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Effect of tax laws on mineral exploration in Canada
Effect of tax laws on mineral exploration in Canada
John H. DeYoung,
Changes federal
since
1972
eliminated
many
incentives
offered
industry.
These
opportunity tax
of
a
trends
exploration
in
of
mineral
that
by
in
mineral provinces and
results
would
with
producers
higher,
more
resulting
in
political
favourable policies.
regions
are
The author
returns, exploration with
more
and less changeable Future
influenced
of
supplies from
effort,
tax
of mineral a
dependent
political
on
which
current
is in turn
by the region’s
tax laws.
is with
US
Geological
Virginia,
22092,
Reston,
the
USA.
Publication of this paper is authorised by the Director of the US Geological Survey. The author is grateful to the many representatives of industry and government who assisted in the collection of information for this study, to E.D. Attanasi and D.A. Brobst of the US Geological Survey for their critical review of the manuscript, and to US Senator Ted Stevens of Alaska for his support of this studv.
and Provincial ’ Federal Towards a Mineral Policy Ottawa, Information Canada,
96
Understanding the effect of tax laws on mineral resource development is of considerable importance to government policymakers. These policymakers work from the perspectives of their employing agencies, which have different assigned goals. For instance, one agency may be responsible for encouraging orderly development of mineral resources in order to satisfy national needs; another may administer tax legislation to provide funding for government operations and programmes. These agencies may find that the interaction of taxation laws and plans for mineral resource development precludes attainment of their separate goals. Recent changes in federal and provincial taxation laws in Canada provide an opportunity to observe the effects of tax law changes in a country that has an active mining industry.
sought
stable
materials
exploration
analysis. have
shifts
by firm
be expected
microeconomic
Mineral
Survey,
an
effect
regions,
these
behaviour
region
provide
the
various
adjoining
comparing
raw
tax
mining
development
resource
from
have
prior
the
country’s
comparing with
the
to
changes
on
Canadian
tax laws
to study
laws
into
in
and provincial
Jr
Ministers, for Canada, 1974, p 26.
Changes in Canadian tax laws Changes to taxation laws affecting mining companies have changed the way investors view mineral exploration in Canada. Unfavourable changes in the perception of investment viability in the mineral sector are related to two aspects of taxation legislation-the loss in corporate revenues as a result of increases in taxes, and the added uncertainty associated with future planning when changes in tax laws have been many and frequent. The importance of minerals in the Canadian economy is shown by the fact that the mineral industry (excluding oil and gas) accounted for more than 25% of Canada’s merchandise exports and for 8.8% of capital expenditure in Canada in 1973.’ Minerals attained this position in Canada’s economy as a result not only of the country’s resource endowment, but also of government assistance rendered to individuals or groups that explore for, prospect for, or develop minerals. Programmes that stimulate development of transportation and power facilities in underdeveloped regions, that provide direct financial aid for mineral exploration, and that involve government participation in mineral exploration and development have been administered by Canadian Government agencies at the federal and provincial level. Although the aid given to the mineral industry by governments in Canada through regional development and exploration assistance programmes has encouraged new investment in Canadian mineral resource development, certain tax law provisions applicable to the Canadian resource industries presented a great stimulus to mining
RESOURCES
POLICY
June
1977
Effect ‘Included among the initial changes made by the Federal Government were the removal of the three-Year tax exemption period for new mines and the of an substitution earned depletion allowance based on eligible exploration and capital expenditure in place of the former automatic depletion allowance. Provincial governments in Canada (which own the minerals and the returns from them within their provincial boundaries under the provisions of the 1867 British North America Act) moved in 1974 to increase taxes paid by mining companies through provincial corporate income taxes and provincial mining duties. As provincial mining duties and royalties were at that time deductible in calculating federal taxable income, provincial tax increases reduced the federal tax base, and the Federal Government was forced to deductibility remove provisions for provincial mining taxes. These changes, coupled with depressed metal market conditions, produced a greater tax burden on mining companies than had been foreseen by either federal or provincial law makers. Northwest Territories and Yukon Territory are entirely under federal jurisdiction, so that the removal of the deductibility provisions did not place the companies mining there in a provincial-federal dispute over taxation powers. In British Columbia, companies producing minerals from Crown lands were subject to a two-tier royalty system in addition to federal income tax, corporate provincial income tax, and provincial mining income tax. The Mineral Royalties Act was enacted in October 1974 and was effective retroactively for that year. The Act called for a basic 5% royalty and an additional royalty of 50% on the excess of gross value (gross revenue minus smelting and refining costs) over 120% of basic value (calculated by means of a per unit basic value established by the British Columbia Government). Further descriptions of the in changes Canadian federal and provincial mineral tax laws and of the philosophy of mineral taxation are contained in The Winds of Change - Tax Increases for Mining, Price Waterhouse and Co, Toronto, 1974; J.H. DeYoung, Jr, ‘Recent changes in Canadian tax laws affecting the mineral industries’, Chapter B in Comparative Study of CanadianUnited States Resource Programs, US Geological Survey, Reston, Virginia, printed for use of the Committee on Appropriations, US Senate, 1975; R.M. Burns, Conflict and its Resolution in the Administration of Natural Resoyces in Canada, Centre for Resource Studies, Queen’s University, Kingston, Ontario, 1976; G.R. Hjorliefson, ‘A national minerals policy’, Resources Policy, Vol 2, No 1, March, 1976, pp 35-45. ‘G. Anders. W.P. Gramm, and S.C. Maurice, The Impact of Taxation and continuedonp
RESOURCES
POLICY
98
June 1977
oftax laws on mineralexploration
in Canada
companies. Laws allowing the immediate deduction of exploration and development expenditure from taxable income and for tax exemption for new mines for a three-year period offered mining companies an opportunity to recover rapidly their preproduction costs and investment and thus greatly enhanced the desirability of projects in Canada, as measured by discounted cash-flow analysis. Another factor which assisted Canadian mining companies in raising equity capital was that, before 1972, capital gains were not taxable. In 1972 and following years, sweeping tax reforms made by federal and provincial governments in Canada produced unexpected effects on the mining industry because of interactions between these reforms. The changes and amendments to tax reform measures during the period 1972-75 were a reflection of the struggle between federal and provincial authorities to collect what was interpreted as their share of tax revenue from the natural resource sector.2 The tax environment presented by a political jurisdiction is of particular importance because companies exploring for minerals are not constrained by provincial, state, or national boundaries. Canadian companies have exploration programmes in the USA, and US companies explore in Canada.
