Chamber of Mines recent editorial - Only so much to give
19 February 2018
Only so much to give
Guest editorial by Gary Vivian, President NWT & Nunavut Chamber of Mines
You can only milk a mine so much ...
As any good farmer knows, a cow produces only so much milk a day. And it requires good feed and attention to ensure it produces that milk. Mistreat it, milk it too hard, and milk supply falters.
Similarly, you can only milk the mining industry for so much, immaterial of what the political critics say.
Let me dig a little deeper on the subject.
First, why do we have a mining industry here? It’s because government does not have the capability, or the risk tolerance to explore, find, and then generate jobs, business, and tax revenues from rocks. It’s not a cheap or easy business. Only 1 in 1,000 projects becomes a mine, and if you find one, constructing it can cost hundreds of millions to billions of dollars. Even if built, market prices or geotechnical issues outside of your control can change and destroy your mining business.
That is why government invites industry – like an expert contractor – to do what it cannot do, squeeze benefits from rock. And as the mining turns rock into value, governments collect a pile of taxes (corporate, income, payroll, property, fuel, etc.) on their work. It collects these taxes even if a mine isn’t profitable. And when it is, government levies another tax on the profits, called royalties. The more profitable the mine, the higher the royalties, and vice versa. What does this all look like?
A revealing study was done by the late northern economist Roy Ellis in his report: The Diavik Diamonds Project: The Distribution of the Project Resource Income (on our website). Taking all taxes into account, governments were projected to receive 38% of the value of the diamonds that Diavik produced. Operating costs would chew up another 24%, capital cost recovery 22% and the remaining 16% would be company profits.
Mining is a no lose situation from government’s perspective as they collect many taxes on a mine’s exploration, construction, operations and capital cost expenditures, whether or not the mine is profitable. (Even when a mine builds new infrastructure to help their profitability, government increases its property taxes, despite the mine having to remove it at closure.) Governments then, not industry, are the major beneficiary of resource development.
The GNWT’s consultant was correct when he reported that: “The high cost of building winter roads every year to existing mines shrinks royalty and corporate income tax payments." So do many other costs. We northerners understand this – high costs lower what we have left over from our paycheque. Mines are no different and likely worse off, because they are price takers and cannot pass increased costs onto their customers. High northern costs leaves them less profitable, and that reduces royalties to all governments. So when governments force new costs onto industry, like a new Yellowknife airport tax, it reduces profitability and thus royalties, even to Indigenous governments.
So, there are some lessons here: help mines be more profitable with infrastructure and less tax burden, and royalties will go up; and open more mines and all taxes will increase.
It’s very simplistic and irresponsible to shoot from the hip and call for more royalties as it just puts our industry under risk. As I’ve said before, you can only milk a cow so hard before she falters.
Winston Churchill summed it up best when he said: "for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."