Lee Hodgkinson
National Industry Leader, Mining - KPMG Canada
Part of the Spotlight on Mining

Supporting and Maintaining Canada’s Global Mining Leadership Position

Takeaways

  1. Canadian mining companies’ social license to operate should be considered a key differentiator enabling Canada to stay in the global mining game.
  2. The Flow-through shares (FTSs) legislation is an essential and strategic value proposition to incentivize mining exploration activity in our country. This is a step in the right direction to ensure mining commitments in Canada.
  3. Mining companies are increasingly aware of the economic benefits digitization can bring to their sector, but remain wary of the societal impacts it could make in local mining communities.

Action

Our governments and universities need to increase their role in supporting our mining sector to maintain its world-leading position. This means collaboratively creating clusters of expertise to help digital transformations and incentivizing Canadian mining companies to invest in our minerals, as well as raising funds to operate abroad.


You were the Global Director of KPMG’s Mining Group have been to over 40 mines on 6 continents. How would you characterize Canada’s position in the global mining industry?

Canadian mining companies have a strong reputation in operating responsibly around the world. Our mining sector ranks highly on policy and transparency, as well as adhering to the rule of law, no matter the location of the deposits, offices or exploration activity. The 2018 Fraser Institute Annual Survey of Mining Companies rated 83 jurisdictions around the world based on their geologic attractiveness for minerals and metals, and the extent to which government policies encourage or deter exploration and investment. Two of our provinces made the top five, with Saskatchewan in 3rdand Quebec in 4thrank. People have confidence in Canadian mining operations and trust that their property ownership rights will be upheld.

“With the TSX, Canada and our mining companies are global leaders in mining; it is now a question of supporting and maintaining our position.”

Mining is a capital-intensive industry and having ready access to capital is absolutely key. For this reason, Canadian mining companies’ easy access to the Toronto Stock Exchange (TSX) has set our industry apart globally as it’s one of the leading exchanges in the world in regard to raising money for mining companies – approximately 50% of the global mining equity was raised in Canada alone over the last 10 years. With the TSX, Canada and our mining companies are global leaders in mining; it is now a question of supporting and maintaining our position.


How would you rate the effectiveness of Canada’s current regulatory environment? Does it position Canadian mining companies as responsible producers and translate into international opportunities for our sector?

It does create an opportunity. Somebody recently told me that Mining companies can either do complex projects in safe jurisdictions or easy projects in complex jurisdictions. Canada falls into the safe jurisdiction and most of the projects would be complex.

“You can’t pay for a social license; you gain it through your behaviour and the moral right to operate, earned by years and years of safe operation; engagement with communities; and treating all of your stakeholders in an equitable manner.”

You can’t pay for a social license; you gain it through your behaviour and the moral right to operate, earned by years of safe operation; engagement with communities; and treating all of your stakeholders in an equitable manner. Those stakeholders are your employees, your local communities, your suppliers, the governments that manage the regions in which you are and the jurisdictions in which you operate. Just one bad step, and not necessarily even by your individual company but possibly by a completely unrelated operation, can ruin that reputation.

So, when the Mining Association of Canada (MAC) developed the Towards Sustainable Mining (TSM) program, it was a best-of-class initiative and enforced our companies’ social license to operate globally.

“As Canadian companies we need to play to our strengths and use Canada’s world-class regulatory framework as a key differentiator.”

The global mining industry is very focused on responsible mining and appropriate engagement with communities. With some of the legacy mining issues that happened many years ago, the industry knows it is in its best interest and the right thing to do to be environmentally responsible. So, as Canadian companies we need to play to our strengths and use Canada’s world-class regulatory framework as a key differentiator.


KPMG has identified several risk factors that may be leading to mining companies in Canada focusing on preserving, rather than growing, their businesses. Which of these do you think are most significant?

Mining companies have gotten their heads around factors that they can control such as operating costs, capital costs and capital allocation. However, some challenges will remain in the mining landscape that are driven by factors outside of a company’s control or out of the government’s reach, such as being price takers of the daily commodity price.

It’s also very difficult to control resource nationalism, which has many faces. It’s really where a country, a jurisdiction, a state or a province, is trying to protect their share of the wealth created by the resources, which is often done by rewriting the laws, the tax code or investment agreements after money has already been advanced. An extreme example would be when a government comes in and expropriates properties and takes back the resources at stake, as we saw happen in Venezuela in the early 2000s, and in Chile in the 1970s. It can also be in the form of significant tax increases or super profits, which occurred more recently in certain African jurisdictions. Tanzania was a classic example where the government challenged a goldmine there and faulted it of not paying its fair share of taxes, which resulted in billions of dollars in fines.

Resource nationalism could be subtler, like on a province-to-province basis, and may focus on keeping more of the downstream benefits in a region. One example is Voisey’s Bay, which is in Newfoundland and Labrador. The deposit was acquired by Inco and later acquired by Vale, from Brazil. In order to be able to get the permit to develop the mine, commitments had to be made to the government of Newfoundland and Labrador, to build a processing facility in the province in order to keep more of the economic benefits local, as opposed to shipping the product to Ontario where Inco had existing operations.