Predicting the effect of taxes on mining The effect of taxation on mineral resource development can be predicted by using classical economic theory or by comparing profitability measures such as rates of return for assumed corporate revenues and costs under different tax systems. In 1975, the Ontario Ministry of Natural Resources published a study using economic theory and empirical analysis to evaluate the effects of taxation and environmental controls on the mining industry of that province.3 A section of that study examines the economics of taxation as it affects the mining company, the mining industry, and tax revenues collected by governments. The theoretical analysis proceeds from a static equilibrium, where levels of company outputs and labour inputs are not affected by changes in taxation, to a longterm case in which marginal companies will leave the industry if tax payments preclude the recovery of fixed costs. Increased taxes may be passed on to consumers if the companies being taxed can significantly influence the price of their product. The addition of uncertainty in the analysis more closely approximates the situation in which companies make investment decisions, ie the expected value and variability of future profits are used as decision criteria, and the effects of present or anticipated tax laws, as perceived by the decisionmaker, guide investment. The effect of changes in tax rates on government revenues can only be determined if the relationships between the tax base and tax laws are understood, for ‘the size of next year’s resource pie is in large part determined by the way this year’s is divided’.4*5 In spite of the problems inherent in comparing effective tax rates for different political regions and for different periods, recent analyses indicate that new Canadian tax laws have directed a larger part of revenue from natural resource production to the federal and provincial governments than did the pre-1972 statutes.6 Whether or not these changes might affect the industry in terms of changes in
97
Eflect
of tax laws on mineral
continuedfromp
exploration
97
Environmental Controls on the Ontario Mining Industry, Mineral Policv Background Paper 1, Toronto, Ontario Mineral Resources Branch, 1975. 4 G. Anders et al, op tit, Reference 3, p 13. “The effective tax rate for a company or industry has been used by some analysts of that as a comparative measure company’s or industry’s tax burden. This measure is of limited usefulness for comparing the mining industry with other industries, as before-tax profitability and the risk associated with investment may not be the same as in the mining industry. Although the effective tax rate shows the percentage of profits paid in taxes, it does not account for how the effective tax rate might change because of changes in gross revenues, costs, and deductible assets. Even for companies in the same industry, this would depend on particular tax laws, such as whether the actual taxes paid were based on net or gross revenues. Changes in tax rates applicable to a net revenue base influence decisions on future investments by altering the profitability of projects as viewed in relation to alternative projects where other tax laws are in effect. Taxes based on gross revenues may prevent a company from recovering its costs and thus cause it to leave the industry (or region). 6 The Winds of Change ~ Tax Increases for Mining, op cit. Reference 2, pp 38-42; H. Helbig, J.D. Mason, R.H. Sclater, and H.J. Wiggett. Tax Legislation Affecting the Canadian Mining Industry, Wood Gundy, Toronto,1 974, pp 24-26. ‘Examples of these studies are C.E. Michener, ‘Political versus geological climate in global exploration’, Canadian Mining Journal, Vol 90. No 4, 1969 pp 124-l 26; P.G. Donald, Investment Nonferrous Metals Decision in Exploration in Mexico: An Economic of Discovery Probabilities, Analysis Expected Financial Returns, and Tax Policy, Pennsylvania State University, University Park, unpublished PhD thesis, 1974, pp 34-42; J.A. Hansuld, ‘Why in Canada?*, Canadian Mining Journal, Vol 96, No 4, 1975, pp 22-26; and J.F. Allan, In Support of Mineral Exploration in Canada, Denver, Colorado, AIME Fall Meeting Preprint 76-l-351, 1976. *As the relative importance of taxation is determined subjectively in these studies, they are of limited use in trying to quantify the effects of tax law changes on mineral industry investment. However, these ranking methods serve to illustrate the effects of resource endowment and mineral laws on resource tax development. ‘Measures of activity in the mining industry include value or quantity of mineral production and grade of ore produced, but, because investment by mining companies in production capacity continued
98
on p 99
in Canada
investment, employment, or output levels is not clear, without consideration of companies’ alternatives for future investments. Even the direction of change of government tax revenues associated with an increase in the tax rate is dependent upon relationships between tax rate, entry or exit of firms from the industry, and profitability relationships that have not been empirically determined. The relative importance of taxation as a consideration for decisionmakers involved in mineral exploration has been discussed in some studies that attempt to identify the separate political and natural conditions within a country that influence investment decisions.’ These conditions are then ranked or evaluated by using subjective ‘yardsticks’ (for instance, mineral production and exploration successes are used as a measure of geological favourability) and, in some cases, combined by using a subjective weighting procedure.a
Assessing
industry’s reaction to new tax laws
The effects of differences in resource policies under different political jurisdictions may be compared by observing the temporal changes in the value of production of mineral commodities, in new capita1 investment in the mineral industries, or in changes in industrial structure resulting from implementation of these policies. The effect of what the mining industry views as harsh changes to the tax system may be reflected in the movement of industrial investment to alternative areas where less favourable resource endowment and probability of discovery may be tolerable in view of a more favourable tax system.9
Financial indicators of mineral industry activity Evidence of reductions in mineral industry activity in Canada has been reported in newspapers and trade journals, which have often cited governments’ over-involvement in natural resource industries as the cause of this decline. Higher taxes, inflation, and labour problems have been given as some of the reasons that mining companies were diversifying through overseas investments and investments in nonmining activities.‘O The analysis of the effect of government policies on the mineral industry is constrained by the availability of data pertaining to corporate expenditure at various stages of mineral resource development in different political regions. Although corporate financial data for Canada are collected and published in aggregated form by a central agency, Statistics Canada, these data have limited usefulness, especially for the analysis of a specific mineral industry. Using the same corporate data from Statistics Canada to prove excessive profits or excessive taxes, Canadian government and industry officials debate the fairness of the distribution of the tax burden and the allocation of revenues.” Given the limitations of available data, financial information for the mining industry can be used to estimate trends in the amount of investment and exploration taking place in Canada’s mineral industries, the amount of taxes actually paid by the mineral sector, and the return that mining corporations and their shareholders are receiving.
RESOURCES
POLICY
June 1977
Effect of tax lawson mineral explorationin Canada
1000
800
Value In 1970 constant dollars (calculated by
8 6
Figure
mining
1.
Capital
(including
200
in in Canada,
investment
coal)
i 4 Investment in Canada
1964-75.
-I2
Source: Canadian Imperial Bank of The Canadian Mining Commerce, Commercial Letter No 2, Industry. Toronto. 1975.
0
ILlI-U
0 1965
1970
1975 (estimate 1
Investment
continuedfromp98 is made after effort has been expended in acquisition, the discovery, and development of a mineral deposit, changes in production may lag several years behind changes in the tax system. and Mining Journal, lo Engineering ‘Canadian mining capital goes foreign to escape tax, inflation, labor pressures’, Vol 178, No 7, 1975, p 48; J. Forget, ‘La profits mineres stabilite des des industrielles passe par la diversification’, Le Devoir (Montreal), 8 August 1975, p 13. ” 8.W. Mackenzie, ‘Economic characteristics of mineral investment in Canada’, in Report on 77th Annual General Meeting of the Canadian Institute of Mining and Metallurgy, Canadian Institute of Mining and Metallurgy Bulletin, Vol 68, No 759, 1975, p 24. Collection and publication of information by Statistics Canada increases the consistency and comparability of data over that available from provincial or state agencies, although differences in the procedures of the reporting bodies may still make comparisons difficult. ‘*The trend of increases in outside exploration expenditure in Canada is also true of most provinces, including Ontario and Quebec, and of the Territories. In British Columbia, however, expenditure for outside or general exploration has continued to decline since 1970.
RESOURCES
POLICY
and exploration activity. Figure 1 shows that current dollar capital investment in mining (including coal) in Canada has increased at an average annual rate of 9.8% over the period of 196475. Capital investment in mining in 197 1 totalled nearly $1 billion, the highest value ever attained. Although mining investment decreased after 197 1, increases over the period 1973-75 appear to be a recovery from the 1972-73 decline. However, viewed in terms of constant dollars, which remove the effects of inflation, investment in the Canadian mining industry has decreased steadily since 197 1, when federal tax reform legislation was introduced in the June budget. Investment in mining as a percentage of total business investment in Canada has also decreased from about 8.3% in 1971 to an estimated 3.9% for 1975, indicating investors’ attraction to non-mining opportunities. Expenditure by mining companies in each province for outside or general exploration, for on-property exploration and development, and for total capital and exploration categories is presented graphically in Figure 2. The 1970 peak in both outside exploration (exploration outside producing properties) and on-property exploration and development expenditure in Canada was followed in 197 1 by a record level of total capital and exploration expenditure in two of the major mineral-producing provinces, British Columbia and Ontario.lZ When the effects of inflation are accounted for by adjusting expenditure values to 1970 constant dollars in Figure 3, annual exploration expenditure has remained approximately at 1972 levels for three years - about $66 million for outside or general exploration and roughly $160 million for on-property exploration and development. Total real (constant-dollar value) capital and
June 1977
99
EfJ‘ect oftax laws on mineralexploration
in Canada
Canada ----
5
Ontario
----________
British Columbia Quebec
-
Yukon Territory and Northwest Territories-
a) Outside or general exploration expenditure
2.5
I
I
I
I
I
I
I
250
i 100 .’
In
z:g50
--
--
,-7
/---/‘\
/---
.._H.
‘\ -LTC________~y_* _A= Y---
.’
_c*c
#*cc
/’
‘\___---’
b) On - property exploration and development expenditure 2.5
I
I
I
I
I
I
I
_ 1000 al
0
:: 500 -g tft 250
Figure
2.
Expenditure
industry in Canada provinces, 1968-74.
by
mining
and in selected
Source: Canadian Minerals Yearbook; excludes petroleum, natural gas, smelting and refining industries.
100
.-G z 06 100 w. 50 -
25
+I/ _---
-
-,a
,.-, +--Y--
/1_
,/
,’
__--A’ ___---
-’
_______---___ Y-
/I’
‘\I--
--__
_,-
-\_0
* c) Total capital and exploration expenditure 1968
1970
RESOURCES
POLICY
June
1977
Effect of tax laws on mineralexploration in Canada
-----
Conada
---
-
Ontario
British Columbia
___-_---
Quebec
-f----t
Yukon and Northwest Territories
--_
$ 25 !z
//EL-’
--=y?.-,A__ 1,
.
0
0”
---w__ ‘1 ._--_
IO
-______----
ii
5 2.5
a) Outside or general explorotlon expenditure I
I
I
_-I-l
I
250
b) On- property development
2.5 3 E
exploration and expenditure
I
I
I
I
I
I
I
1000
::
0” 500 t “0 -z 250 w
Canada 1968-74.
3.
