Economy

Forget tax issues, mines need lower costs to thrive, NWT told

Last modified: October 21, 2020 at 6:13pm


The barrier to attracting more mines to the NWT is not taxes and royalties but the sheer cost of operating in the territory, a study by analysts PricewaterhouseCoopers found.

In a report commissioned by the NWT government, the firm compared the territory’s tax and royalty regime against a range of other world mining hotspots.

The report concludes the territory is, if anything, one of the friendlier places for mining companies to do business. However, operating costs are so high that many mines will only be built if the deposits are high-grade or prices high.

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PricewaterhouseCoopers concludes: “To increase its mine development potential, the Northwest Territories will need to focus on the underlying drivers of its high costs, rather than tax and royalty policy.”

Releasing the report, NWT industry minister Caroline Wawzonek said it was an “initial step” in evaluating whether the territory should change how it taxes mines and assesses royalties.

The territory noted the report also found the territory “is receiving a fair return in line with the other Canadian jurisdictions.”

Kevin O’Reilly, the MLA for Frame Lake, said the report was flawed and “should not serve as the foundation for our review of the fiscal regime for mining.”

In a news release, O’Reilly said the report should have more thoroughly studied more areas of comparison – and whether the federal government should be giving the territory a bigger share of its mining revenues (which are currently split between the two governments).

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“There are a variety of problems and issues with the way this study was designed,” said O’Reilly.

“Until the veil of secrecy is lifted on public reporting of royalties and taxation of the extractive sector, it will be impossible to have that public debate.”

What the study found

The study, in the works for years, compares how the NWT treats mines – and how much mines cost to operate – with 21 other Canadian and international jurisdictions, ranging from Alberta and Alaska to Mexico and Sweden.

Overall, the territory’s tax and royalty regime is one of the more permissive. In scenarios studied by PricewaterhouseCoopers, the territory is consistently among the eight or so areas with a lower tax demand on companies – or, at worst, the NWT is slightly friendlier-than-average to business.

The problem for businesses, and for the territory in attracting new mines, is that running a mine in the Northwest Territories is simply more expensive than anywhere else, regardless of the tax situation.

Diamond mining is still particularly attractive because it brings in enough money to outweigh those high operating costs, the report concluded – even if diamond mines elsewhere might be more profitable.

Mining for other metals, though, means lower prices.

“These mines would not be built unless deposits are of high quality and/or
prices are expected to be relatively high,” the report stated.

“Our results do not mean that no mines will be built in the Northwest Territories under any circumstances. Rather, they highlight the fact that cost competitiveness is a major challenge in the Northwest Territories.

“Therefore, only relatively high-grade deposits are likely to be developed under the status quo.”

Ultimately, PricewaterhouseCoopers wrote, “lowering taxes is unlikely to be effective for the Northwest Territories.”

Instead, the report argued, the territory “should consider developing energy and transportation infrastructure that would lower costs for mining companies, as well as encouraging the development and use of technologies that can overcome challenges of operating in northern Canada.”

O’Reilly’s response

That last line will be music to the ears of the territorial government, which has founded much of its current mandate on the principle of costly infrastructure projects designed to do exactly what the report suggests: bring cheaper energy to the mining zone northeast of Yellowknife, and build a better road connecting it to the south.

Together, the road and the cheaper, greener power are set to cost at least $2 billion.

O’Reilly, long an opponent of what he sees as the territory’s unjustified over-reliance on infrastructure spending, fundamentally disagrees with that trajectory.

In this instance, he said the report – the first of its kind conducted in the territory for more than a decade, at a cost of $300,000 – had gone ahead without consultation on its design from regular MLAs.

“We need analysis of the real and actual revenues from mining to our government to ensure we achieve a fair balance between competitiveness and fair return,” O’Reilly wrote in his news release.

“The study does not consider the numerous other issues related to competitiveness including political stability and regulatory certainty. There was no attempt to compare the relative effectiveness of revenue capture across a variety of regimes or approaches. Analysis and comparison of revenue leakage were also not considered.

“While I support having this theoretical review of some aspects of competitiveness, it should not serve as the foundation for our review of the fiscal regime for mining. It is an important piece but should not limit in any way the important work that remains to ensure we get fair value.”

Lastly, said O’Reilly, a review of mining taxation and royalties should not be left in the hands of “a department charged with promoting mining.”

That he said, was “not the way to ensure a thorough and balanced review.”

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