that there is no technical problem with the mine, only political ones”. Opponents to the project however argue that the measures to mitigate adverse environmental impacts are not sufficient. In response to this stalemate, Pacific Rim has filed for international arbitration.

 Pacific Rim announced in December 2008 their intention to file for arbitration under Dominican Republic-United States-Central America Free Trade Agreement’s (“CAFTA”) investment rules. Pacific Rim can rely on this agreement as it has U.S. subsidiaries operating in El Salvador (PRES and DOREX). The company formally filed for arbitration at the ICSID on April 30, 2009. The hearing of preliminary objections has taken place only recently on May 31st and June 1st 2010. The Government of El Salvador was attempting to get the case dismissed at the outset. Video recordings of the hearing are available here. We are still months away of any substantial developments. Should any newsworthy development arises, you will be made aware.

Similarly to Pacific Rim, Vannessa Ventures, through its subsidiary Industrias Infinito S.A, attempted to obtain an environmental permit for its Cerro Crucitas gold project. The permit it obtained was overturned in 2004 by the Supreme Court of Costa Rica as the permit violated provisions from the constitution guaranteeing the public a healthy environment. The court ordered the state to pay costs, damages and compensation to Vannessa Ventures. The company later on filed for arbitration with the ICSID and is now operating on another name: Infinito Gold Ltd. A bit of browsing has indicated that Infinito Gold has also filed for arbitration regarding the expropriation of its Las Cristinas project in Venezuela. Gracias!

 This was just a quick sightseeing of the international arbitration seen from the mining industry’s perspective. The UN Commission on International Trade Law another international arbitration body, similarly to Chamber of Commerce International Court of Arbitration, does not publish a registry of cases. So this entry is only a sampling of current cases but it does underscore the political and social risks inherent to mining operations.

Effective Tax Rates on Mining

31 05 2010

I have made you aware in a previous entry, that the mining industry’s organized response to the new Australian mining tax would be articulated through Keep Mining Strong an initiative essentially based on social media. Above is one of their You Tube videos discussing the effective tax rates on mining.

The campaign seems to attract little attention so far. The oldest video on its You Tube channel was released one week ago and has only 2,207 views. Its Twitter account is currently being followed by fewer people (246) than it is following (269). Metrics were taken at 3.45 EDT!

The rates presented in the video are a bit controversial as rates cited in the Brisbane Times suggests that effective tax rates for the mining industry are 29% in Britain, 22% in the U.S, 21% in China, 20,4% in South Africa, 17.9% in Canada and 16.4% in Australia. The worldwide average is 23%. These numbers were taken from PricewaterhouseCoopers’ Effective Rate Comparison of the Global Mining Industry, an annual study of taxes paid by 57 leading mining firms.

The Australian Government will be relying on a $38 million budget to sell its tax on mining to its constituents who, for now, are divided on the issue.

Mr. Rudd’s Super Profit Tax

10 05 2010

Oh my, 40% tax on resource profits sounds like a lot. Actually, it is. In effective terms, it will bring the tax rate on mining to 57% (up from 43% currently), making it the highest taxed resources industry in the world. There is currently a lot of debate about the extent to which the Australian mining industry will be negatively affected by this new tax. While the debate rages on, I decided to put my two [tax analyst] cents in to assess whether this new tax is 1) the plague, 2) cholera or 3) just a storm in a tea cup. But before that, Ladies and Gentlemen, the facts:

The Beast

The Super Profit Tax, effective in 2012, will apply a 40% tax rate on profits from Australian operations that are above what the Government considers reasonable. Reasonable in this case will be defined as the value of a mine’s asset multiplied by the interest rate of the 10-year Government bond (of 6%). The amount of profits above that amount will be taxed at 40%. The existing Petroleum Resource Rent Tax kicks in at profits five percentage points above this rate. To make this new tax policy more bearable, the Government will introduce an exploration tax rebate of 30%. The new tax is expected to raise AUS$3 billion in its first year.

This new tax, a by-product of the Henry Tax Review, will replace the current royalty regime as part of which companies were taxed on production rather than on profits. The Henry Tax Review is also suggesting that the corporate income tax be reduced by 2%.

Reaction Shot

Let’s cut away from the facts and focus on the industry’s reaction to the announcement of the tax. First there was the general outcry from industry which now seems to have been replaced by an organized a more coordinated response through the Keep Mining Strong website, media advertisements and the mobilization of their shareholders.

Remember that last week some firms have responded quite erratically to the announcement of the new tax. For example, Cape Lambert Resources halted plans to drill for iron ore in the Pilbara citing the legislative uncertainty caused by the tax. The Chairman of the company apparently still went on to buy a million shares in the company, though. While this is an extreme, and purposely cherry-picked, it seemed that many were anxious about the ability to sustain investments in the mining industry in the conditions created by the new tax.

Perceived Risks

The announcement of the new tax will “kill the goose that lays the golden egg” by making Australia less attractive for investors. While it is true that a tax reduces the return on investment, mining assets are not mobile across borders and it would be a bit far-fetch to predict that investment would evaporate. I am a bit sceptical of a lot of the negative impacts attributed to the entry in force of the new tax.

For example, the assumption that small mine developers will be literally clobbered by this new tax. This is perhaps a bit bold but I would think that they may be positively impacted by the new tax policy as they’re unlikely to post excessive profits (or even posts profits to begin with) but on the other hand they will get a refund of 30% of their exploration expenses and reduce their taxes owing substantially. The implementation of a flow-through share system, if envisioned, to pass these deductions onto shareholders could also have the effect of helping these guys attract capital.

There is also the risk that firms be tempted to reduce their output to maintain profits below the threshold of reasonable profits in order to keep their taxes low. Yet, doing this, would come at the (likely greater) costs of relinquishing opportunities arising from rapid growth, inflation, emerging market demand. I am sceptical that this scenario could materialize on a large scale.

In Sum, it’s more like a chronic neck pain

Overall, I think that the industry should be able to stomach the tax increase. The attractiveness of Australia as a mining jurisdiction is based on factors beyond taxation. The Fraser Institute’s Survey of Mining Companies for 2009-2010 ranked South Australia in the top 10 of mining jurisdictions. According to the survey, the taxation regime in most Australian jurisdictions (under the previous regime) was considered as only a mild deterrent to investment. Jurisdictions with taxation regimes considered to be strong deterrents to investment are developing countries with unstable regimes and a high level of corruption (but still advertising low statutory tax rates). Note that the survey did not provide for the possibility to answer that a taxation regime was conducive to investment, confirming that taxation is indeed a pain in the neck.