Constant-dollar value of industry expenditure in and in selected provinces,
:
RESOURCES
POLICY
1970
using
June
-I
-.
0.__3“ -1
__---
-\.___A-
50
25
exploration expenditure I 1968
1977
-----------.
L .i
I’
____-----
z Source: as Figure 2: value in constant dollars calculated by ^ LanaUlan wholesale pnce Index.
//
4
B 100 6
-:; /’
0
>d---_’
.-6 Figure mining
_I-
.h
_’
,.-L-4.
I
I 1970
I
I 1972
I
I 1974
101
Effect
of tax laws on mineralexploration
l3G. Bub. Draper Dobie Toronto, oral communication,
and Co 1975.
Ltd.
in Canada
exploration expenditure in the Canadian mining industry has decreased at an average annual rate of 19.8% since 197 1. In absolute terms, more than 50% of the decrease in this value from 197 1 to 1974 is accounted for by changes in mining industry activity in British Columbia. The consequences of this decline in exploration and capital investment in a region’s mineral industry relative to that of other regions are obvious when we recall that exploration is the first step in the lengthy process of transforming undiscovered resources into mineral production. Less exploration means that fewer discoveries will be available for later development. The decline in general exploration expenditure in British Columbia contrasts with increases in Quebec and the Atlantic provinces, where provincial tax policies may not have had as discouraging an effect on exploration managers’ decisions. Expenditure for general exploration also increased in Yukon Territory and Northwest Territories, where mining companies are not caught between federal-provincial debates over mining tax deductibility. Canadian mining companies spent an estimated 60% of their exploration effort abroad in 1975, compared with 20% in 197 1. A major part of this 1975 work was done in the USA, South Africa, and in other African countries. Much of the 40% that remained in Canada was directed to the far north (Northwest Territories and Yukon Territory) and very little to British Columbia.13 Relating the trends in exploration expenditure and capital investment by the mining industry in Canada or in individual provinces to trends in the USA or in individual states would be interesting; differences in expenditure might be explained by taxation legislation applicable in different regions. Such a comparison could not be made in this study because data for the USA comparable with that collected by Statistics Canada and published in Canadian Minerals Yearbook were not available. However, mineral exploration expenditure in Alaska, shown in Figure 4, increased markedly in 1975
a)
dollars
I
3
Wg
Current
2.5/-I
I
I
1968
I
I
1
1970
1972
I
I
I
1974
1976 (estimate)
Figure
4.
Expenditure
companies
for
mineral
(excluding
petroleum)
by
major
z 0 :: g =
exploration
fft
in
y
Alaska,
1968-76. 4 Source of data: US Bureau of Mines, Minerals Yearbook; R.A. Carter, ‘Alaska mining’s chilly future in the land of the midnight sun’, Mining Engineering, Vol 28, No 1 1, 1976, pp 20-29.
102
E W0 -
.~ b) 25
US
:
2 5
Constant
dollars
wholesale
calculated
price
with
Index
T--p
1
r 1968
I 1970
l_I_l~~l..__ 1972
L-1 1976
1974
(estimate)
RESOURCES
POLICY
June
1977
Efect Table
1. Summary
Columbia,
1970-74
(Canadian
Federal taxes BC provincial taxes and royalties BC municipal taxes Total taxes Source: Price Waterhouse and Co, The British Columbia Mining Industry in 1974, Vancouver, British Columbia, 1975, pp 32 and 67.
Return to shareholders Shareholders’ return on year-end investment
I4 The British Columbia Mining Industry in Price Waterhouse and Co, 1974, Vancouver, British Columbia, 1975, pp 91-94. l5 Mining companies have reported that their total tax payments as a percentage of net profits increased after tax law changes were enacted, as had been predicted by effective tax rate analyses of the proposed changes. Noranda Mines reported the following changes in taxes as a percentage of profits from 1973 to 1974: British Columbia - 42% to 67.7%; 57.2% to 84.3%: Saskatchewan Ontario - 42% to 55.1%: and Quebec ~ 42% to 54.2%. See J. Forget, op tit, Reference IO. Bethlehem Copper, based in British Columbia, reported that taxes for the first 6 months of 1975 represented 136% of mine earnings as compared with 70% for the first half of 1974. For the first half of 1975, its before-tax operating profit, $560 696, was less than the sum of British Columbia royalties ($514 762). other British Columbia taxes ($124437). and federal income taxes ($121 112). See Northern Miner, ‘Bethlehem tax 136% of mine earnings’, 14 August 1975, p 3. l6 Starting in 1973, all diamond drilling in Minerals Yearbook (US reported Bureau of Mines) was classified as exploratory. Diamond drilling footage in the USA, as reported by the USBM. is collected from mining companies who report drilling done with their own personnel and equipment and that done by diamond drilling contractors. Many commodities constitute the object of this exploratory drilling. Of the 1974 total of 570 000 m, 45% was for copper, 12% for zinc, a total of 29% for gold, iron ore, lead, and fluorspar. and the remaining 14% for other materials. Canadian Diamond Drilling The Association (CDDA) collects figures for drilling by contractors in diamond Canada. Amounts of drilling for each province and territory are separated into underground and surface categories by core size in the monthly CDDA statistical reports, which were initiated in 1970. The CDDA drilling figures do not include work done by mining companies with their own continuedonp 104
and increased somewhat reduced in Canada.
POLICY
June
lawson mineral explorationin Canada
of taxes paid and shareholders’ dollan 1970
RESOURCES
of tax
(%I
returns for operating
mines in British
x 106) 1971
1972
1973
1974
22.8
15.9
12.8
24.4
45.1
26.9 2.5 52.2
24.4 3.2 43.5
21.7 4.3 38.8
52.3 4.7 81.4
89.1 5.8 140.0
45.0
-13.0
17.0
241.0
131.0
6.4
-1.6
1.7
24.0
12.7
in 197 1 when exploration
expenditure
was
Government revenues and returns to corporations and shareholders. Tax payments to all levels of government by British Columbia mining companies increased at an annual average rate of 28% from 1970 to 1974.14 Taxes paid to the British Columbia Government alone in 1974 were greater than total taxes paid to all levels of government for the previous year. In Table 1, taxes paid to all levels of government in British Columbia are compared with the return to shareholders of operating mines in the province. The increase in taxes paid in 1974 contrasts with the reduction in shareholders’ return. If the magnitude of future returns to shareholders is, in fact, a function of the distribution or sharing of present ‘resource’ profits, a decrease in future returns may be expected, all other things being equal. Return to shareholders as a percentage of shareholders’ investment increased to 24% in 1973. This high return was accompanied by an increase in government tax revenues. In the following year, 1974, return on investment dropped to 12.7%, as further increases in tax payments and the end of ‘boom’ conditions in metal markets, especially copper, reduced industry’s profits from the record 1973 levels. I5
1977
Other indicators of mineral industry activity Exploration
diamond drilhg. Exploratory drilling is one of the physical measures of exploration for which data are available for the USA. The US Bureau of Mines (USBM) publishes data for footage of exploration and development drilling for each state in its Minerals Yearbook. Footage is also reported for selected commodities, but information is not published which distinguishes exploration and development drilling by both commodities and states.16 In Table 2, these data are compared with CDDA figures and with USBM data for the USA. The Canadian Minerals Yearbook data include only diamond drilling for metals and are not reported separately for each province.” Differences in the amount of drilling in a state or province as compared with another political division are in part the result of the geographic size of the regions being compared. It would be more desirable to measure such areas as:
103
Effect of tax laws on mineral exploration in Canada Table 2. Comparison a Exploratory diamond drilling for nonfuel minerals as reported by the US Bureau of Mines. b Exploration diamond drilling by mining companies and contractors for metal deposits as reported by Canadian Minerals Yearbook. Figures for 1973-75 are not available. c Surface diamond drilling by contractors (conventional and wireline, all core sizes) as reported by Canadian Diamond Drilling Association. Collection of this data series began with 1970 reports.
of exploration
diamond
drilling
in Canada
Year
USAa
Canadab
1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
777 804 777 684 746 620 664 494 570 770
1 1 1 1 1 1 1
823 054 836 025 215 207 000 000 000 000
Table 3. Average annual intensity 1970-75 (m/km* land area)
of diamond
and USA, 1966-75
(m)
CanadaC
208 240 216 301 150033 207 640 290 209 140 169 091 404
1 004 918 762 851 933 866
drilling in the USA,
1966-75,
722 735 319 579 474 163
and Canada,
Canadab
USAa Alaska Arizona
0.0026 0.4508
Newfoundland Labrador
California Colorado Idaho
0.0492 0.2924 0.1098
Nova Scotia and Prince Edward Island
0.2987
Illinois
0.1662
New Brunswick
0.3843
Maine Michiwn
0.0807 0.1436
Quebec
0.1637
Minnesota Missouri
0.2418 0.3497
Ontario
0.2651
Montana
0.0298
Manitoba
0.2078
Nevada New Mexico
0.0658 0.1446
Saskatchewan
0.1156
New York South Dakota
0.0811 0.1122
Alberta
0.0390
a Exploration diamond drilling for nonfuel minerals: USA includes all 50 states; annual data from US Bureau of Mines Minerals Yearbook.