Whether these examples are appropriate or inappropriate, resource nationalism is certainly a risk that companies have to consider. Inco likely bought the mining project with the objective of leveraging their facilities in Ontario. It’s clear that the conditions for acquiring the permit changed their operational capacity and return on investment.


What should Canada focus on to improve our competitiveness in terms of attracting foreign direct investment to our mining industry?

Attracting foreign direct investment implies that the focus is to incentivize countries to invest in Canada to develop resources. In that respect, Canada competes with all sorts of resource-rich countries throughout Latin America and Africa, or Australia and Russia. A lot of the easy resource exploitation projects have been found and developed, and now exploration must go to remote locations to expand. This is a challenge for the sector. Projects are getting harder to find with significant costs attached.

“Canada has the Flow-through shares legislation, which has been tremendously successful and has been the envy of many countries.”

Canada has the Flow-through shares (FTSs) legislation, which has been tremendously successful and has been the envy of many countries, including Australia and South Africa. Certain corporations in the mining sector may issue FTSs to help finance their project development activities, encouraging exploration at the junior end of the spectrum. We have hundreds of small exploration companies that will go out hunting for projects, with the commitment to spend that money within Canada.

So, I would argue that the question should be: how do we encourage Canadian mining companies to direct the money they raise in Canada towards developing Canadian mining assets, as opposed to attracting foreign direct investment?  There is significant mineral wealth in the Territories and the northern parts of British Columbia, Saskatchewan, Manitoba, Ontario and Quebec. If the adequate infrastructure is deployed, policy issues resolved, Indigenous communities are consulted, and Canada succeeds in building ports and facilities that could be shared by multiple companies, it would advance the development of the mining industry in the North and make Canada economically attractive for global stakeholders.

“The question should be: how do we encourage Canadian mining companies to direct the money they raise in Canada towards developing Canadian mining assets, as opposed to attracting foreign direct investment?”

In terms of competitiveness on the ground, there are some large state-owned enterprises that Canadian companies struggle to compete with. When you see Chinese companies going to Africa, receiving high levels of support from the Chinese Government to build roads and infrastructure, developing the new Silk Road and the Belt and Road Initiative, that is a different scale entirely, and it is difficult to compete with that.


At a time when there is so much technology being leveraged, would you say we are doing enough to promote Canadian innovation in the mining sector?

I don’t think so. I recently attended the world’s leading mining conference – the Bank of Montreal’s Global Metals & Mining Conference in Florida – where a few of the largest companies in the world spoke on stage about how they were focusing on innovation and technology, and looking to leverage that to improve their operations. Those companies have significant balance sheets. For example, BHP, the world’s largest mining company, has a market capitalization of US$200 billion. The largest Canadian companies might be C$40 billion and they cannot differentiate themselves by product since they are producing a commodity, so it is very difficult for mining companies to distinguish themselves and it is very risky for them to invest in unknown technology because they cannot necessarily afford to fail.

Technological progress in mining also poses major changes in traditional economic benefits. Let’s look at the hypothesis that the future of mining in 20 years’ time will have no workers underground and no workers above 3,000 meters to increase safety. The individual company can operate all their equipment from remote control centers thousands of miles away. It sounds really impressive, but that changes the equation in terms of the economic benefit a mining company can bring into the jurisdiction it operates. Suddenly, instead of having a thousand jobs created locally and creating economic development and wealth in the community, we’re now looking at 40 jobs based out of offices in Toronto or elsewhere. Mining companies are wary of that change of equation and understand that as they embrace technology and digitization, they need to also remain a stable economic contributor to the local communities they operate in. They fully understand that if they are not going to provide that prosperity directly by employment then they have to find a way of doing it indirectly.

“Mining companies […] understand that as they embrace technology and digitization, they need to also remain a stable economic contributor to the local communities they operate in.”

To fully innovate in the sector, there will need to be a collaborative effort by people in the industry, academia and especially governments. It does not make economic sense for an individual mining company to invest in innovation and technology alone. But if there is a pool of resources shared among companies, suppliers and educational institutions, it would create a cluster of expertise. Universities should also play a significant role in how they teach and encourage mining engineering students and computer science students, as well as manufacturers and supply chain workers. The Canadian government has many initiatives, and if it can set specific programs, rewards, incentives and training specifically related to innovation in mining, it will ensure the digital transformation of all Canadian mining companies.

In this respect, I would stress the point to our Prime Minister that mining is one of the few industries where Canada can legitimately say we have a world-leading industry and we do punch well above our weight. It would be a terrible shame if in 10 years’ time we look back and say, “Remember when Canada was the leading mining country in the world?” So, we have to support the industry and support the change that is occurring in the industry, and ensure that we maintain that world-leading position.


Part of the Future of Mining Series presented by: