High-Tech Productivity Powerhouse
The Ontario Mining Association recently released the results of a study into the contribution of mining to the Ontario economy. This article summarizes the report, which can be downloaded at www.oma.on.ca/economics/resources/high_ tech_productivity_powerhouse_report.pdf.
Ontario is Canada’s largest miner, producing almost 28% of Canada’s total minerals by value in 2005. Almost two-thirds of this value is in metals, principally nickel, gold, copper, platinum group metals and zinc. About 30% is quarried material used in construction.
This diversity of production is spread across the province. The mines themselves are mostly rural, but many cities host offices and technical service facilities, not to mention employee homes. Half the mining activity in Ontario occurs in the Sudbury Basin, with the rest divided among the northeast, northwest and southern Ontario regions. The development of the Victor diamond mine in northern Ontario may soon alter this ratio.
The mining industry has enjoyed rising prices for many of its commodities during the last five years, valued in both U.S. and Canadian dollars, but cyclicity is to be expected. Prices are set in an international market, reflecting global supply and demand. Selling price fluctuations are perhaps the single largest source of economic risk in the industry. The recent upswing has come after 10 years of flat or declining prices since the last peak, in 1989. Most analysts predict lower prices in the future.
The recent higher price environment has produced a surge in exploration activity in Ontario, which has more than doubled since 2002. Ontario ranks first in Canada as a destination for mineral exploration, with a preliminary 2005 total of $321 million (out of $1.3 billion for all of Canada).
Mining needs up-front capital investment. Not only exploration, but also mine development, construction, plant and equipment costs must all be incurred before any substantive mineral output can be produced. After being relatively stable for a decade, the annual investment in mine construction and equipment in Ontario almost doubled, from $723 million in 2002 to $1.25 billion in 2005.
The total capital investment in Ontario mining, including research, exploration, construction and equipment, was $1,684 million in 2005, up 87% since 2002. To some extent, this reflects higher prices for these mine inputs, which are in high demand and short supply around the world. But in general, this increase reflects renewed interest in mining in Ontario, including the recommissioning of old mines as well as new projects.
Most mining companies raise the capital to finance new projects in the equity markets. Lucky for Ontario that its capital–Toronto–is the world’s largest mining finance centre; most of the capital for new mining projects in Ontario is raised through equity offerings on the Toronto Stock Exchange (TSX). The trading volumes for TSX-listed mining stocks have grown steadily since 2001 along with the market capitalization, which reached $245 billion in June 2006. A further $26 billion in market capitalization trades on the TSX Venture Exchange, 90% of which are small exploration companies.
Since mineral producers cannot set their own prices, once in production their goal is to be the lowest cost producer, through high productivity and minimal overhead. During cyclical downturns in commodity prices, many producers are forced to make significant cost reductions. Although this often involves job losses, another result is innovative new methods for production, and migration to new technologies that increase output per employee. R&D spending has grown to record levels, indicating that the industry is continuing to strive for better ways to do its work, even in the absence of a price squeeze.
Employment and productivity
Mining in Ontario employs over 14,000 individuals directly, and mine service companies employ a further 5,000. These employment levels have only recently increased after years of decline. Ontario maintained its 30% share of Canada-wide mining employment throughout the period 1994-2005.
A noteworthy trend is the increase in mine services employment, including contract miners as well as drilling companies and other consultants. Their numbers have almost doubled since 1999, indicating the outsourcing of specialized mining jobs.
Mining industry jobs continue to be among the highest paid of all industries in Ontario, approximately 50% above the average of all industries. This high value has also translated into significant productivity improvements in recent years. Since 1999, productivity is up 66%, an almost 9% compounded annual growth rate. Because of these recent improvements, mining now ranks third Canada-wide in hourly productivity.
Workers are also trained better. Safety training has helped reduce both serious (lost-time) and total medical injuries in the mining industry to 0.9 and 8.2 per 200,000 hours, respectively, in 2005. This continues the steady downward trend in these accident rates over the past 12 years.
GDP and tax impacts
Mining especially affects communities near the mine sites. Procurement in general is estimated to be sourced over 40% from local suppliers. The total value of goods and services procured within 80 km of mine sites in Ontario has more than doubled since 2001. The recent decision by De Beers Canada to develop the Victor diamond mine near Attawapiskat has made Timmins a major procurement centre for the almost $1-billion capital project.
A further 43% of supplies are sourced elsewhere in the province, and 9% elsewhere in Canada. Essentially, 95% of the operational inputs to the Ontario mining process are Canadian. When this is combined with the fact that over 80% of mineral output is exported to markets in the United States, Europe and the Far East, the Ontario mining industry contributes immensely to improving Ontario’s international balance of trade.
Even when financial capital imports are considered, the Ontario mining industry enjoys a strong trade surplus ($1.7 billion average for 2004-05), almost entirely related to metals mining.
The total value of mineral production was $7.2 billion in 2005. This represents approximately 1.3% of Ontario’s $538.4-billion GDP (fiscal year 2005-06). Government revenues from Ontario mines are also rising with higher profitability and production values. Over $400 million was paid in taxes to all levels of government in both 2004 and 2005, more than 50% higher than the previous 10-year average. Over 50% of the tax revenues are local or Ontario taxes, rather than federal taxes.
Challenges facing the industry
Currently, Ontario mines on average are enjoying strong gross margins, but challenges remain.
In 2005, energy prices increased at a faster rate than mineral prices. Mines are powered primarily by electricity. Ontarians now pay on average about 40% more per kilowatt hour for electricity than other Canadians.
The industry faces a shortage of new entrants to the labour force and skilled trades positions. An increasing number of workers are choosing early retirement at 55 or younger. This two-pronged squeeze presents a significant challenge for the future.
Company-sponsored benefits comprise almost 32% of the per-employee average annual cost of $135,000 in Ontario. Payroll taxes now amount to 5.5% of total compensation costs, approximately $7,500 per employee and almost $100 million in aggregate. Workers’ compensation premiums represent approximately $40 million annually.
New accounting rules have increased the attention mining companies pay toward environmental obligations. Companies must now accrue their commitments for reclamation as balance sheet liabilities, discounted to present value and amortized into earnings each year.
New mining projects now undertake extensive community consultations in advanc
e of field development, to ensure residents are well informed about potential economic, environmental or social impacts.