Tennessee Utah Washington Wisconsin Wyoming
0.3755 0.2030 0.0635 0.0518 0.0699
British Columbia
0.1001
Northwest
0.0179
b Surface diamond drilling by contractors: annual data from Canadian Diamond Drilling Association.
USA
0.0744
Can ada
continued fromp 103 personnel and equipment. The amount of exploration diamond drilling on metal deposits in Canada done by contractors and by mining companies is published in Canadian Minerals Yearbook. ‘I Surface diamond drilling is used for comparison in Table 2 because probably a large part, if not all, of underground drilling is classified as development work. Data from Canadian Minerals Yearbook for diamond drilling carried out by contractors and for total diamond drilling were used’ to determine that 89% of exploration diamond drilling on metal deposits from 1970 to 1972 was done by contractors. During the period 1963-72, exploration the percentage of total continuedonp 105
0 0 0
Yukon
and 0.0592
Territories
0.0144
Territory
0.0965
settled lands or lands close to markets for mineral products; lands underlain by geologic formations favourable for deposits; lands open to mineral exploration and development.
ore
However, such areas are not as easily defined as is the land area of political divisions. Drilling intensity, measured in the total length of drill holes per unit land area, has been calculated for states in the USA and for provinces and territories in Canada. Occurrence models of mineral resources have embodied the concept of value per unit area or unit regional value; search or exploration activity per unit area is an extension of this method of interregional comparison.lE Table 3 gives a comparison of diamond drilling for the USA (1966-75) and Canada (1 970-75).r9 Drilling in Canada has declined at an average annual rate of 2.9%
RESOURCES
POLICY
June
1977
Effect continued fromp 104 diamond drilling for metals done by contractors averaged 87%. with a range of 76.95%. ‘8 The unit regional value concept has been used by several resource analysts; some examples are: T.B. Nolan, ‘The mining districts’, for new search Economic Geology, Vol 45, No 7. 1950, pp 601-608; J.C. Griffiths, The Unit Concept and its Value Regional Kansas, Special Application to Distribution Publication 38, Kansas State Geological Survey, Lawrence, Kansas, 1969; D.A. Singer, Multivariate Statistical Analysis of Unit Regional Value of Mineral Resources, PhD thesis, 1971, Pennsylvania State University, University Park; US Bureau of Mines, Final Report, Grant NoG0190107 (MRE-19). r9Table 3 shows that Arizona was the most intensely drilled state during the past ten years; an average of 0.45 m/km’. Other states that had drilling activity greater than 0.20 m/km’ during the period 1966-75 were: Tennessee 0.37 m/km*; Missouri ~ 0.35 m/km*; Colorado ~ 0.29 m/km2; Minnesota 0.24 m/km’; and Utah ~ 0.203 m/km*. Drilling in m/km* for the entire USA was decreasing until 1973, but that of some states (eg, Colorado, Michigan, Utah), decreased more rapidly than did the drilling national average, whereas intensity has been increasing in other states (eg, Illinois, Maine, Tennessee). The most intensely drilled provinces in Canada during the period 1970-75, on the basis of data in Table 3, are New Brunswick ~ 0.38 m/km’; Nova Scotia and Prince Edward Island ~ 0.30 m/km’; and Ontario ~ 0.27 m/kmz. Annual drilling intensity figures for these provinces are not as high as those for the leading US states, a fact partially due to the inclusion of only contractors’ drilling in the Canadian data - drilling that probably amounts to about 85% of total (mining company and contractor) drilling work. drilling figures some Average for provinces are similar to or even greater than those for neighbouring states across the international border, but average figures for drilling per unit area do not account for the fact that drilling activity is in many places concentrated in the southern part of the provinces. 20 An alternative approach to analysing the annual amount of drilling is to view seasonal changes in drilling from year to year. Changes in drilling activity during peak periods of exploration can then be distinguished from changes in annual which include totals, ambient or background levels of drilling done on a year-round basis. Peaks may occur at the end of the summer exploration season in some areas or in March or Ap:il for areas where drilling is done on the frozen surface before prospects are made less accessible by the spring thaw. The cyclical pattern of exploration is continued
RESOURCES
POLICY
on p 106
June
of tax laws on mineral
exploration
in Canada
during the period 1970-75 compared with an increase of 0.8% per year for the USA over the same period. Declining drilling activity in British Columbia, Manitoba, and Ontario has been accompanied by increased diamond drilling in Yukon Territory, Saskatchewan, New Brunswick, and Nova Scotia and Prince Edward Island. Ontario and Quebec accounted for more than half the total of diamond drilling from 1970-75 and maintained 49-56% of each year’s total during the period. Since 1972, the initial year of major Canadian taxation reforms, Yukon Territory, and Nova Scotia and Prince Edward Isla.nd, have more than doubled their percentage of diamond drilling, and New Brunswick has had a threefold increase, from 1.9% to 5.9% of the national total. Major reductions took place in Manitoba (13.7% to 6.9%) and in British Columbia (13.3% to 7 *2%).20
Claim staking. Though drilling information provides a basis for comparing exploration in the USA and Canada, drilling footage has some drawbacks as a measure of industry’s reactions to changes in the tax laws of a political region. Some drilling for coal is included in the totals for British Columbia, but coal is not subject to the Mineral Royalties Act. Of the myriad indicators published by government agencies in Ontario, or British Columbia (including Quebec, prospectors’ licenses, issues and renewals of development licenses, days, number of reports, and value of assessment work, individual and company miner’s certificates, and number of claims recorded, cancelled, and in good standing), the selection of one that is available in comparable form for a large number of states and provinces is difficult if not impossible. The number of claims staked is available for Canadian provinces, but claim-staking information is not collected by most state governments in the USA. In some states, information on claim staking is available only by contacting the offices of county recorders. Table 4 shows the number of claims staked in Canadian provinces and claims filed in Alaska during the years 1970-75. In British Columbia, where diamond drilling has declined in recent years, claim staking dropped from 78 901 in 1972 to 11 791 in 1975 (claim staking for 1975 in British Columbia is reported in units that are about the same size as pre-1975 claims), an average annual decline of 47% for claim staking in this province from 1972 to 1975. The 40% decline in claim staking in Ontario from 1970 to 1971 has been attributed to the lack of any outstanding discovery that might have precipitated a prospecting rush and to fears of increases in mineral industry taxes proposed by the Federal Government’s White Paper on taxation.21 Claim staking in Quebec during the years covered in Table 4 is well below the 1969 level of 58 757 claims. Claim staking has not been on the wane in all Canadian provinces and territories during the post-1972 period of tax reform. Some of the biggest gains in terms of number of claims have been registered in Nova Scotia and Prince Edward Island, Northwest Territories, and Yukon Territory. The largest percentage increase for 1972-75 was in Newfoundland and Labrador, where claims staked increased by 3 17% per year. Alaska is one state with an agency that collects data on mineral exploration. Each filing for new claims includes some federal (20 acre) or state (40 acre) claims and is thus not identical with the number of
1977
105
Effect of tax laws on mineral exploration continuedfromp
in Canada
105
in drilling data, as most evident exploration drilling in British Columbia, Northwest Territories, and Yukon Territory is done in the summer months. The introduction of the British Columbia Mineral Royalties Act in February 1974 preceded two summers of greatly in that province. In reduced drilling the registered Territories contract, increases in summer drilling in 1974 and 1975. 21 Ontario Department of Mines and Northern Affairs, Ontario Mineral Review 7971,Toronto. 1971, p 13. 22 Although statistics for exploration activity by states are not available in published form for the USA, reviews of mining and exploration activity are released by some state geological surveys. These reports indicate that some of British Columbia’s decrease in mineral exploration may be related to reported increases in exploration in the neighbouring of Washington, states Idaho, and Montana. Information on mineral exploration in the northwestern USA is contained in many of the papers presented by state geologists and others engaged in exploration, at the Annual Northwest Mining Association Convention in Spokane, Washington. The 1975 papers included W.M. Johns, and ‘Mineral staff, exploration and development in Montana ~ 1975’. and W.S. Moen, ‘Some developments in mineral exploration in Washington during 1975’. 23 British Columbia’s Premier appointed a new Minister of Mines to reassess the mining tax system, but this evaluation redirected by a was change of government in the December 1975 election. The new government has introduced a bill to repeal the royalty legislation in favour of profit-based taxes in order to. restore the province’s competitive position in the market for mining companies’ exploration dollars. See Canadian Institute of Mining and Metallurgy ‘New Bulletin. British Columbia mining legislation’, Vol 69, NO 772. 1976, pp 17-18; and M. Chender, ‘Copper exploration restrained by resource nationalism and low metals prices’, Engineering and Mining Journal, Vol 177. No 8, 1976, pp 77-80. The Ontario Government amended its Mining Tax Act in 1974 to provide new processing allowances and other incentives. Further concessions to the Ontario mining industry were made in December 1975, when the Mining Tax Act was amended to allow mining companies, in calculating taxable income, to deduct for 5 years the cost of mineral processing done outside Canada. See Wall Street Journal, ‘Ontario sets tax break for mineral processing in offshore operations’, 26 December 1975, p 16. 24 It is an interesting coincidence that 2 days after British Columbia’s December continuedonp
106
107
Table 4. Claims staked in Canada and Alaska, 1970 Newfoundland Labrador
1972
1973
1974
1975
and
Nova Scotia and Prince Edward island New Brunswick Quebeca Ontariob Manitoba Saskatchewan British Columbiad Northwest Territories Yukon Territorye Alaskaf
1971
1970-75
9 33 500 12800 25 474 40 693 800 I 800 69 546 14 600 8 400 7 469
42
35
490
1 443
600 000 746 410 800 100 778 700 872
25000 9 300 30 156 19 267 500 1 300 78 901 5 600 7 358
50000 9 100 26 949 18 170 650 600 35 659 15300 IO 368
62311 10 000 24 479 22 097 230 2 000 16 972 12 180 13 038
34 517 12600 26 204 I9 761 78;198’ 248;528’ 11 791 21 049 8 559
6 472
7 484
5 852
10 623
11 383
19 11 21 24 I 57 6 5
Source: D.J. Worth, ‘Pros and cons of mineral exploration in Canada a banker’s viewpoint’, Denver, Colorado, AIME Fall Meeting Preprint 76-l-349, 1976, except as otherwise noted.
