Benefits of going beyond borders outweigh challenges for Canadian miners
Canada plays host to nearly 75 percent of the world’s mining companies. Yet, despite being headquartered here, most Canadian companies have properties that are outside our borders.
Canada is a safe place to call home for global mining firms. The industry is engrained in our history, significant capital can be raised on the TSX and companies enjoy a well understood legal and regulatory framework. However, when it comes to finding new world class deposits, companies are more likely to find them in emerging mining regions than traditional mining areas like Canada.
Going beyond our borders provides Canadian miners with more opportunity to find the next big deposits. However, there are important issues to consider when working offshore, such as tax implications, and political and infrastructural challenges found in emerging regions like parts of South America and Africa.
Mining Royalties on the Rise
With governments more likely to boost taxes when commodity prices are high, we’re seeing more regions introduce mining royalties with heavy price tags for companies in these areas.
Mining tax hikes have garnered significant media attention this year, such as Australia’s proposed 30 percent levy on iron ore and coal and, more recently, the Chilean government’s approval to raise mining royalties to help fund reconstruction after the country’s earthquake in February.
Mining levies have already taken hold in many African countries this year as global investment in the African mining industry increases. Ghana, for instance, increased mining royalties from three to five percent in March 2010. The same month, South Africa increased mining royalties to five percent on refined minerals and seven percent on unrefined minerals sales. In Zambia, the government has refused to cancel variable taxes on mining companies despite mounting pressure from industry groups to keep the region investor-friendly.
Taming the New Frontier
Canadian miners are increasingly looking to less politically stable areas in parts of South America and Africa to set up new operations. Although risks have subsided, companies still face challenges in operating in these new areas.
A South American example is Colombia which has come a long way from its past where risks associated with drug cartels and kidnapping kept investors at bay. In Colombia, gold and coal deposits that were under-explored for years have been attracting Canadian miners to the country in the last 5 years. We expect to see many more initial public offerings of companies with Colombian assets.
Western and southern Africa has also become more stable in the past 15 years and is a new frontier for Canadian investors. Africa is rich with deposits, and untapped sources of high-demand commodities like gold, iron ore, bauxite, copper, nickel and cobalt can all be found on the continent. Risks still remain, though. For example, there is uncertainty regarding mining permits in the Democratic Republic of Congo following issues regarding First Quantum’s permits in that country. Also, South Africa recently stopped issuing new mining permits as a result of its concerns with progress in its Black Economic Empowerment initiatives.
Starting from Scratch
Similar to Canada’s North, an ongoing challenge in Africa and other emerging regions relates to the lack of infrastructure and access to water needed to support mining operations.
Building the necessary infrastructure to support all facets of the mining process requires significant time and financial investment. However, these challenges have certainly not deterred Canadian companies from investing in Africa in recent years. On the contrary, the record prices of gold and the high market value of commodities have only helped to intensify interest in Africa, as the potential for profits often outweighs the costs associated with building up the infrastructure.
Weighing the Benefits
Despite challenges related to the ever-growing threat of mining taxes, and the political and infrastructural issues related to setting up operations in emerging mining areas, going offshore can be very lucrative for Canadian-based companies.
Canadian-based mining companies enjoy the best of both worlds. Listing on the TSX gives them access to a high-liquidity stock market that allows them to raise capital better than other international exchanges. At the same time, investing in emerging mining areas beyond our borders allows companies to tap into new world class deposits easier than in traditional mining areas.
CMJ
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