a Registered claims reported in Mining Industry in Quebec, 1968-l 974 editions; 1975 figure from Quebec Department of Natural Resources. b As reported in Ontario Mineral Review and its predecessor volumes, 1970.74 editions,
c TWO types minimum 960
of claims blocks acre.
2 537
40
acres
and
d As reported in British Columbia Minister and Petroleum of Mines Resources Annual Report, 1973; 1974 figure from British Columbia and Yukon Chamber of Mines. e As reported by Fred Higgs, British Columbia and Yukon Chamber of Mines, Vancouver, oral communication, 1975. f As reported by Carole Stevenson, Geological and Geophysical Survey, Dept of Natural Resources, College, Alaska, oral communication, 1976.
claims staked. Nevertheless, these data do indicate the extent of exploration in Alaska, and they show a marked increase in 1974 and 1975, when drilling and claim staking figures declined in neighbouring British Columbia.22
Further changes in resource tax laws In response to economic and political pressures, the federal and provincial governments in Canada have altered some of their tax reforms by providing a federal resource allowance, some increased allowances for processing and fabricating assets, and incomeaveraging provisions.23 The changes in laws and political leaders in Canada seem to reflect a desire for economic results different from those created by the post1972 taxation reforms. The interaction of federal and provincial statutes had some effects on the mining industry that were not predicted by legislators, especially in British Columbia.24 In contrast to changes in resource tax laws in Canada and Australia, several state governments in the USA have made proposals to initiate taxes based on the gross value of mineral production. The Colorado Government proposed a 6% severance tax on gross income from mineral production. 25 Tennessee’s plan for a 4% tax on gross revenues before federal taxes would take an estimated 50% of zinc companies’ before-tax profit in that state.26 Proposals for the Alaska state legislature ‘would strongly increase the state’s severance tax on oil and gas and would institute an “excess value” tax aimed at limiting so-called windfall profits’.”
RESOURCES
POLICY
June
1977
Effect
of tax laws on mineral
exploration
in Canada
Conclusions
continued
fromp
106
1975 election. resource policy played a major part in a sweeping victory for a Australia. coalition in conservation Estimates were that exploration in Australia had been halved under the former Labour Party government. See Journal, ‘Australia’s Wall Street conservative coalition wins a sweeping victory in national election,’ 15 December 1975, p 8; Engineering and Mining Journal, ‘Debate on Connor resource policy reaching boiling point in Australia’ Vol 176. No 9,1975, I, 178. 25 Engineering and Mining Journal, ‘Mining industry views proposed Colorado severance tax as a disaster’, Vol 176, No 5. 1975, p 21; Engineering and Mining Journal, ‘Colorado’s proposed tax sparks interest in other states’ mining taxes’, Vol 176, No 6, 1975, pp 32 and 37. 26 f nqineerinq and Mining Journal, ‘Tennessee’s proposed minerals tax creates storm of opposition’, Vol 176, No 9. 1975, pp 41 and 44. 27 C.J. Elia. ‘Tightening squeeze facing Alaska oil profits pushes investors into even deeper quandary’, Wall Street Journal, 14 January 1976, p 33. 28 For example, the costs of exploration may be less in areas where the results of earlier investigations or geological topographic base mapping are available provincial, or federal from state, geological surveys.
RESOURCES
POLICY
June
Further investigation is needed to separate the effects of taxes and price changes, but the conclusions are that tax law variations, rather than differences in commodity price changes, have been responsible for shifts in mineral exploration from one political region to another. This view is substantiated by the fact that decreasing mineral exploration in certain parts of Canada has coincided with increased mineral exploration in areas of the USA and in other parts of Canada, and with diversification by mining companies into non-mining activities. It is difficult to analyse separately the effect of all the different considerations facing the managers of exploration budgets. These decision-makers are concerned with the possibility of discovering ore deposits by using available methods; with the costs of finding, mineral marketing developing, producing, and acquiring, commodities; and with expected revenues from product sales. Budgetallocation decisions by those engaged in exploration are influenced by many characteristics of a region including: geology, topography, climate, population density, political structure, applicable legislation on zoning, taxation, and environmental controls, and transportation facilities.‘* The decline in mineral exploration in Canada, particularly in British Columbia, which followed increases in taxes for mining companies has provided policymakers with several examples that should be considered in the development of future mineral policies. First, economic analysis has shown that if the goal is to increase tax revenues for government and to maintain output and employment at favourable levels, then industries that face prices set in competitive world markets are a poor choice for increased taxation. For instance, the copper industry in British Columbia sells its product (copper concentrate) on world markets, and higher taxes imposed on British Columbia copper producers by federal and provincial governments have caused a decrease in new investment in exploration and development relative to some other areas. Secondly, taxes on gross revenue that prevent a company from recovering the average fixed cost component of the value of the total product will cause that company to leave the industry. The British Columbia Mineral Royalties Act of 1974, which was based on gross revenue, not profitability, had the effect of taking over 100% of some companies’ profits as taxes. Finally, the serious nature of exploration cutbacks and unemployment in British Columbia’s mining industry has shown the need for coordinated informed decisions on mineral policy. Action concentrated on the problems of the moment - whether environmental degradation, soaring prices, monopoly profits, domestic shortages and embargo threats, or decline in domestic production because of overseas competition - can lead to unpredicted disastrous and when results imposed simultaneously. Multidisciplinary analysis of mineral resource policy problems should consider the effect of simultaneous imposition of policy actions before these actions are taken.
1977
107
John H. DeYoung,
Changes federal
since
1972
eliminated
many
incentives
offered
industry.
These
opportunity tax
of
a
trends
exploration
in
of
mineral
that
by
in
mineral provinces and
results
would
with
producers
higher,
more
resulting
in
political
favourable policies.
regions
are
The author
returns, exploration with
more
and less changeable Future
influenced
of
supplies from
effort,
tax
of mineral a
dependent
political
on
which
current
is in turn
by the region’s
tax laws.
is with
US
Geological
Virginia,
22092,
Reston,
the
USA.
Publication of this paper is authorised by the Director of the US Geological Survey. The author is grateful to the many representatives of industry and government who assisted in the collection of information for this study, to E.D. Attanasi and D.A. Brobst of the US Geological Survey for their critical review of the manuscript, and to US Senator Ted Stevens of Alaska for his support of this studv.
and Provincial ’ Federal Towards a Mineral Policy Ottawa, Information Canada,
96
Understanding the effect of tax laws on mineral resource development is of considerable importance to government policymakers. These policymakers work from the perspectives of their employing agencies, which have different assigned goals. For instance, one agency may be responsible for encouraging orderly development of mineral resources in order to satisfy national needs; another may administer tax legislation to provide funding for government operations and programmes. These agencies may find that the interaction of taxation laws and plans for mineral resource development precludes attainment of their separate goals. Recent changes in federal and provincial taxation laws in Canada provide an opportunity to observe the effects of tax law changes in a country that has an active mining industry.
sought
stable
materials
exploration
analysis. have
shifts
by firm
be expected
microeconomic
Mineral
Survey,
an
effect
regions,
these
behaviour
region
provide
the
various
adjoining
comparing
raw
tax
mining
development
resource
from
have
prior
the
country’s
comparing with
the
to
changes
on
Canadian
tax laws
to study
laws
into
in
and provincial
Jr
Ministers, for Canada, 1974, p 26.
Changes in Canadian tax laws Changes to taxation laws affecting mining companies have changed the way investors view mineral exploration in Canada. Unfavourable changes in the perception of investment viability in the mineral sector are related to two aspects of taxation legislation-the loss in corporate revenues as a result of increases in taxes, and the added uncertainty associated with future planning when changes in tax laws have been many and frequent. The importance of minerals in the Canadian economy is shown by the fact that the mineral industry (excluding oil and gas) accounted for more than 25% of Canada’s merchandise exports and for 8.8% of capital expenditure in Canada in 1973.’ Minerals attained this position in Canada’s economy as a result not only of the country’s resource endowment, but also of government assistance rendered to individuals or groups that explore for, prospect for, or develop minerals. Programmes that stimulate development of transportation and power facilities in underdeveloped regions, that provide direct financial aid for mineral exploration, and that involve government participation in mineral exploration and development have been administered by Canadian Government agencies at the federal and provincial level. Although the aid given to the mineral industry by governments in Canada through regional development and exploration assistance programmes has encouraged new investment in Canadian mineral resource development, certain tax law provisions applicable to the Canadian resource industries presented a great stimulus to mining
RESOURCES
POLICY
June
1977
Effect ‘Included among the initial changes made by the Federal Government were the removal of the three-Year tax exemption period for new mines and the of an substitution earned depletion allowance based on eligible exploration and capital expenditure in place of the former automatic depletion allowance. Provincial governments in Canada (which own the minerals and the returns from them within their provincial boundaries under the provisions of the 1867 British North America Act) moved in 1974 to increase taxes paid by mining companies through provincial corporate income taxes and provincial mining duties. As provincial mining duties and royalties were at that time deductible in calculating federal taxable income, provincial tax increases reduced the federal tax base, and the Federal Government was forced to deductibility remove provisions for provincial mining taxes. These changes, coupled with depressed metal market conditions, produced a greater tax burden on mining companies than had been foreseen by either federal or provincial law makers. Northwest Territories and Yukon Territory are entirely under federal jurisdiction, so that the removal of the deductibility provisions did not place the companies mining there in a provincial-federal dispute over taxation powers. In British Columbia, companies producing minerals from Crown lands were subject to a two-tier royalty system in addition to federal income tax, corporate provincial income tax, and provincial mining income tax. The Mineral Royalties Act was enacted in October 1974 and was effective retroactively for that year. The Act called for a basic 5% royalty and an additional royalty of 50% on the excess of gross value (gross revenue minus smelting and refining costs) over 120% of basic value (calculated by means of a per unit basic value established by the British Columbia Government). Further descriptions of the in changes Canadian federal and provincial mineral tax laws and of the philosophy of mineral taxation are contained in The Winds of Change - Tax Increases for Mining, Price Waterhouse and Co, Toronto, 1974; J.H. DeYoung, Jr, ‘Recent changes in Canadian tax laws affecting the mineral industries’, Chapter B in Comparative Study of CanadianUnited States Resource Programs, US Geological Survey, Reston, Virginia, printed for use of the Committee on Appropriations, US Senate, 1975; R.M. Burns, Conflict and its Resolution in the Administration of Natural Resoyces in Canada, Centre for Resource Studies, Queen’s University, Kingston, Ontario, 1976; G.R. Hjorliefson, ‘A national minerals policy’, Resources Policy, Vol 2, No 1, March, 1976, pp 35-45. ‘G. Anders. W.P. Gramm, and S.C. Maurice, The Impact of Taxation and continuedonp
RESOURCES
POLICY
98
June 1977
oftax laws on mineralexploration
in Canada
companies. Laws allowing the immediate deduction of exploration and development expenditure from taxable income and for tax exemption for new mines for a three-year period offered mining companies an opportunity to recover rapidly their preproduction costs and investment and thus greatly enhanced the desirability of projects in Canada, as measured by discounted cash-flow analysis. Another factor which assisted Canadian mining companies in raising equity capital was that, before 1972, capital gains were not taxable. In 1972 and following years, sweeping tax reforms made by federal and provincial governments in Canada produced unexpected effects on the mining industry because of interactions between these reforms. The changes and amendments to tax reform measures during the period 1972-75 were a reflection of the struggle between federal and provincial authorities to collect what was interpreted as their share of tax revenue from the natural resource sector.2 The tax environment presented by a political jurisdiction is of particular importance because companies exploring for minerals are not constrained by provincial, state, or national boundaries. Canadian companies have exploration programmes in the USA, and US companies explore in Canada.
Predicting the effect of taxes on mining The effect of taxation on mineral resource development can be predicted by using classical economic theory or by comparing profitability measures such as rates of return for assumed corporate revenues and costs under different tax systems. In 1975, the Ontario Ministry of Natural Resources published a study using economic theory and empirical analysis to evaluate the effects of taxation and environmental controls on the mining industry of that province.3 A section of that study examines the economics of taxation as it affects the mining company, the mining industry, and tax revenues collected by governments. The theoretical analysis proceeds from a static equilibrium, where levels of company outputs and labour inputs are not affected by changes in taxation, to a longterm case in which marginal companies will leave the industry if tax payments preclude the recovery of fixed costs. Increased taxes may be passed on to consumers if the companies being taxed can significantly influence the price of their product. The addition of uncertainty in the analysis more closely approximates the situation in which companies make investment decisions, ie the expected value and variability of future profits are used as decision criteria, and the effects of present or anticipated tax laws, as perceived by the decisionmaker, guide investment. The effect of changes in tax rates on government revenues can only be determined if the relationships between the tax base and tax laws are understood, for ‘the size of next year’s resource pie is in large part determined by the way this year’s is divided’.4*5 In spite of the problems inherent in comparing effective tax rates for different political regions and for different periods, recent analyses indicate that new Canadian tax laws have directed a larger part of revenue from natural resource production to the federal and provincial governments than did the pre-1972 statutes.6 Whether or not these changes might affect the industry in terms of changes in
97
Eflect
of tax laws on mineral
continuedfromp
exploration
97
Environmental Controls on the Ontario Mining Industry, Mineral Policv Background Paper 1, Toronto, Ontario Mineral Resources Branch, 1975. 4 G. Anders et al, op tit, Reference 3, p 13. “The effective tax rate for a company or industry has been used by some analysts of that as a comparative measure company’s or industry’s tax burden. This measure is of limited usefulness for comparing the mining industry with other industries, as before-tax profitability and the risk associated with investment may not be the same as in the mining industry. Although the effective tax rate shows the percentage of profits paid in taxes, it does not account for how the effective tax rate might change because of changes in gross revenues, costs, and deductible assets. Even for companies in the same industry, this would depend on particular tax laws, such as whether the actual taxes paid were based on net or gross revenues. Changes in tax rates applicable to a net revenue base influence decisions on future investments by altering the profitability of projects as viewed in relation to alternative projects where other tax laws are in effect. Taxes based on gross revenues may prevent a company from recovering its costs and thus cause it to leave the industry (or region). 6 The Winds of Change ~ Tax Increases for Mining, op cit. Reference 2, pp 38-42; H. Helbig, J.D. Mason, R.H. Sclater, and H.J. Wiggett. Tax Legislation Affecting the Canadian Mining Industry, Wood Gundy, Toronto,1 974, pp 24-26. ‘Examples of these studies are C.E. Michener, ‘Political versus geological climate in global exploration’, Canadian Mining Journal, Vol 90. No 4, 1969 pp 124-l 26; P.G. Donald, Investment Nonferrous Metals Decision in Exploration in Mexico: An Economic of Discovery Probabilities, Analysis Expected Financial Returns, and Tax Policy, Pennsylvania State University, University Park, unpublished PhD thesis, 1974, pp 34-42; J.A. Hansuld, ‘Why in Canada?*, Canadian Mining Journal, Vol 96, No 4, 1975, pp 22-26; and J.F. Allan, In Support of Mineral Exploration in Canada, Denver, Colorado, AIME Fall Meeting Preprint 76-l-351, 1976. *As the relative importance of taxation is determined subjectively in these studies, they are of limited use in trying to quantify the effects of tax law changes on mineral industry investment. However, these ranking methods serve to illustrate the effects of resource endowment and mineral laws on resource tax development. ‘Measures of activity in the mining industry include value or quantity of mineral production and grade of ore produced, but, because investment by mining companies in production capacity continued
98
on p 99
in Canada
investment, employment, or output levels is not clear, without consideration of companies’ alternatives for future investments. Even the direction of change of government tax revenues associated with an increase in the tax rate is dependent upon relationships between tax rate, entry or exit of firms from the industry, and profitability relationships that have not been empirically determined. The relative importance of taxation as a consideration for decisionmakers involved in mineral exploration has been discussed in some studies that attempt to identify the separate political and natural conditions within a country that influence investment decisions.’ These conditions are then ranked or evaluated by using subjective ‘yardsticks’ (for instance, mineral production and exploration successes are used as a measure of geological favourability) and, in some cases, combined by using a subjective weighting procedure.a
Assessing
industry’s reaction to new tax laws
The effects of differences in resource policies under different political jurisdictions may be compared by observing the temporal changes in the value of production of mineral commodities, in new capita1 investment in the mineral industries, or in changes in industrial structure resulting from implementation of these policies. The effect of what the mining industry views as harsh changes to the tax system may be reflected in the movement of industrial investment to alternative areas where less favourable resource endowment and probability of discovery may be tolerable in view of a more favourable tax system.9
Financial indicators of mineral industry activity Evidence of reductions in mineral industry activity in Canada has been reported in newspapers and trade journals, which have often cited governments’ over-involvement in natural resource industries as the cause of this decline. Higher taxes, inflation, and labour problems have been given as some of the reasons that mining companies were diversifying through overseas investments and investments in nonmining activities.‘O The analysis of the effect of government policies on the mineral industry is constrained by the availability of data pertaining to corporate expenditure at various stages of mineral resource development in different political regions. Although corporate financial data for Canada are collected and published in aggregated form by a central agency, Statistics Canada, these data have limited usefulness, especially for the analysis of a specific mineral industry. Using the same corporate data from Statistics Canada to prove excessive profits or excessive taxes, Canadian government and industry officials debate the fairness of the distribution of the tax burden and the allocation of revenues.” Given the limitations of available data, financial information for the mining industry can be used to estimate trends in the amount of investment and exploration taking place in Canada’s mineral industries, the amount of taxes actually paid by the mineral sector, and the return that mining corporations and their shareholders are receiving.
RESOURCES
POLICY
June 1977
Effect of tax lawson mineral explorationin Canada
1000
800
Value In 1970 constant dollars (calculated by
8 6
Figure
mining
1.
Capital
(including
200
in in Canada,
investment
coal)
i 4 Investment in Canada
1964-75.
-I2
Source: Canadian Imperial Bank of The Canadian Mining Commerce, Commercial Letter No 2, Industry. Toronto. 1975.
0
ILlI-U
0 1965
1970
1975 (estimate 1
Investment
continuedfromp98 is made after effort has been expended in acquisition, the discovery, and development of a mineral deposit, changes in production may lag several years behind changes in the tax system. and Mining Journal, lo Engineering ‘Canadian mining capital goes foreign to escape tax, inflation, labor pressures’, Vol 178, No 7, 1975, p 48; J. Forget, ‘La profits mineres stabilite des des industrielles passe par la diversification’, Le Devoir (Montreal), 8 August 1975, p 13. ” 8.W. Mackenzie, ‘Economic characteristics of mineral investment in Canada’, in Report on 77th Annual General Meeting of the Canadian Institute of Mining and Metallurgy, Canadian Institute of Mining and Metallurgy Bulletin, Vol 68, No 759, 1975, p 24. Collection and publication of information by Statistics Canada increases the consistency and comparability of data over that available from provincial or state agencies, although differences in the procedures of the reporting bodies may still make comparisons difficult. ‘*The trend of increases in outside exploration expenditure in Canada is also true of most provinces, including Ontario and Quebec, and of the Territories. In British Columbia, however, expenditure for outside or general exploration has continued to decline since 1970.
RESOURCES
POLICY
and exploration activity. Figure 1 shows that current dollar capital investment in mining (including coal) in Canada has increased at an average annual rate of 9.8% over the period of 196475. Capital investment in mining in 197 1 totalled nearly $1 billion, the highest value ever attained. Although mining investment decreased after 197 1, increases over the period 1973-75 appear to be a recovery from the 1972-73 decline. However, viewed in terms of constant dollars, which remove the effects of inflation, investment in the Canadian mining industry has decreased steadily since 197 1, when federal tax reform legislation was introduced in the June budget. Investment in mining as a percentage of total business investment in Canada has also decreased from about 8.3% in 1971 to an estimated 3.9% for 1975, indicating investors’ attraction to non-mining opportunities. Expenditure by mining companies in each province for outside or general exploration, for on-property exploration and development, and for total capital and exploration categories is presented graphically in Figure 2. The 1970 peak in both outside exploration (exploration outside producing properties) and on-property exploration and development expenditure in Canada was followed in 197 1 by a record level of total capital and exploration expenditure in two of the major mineral-producing provinces, British Columbia and Ontario.lZ When the effects of inflation are accounted for by adjusting expenditure values to 1970 constant dollars in Figure 3, annual exploration expenditure has remained approximately at 1972 levels for three years - about $66 million for outside or general exploration and roughly $160 million for on-property exploration and development. Total real (constant-dollar value) capital and
June 1977
99
EfJ‘ect oftax laws on mineralexploration
in Canada
Canada ----
5
Ontario
----________
British Columbia Quebec
-
Yukon Territory and Northwest Territories-
a) Outside or general exploration expenditure
2.5
I
I
I
I
I
I
I
250
i 100 .’
In
z:g50
--
--
,-7
/---/‘\
/---
.._H.
‘\ -LTC________~y_* _A= Y---
.’
_c*c
#*cc
/’
‘\___---’
b) On - property exploration and development expenditure 2.5
I
I
I
I
I
I
I
_ 1000 al
0
:: 500 -g tft 250
Figure
2.
Expenditure
industry in Canada provinces, 1968-74.
by
mining
and in selected
Source: Canadian Minerals Yearbook; excludes petroleum, natural gas, smelting and refining industries.
100
.-G z 06 100 w. 50 -
25
+I/ _---
-
-,a
,.-, +--Y--
/1_
,/
,’
__--A’ ___---
-’
_______---___ Y-
/I’
‘\I--
--__
_,-
-\_0
* c) Total capital and exploration expenditure 1968
1970
RESOURCES
POLICY
June
1977
Effect of tax laws on mineralexploration in Canada
-----
Conada
---
-
Ontario
British Columbia
___-_---
Quebec
-f----t
Yukon and Northwest Territories
--_
$ 25 !z
//EL-’
--=y?.-,A__ 1,
.
0
0”
---w__ ‘1 ._--_
IO
-______----
ii
5 2.5
a) Outside or general explorotlon expenditure I
I
I
_-I-l
I
250
b) On- property development
2.5 3 E
exploration and expenditure
I
I
I
I
I
I
I
1000
::
0” 500 t “0 -z 250 w
Canada 1968-74.
3.
Constant-dollar value of industry expenditure in and in selected provinces,
:
RESOURCES
POLICY
1970
using
June
-I
-.
0.__3“ -1
__---
-\.___A-
50
25
exploration expenditure I 1968
1977
-----------.
L .i
I’
____-----
z Source: as Figure 2: value in constant dollars calculated by ^ LanaUlan wholesale pnce Index.
//
4
B 100 6
-:; /’
0
>d---_’
.-6 Figure mining
_I-
.h
_’
,.-L-4.
I
I 1970
I
I 1972
I
I 1974
101
Effect
of tax laws on mineralexploration
l3G. Bub. Draper Dobie Toronto, oral communication,
and Co 1975.
Ltd.
in Canada
exploration expenditure in the Canadian mining industry has decreased at an average annual rate of 19.8% since 197 1. In absolute terms, more than 50% of the decrease in this value from 197 1 to 1974 is accounted for by changes in mining industry activity in British Columbia. The consequences of this decline in exploration and capital investment in a region’s mineral industry relative to that of other regions are obvious when we recall that exploration is the first step in the lengthy process of transforming undiscovered resources into mineral production. Less exploration means that fewer discoveries will be available for later development. The decline in general exploration expenditure in British Columbia contrasts with increases in Quebec and the Atlantic provinces, where provincial tax policies may not have had as discouraging an effect on exploration managers’ decisions. Expenditure for general exploration also increased in Yukon Territory and Northwest Territories, where mining companies are not caught between federal-provincial debates over mining tax deductibility. Canadian mining companies spent an estimated 60% of their exploration effort abroad in 1975, compared with 20% in 197 1. A major part of this 1975 work was done in the USA, South Africa, and in other African countries. Much of the 40% that remained in Canada was directed to the far north (Northwest Territories and Yukon Territory) and very little to British Columbia.13 Relating the trends in exploration expenditure and capital investment by the mining industry in Canada or in individual provinces to trends in the USA or in individual states would be interesting; differences in expenditure might be explained by taxation legislation applicable in different regions. Such a comparison could not be made in this study because data for the USA comparable with that collected by Statistics Canada and published in Canadian Minerals Yearbook were not available. However, mineral exploration expenditure in Alaska, shown in Figure 4, increased markedly in 1975
a)
dollars
I
3
Wg
Current
2.5/-I
I
I
1968
I
I
1
1970
1972
I
I
I
1974
1976 (estimate)
Figure
4.
Expenditure
companies
for
mineral
(excluding
petroleum)
by
major
z 0 :: g =
exploration
fft
in
y
Alaska,
1968-76. 4 Source of data: US Bureau of Mines, Minerals Yearbook; R.A. Carter, ‘Alaska mining’s chilly future in the land of the midnight sun’, Mining Engineering, Vol 28, No 1 1, 1976, pp 20-29.
102
E W0 -
.~ b) 25
US
:
2 5
Constant
dollars
wholesale
calculated
price
with
Index
T--p
1
r 1968
I 1970
l_I_l~~l..__ 1972
L-1 1976
1974
(estimate)
RESOURCES
POLICY
June
1977
Efect Table
1. Summary
Columbia,
1970-74
(Canadian
Federal taxes BC provincial taxes and royalties BC municipal taxes Total taxes Source: Price Waterhouse and Co, The British Columbia Mining Industry in 1974, Vancouver, British Columbia, 1975, pp 32 and 67.
Return to shareholders Shareholders’ return on year-end investment
I4 The British Columbia Mining Industry in Price Waterhouse and Co, 1974, Vancouver, British Columbia, 1975, pp 91-94. l5 Mining companies have reported that their total tax payments as a percentage of net profits increased after tax law changes were enacted, as had been predicted by effective tax rate analyses of the proposed changes. Noranda Mines reported the following changes in taxes as a percentage of profits from 1973 to 1974: British Columbia - 42% to 67.7%; 57.2% to 84.3%: Saskatchewan Ontario - 42% to 55.1%: and Quebec ~ 42% to 54.2%. See J. Forget, op tit, Reference IO. Bethlehem Copper, based in British Columbia, reported that taxes for the first 6 months of 1975 represented 136% of mine earnings as compared with 70% for the first half of 1974. For the first half of 1975, its before-tax operating profit, $560 696, was less than the sum of British Columbia royalties ($514 762). other British Columbia taxes ($124437). and federal income taxes ($121 112). See Northern Miner, ‘Bethlehem tax 136% of mine earnings’, 14 August 1975, p 3. l6 Starting in 1973, all diamond drilling in Minerals Yearbook (US reported Bureau of Mines) was classified as exploratory. Diamond drilling footage in the USA, as reported by the USBM. is collected from mining companies who report drilling done with their own personnel and equipment and that done by diamond drilling contractors. Many commodities constitute the object of this exploratory drilling. Of the 1974 total of 570 000 m, 45% was for copper, 12% for zinc, a total of 29% for gold, iron ore, lead, and fluorspar. and the remaining 14% for other materials. Canadian Diamond Drilling The Association (CDDA) collects figures for drilling by contractors in diamond Canada. Amounts of drilling for each province and territory are separated into underground and surface categories by core size in the monthly CDDA statistical reports, which were initiated in 1970. The CDDA drilling figures do not include work done by mining companies with their own continuedonp 104
and increased somewhat reduced in Canada.
POLICY
June
lawson mineral explorationin Canada
of taxes paid and shareholders’ dollan 1970
RESOURCES
of tax
(%I
returns for operating
mines in British
x 106) 1971
1972
1973
1974
22.8
15.9
12.8
24.4
45.1
26.9 2.5 52.2
24.4 3.2 43.5
21.7 4.3 38.8
52.3 4.7 81.4
89.1 5.8 140.0
45.0
-13.0
17.0
241.0
131.0
6.4
-1.6
1.7
24.0
12.7
in 197 1 when exploration
expenditure
was
Government revenues and returns to corporations and shareholders. Tax payments to all levels of government by British Columbia mining companies increased at an annual average rate of 28% from 1970 to 1974.14 Taxes paid to the British Columbia Government alone in 1974 were greater than total taxes paid to all levels of government for the previous year. In Table 1, taxes paid to all levels of government in British Columbia are compared with the return to shareholders of operating mines in the province. The increase in taxes paid in 1974 contrasts with the reduction in shareholders’ return. If the magnitude of future returns to shareholders is, in fact, a function of the distribution or sharing of present ‘resource’ profits, a decrease in future returns may be expected, all other things being equal. Return to shareholders as a percentage of shareholders’ investment increased to 24% in 1973. This high return was accompanied by an increase in government tax revenues. In the following year, 1974, return on investment dropped to 12.7%, as further increases in tax payments and the end of ‘boom’ conditions in metal markets, especially copper, reduced industry’s profits from the record 1973 levels. I5
1977
Other indicators of mineral industry activity Exploration
diamond drilhg. Exploratory drilling is one of the physical measures of exploration for which data are available for the USA. The US Bureau of Mines (USBM) publishes data for footage of exploration and development drilling for each state in its Minerals Yearbook. Footage is also reported for selected commodities, but information is not published which distinguishes exploration and development drilling by both commodities and states.16 In Table 2, these data are compared with CDDA figures and with USBM data for the USA. The Canadian Minerals Yearbook data include only diamond drilling for metals and are not reported separately for each province.” Differences in the amount of drilling in a state or province as compared with another political division are in part the result of the geographic size of the regions being compared. It would be more desirable to measure such areas as:
103
Effect of tax laws on mineral exploration in Canada Table 2. Comparison a Exploratory diamond drilling for nonfuel minerals as reported by the US Bureau of Mines. b Exploration diamond drilling by mining companies and contractors for metal deposits as reported by Canadian Minerals Yearbook. Figures for 1973-75 are not available. c Surface diamond drilling by contractors (conventional and wireline, all core sizes) as reported by Canadian Diamond Drilling Association. Collection of this data series began with 1970 reports.
of exploration
diamond
drilling
in Canada
Year
USAa
Canadab
1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
777 804 777 684 746 620 664 494 570 770
1 1 1 1 1 1 1
823 054 836 025 215 207 000 000 000 000
Table 3. Average annual intensity 1970-75 (m/km* land area)
of diamond
and USA, 1966-75
(m)
CanadaC
208 240 216 301 150033 207 640 290 209 140 169 091 404
1 004 918 762 851 933 866
drilling in the USA,
1966-75,
722 735 319 579 474 163
and Canada,
Canadab
USAa Alaska Arizona
0.0026 0.4508
Newfoundland Labrador
California Colorado Idaho
0.0492 0.2924 0.1098
Nova Scotia and Prince Edward Island
0.2987
Illinois
0.1662
New Brunswick
0.3843
Maine Michiwn
0.0807 0.1436
Quebec
0.1637
Minnesota Missouri
0.2418 0.3497
Ontario
0.2651
Montana
0.0298
Manitoba
0.2078
Nevada New Mexico
0.0658 0.1446
Saskatchewan
0.1156
New York South Dakota
0.0811 0.1122
Alberta
0.0390
a Exploration diamond drilling for nonfuel minerals: USA includes all 50 states; annual data from US Bureau of Mines Minerals Yearbook.
Tennessee Utah Washington Wisconsin Wyoming
0.3755 0.2030 0.0635 0.0518 0.0699
British Columbia
0.1001
Northwest
0.0179
b Surface diamond drilling by contractors: annual data from Canadian Diamond Drilling Association.
USA
0.0744
Can ada
continued fromp 103 personnel and equipment. The amount of exploration diamond drilling on metal deposits in Canada done by contractors and by mining companies is published in Canadian Minerals Yearbook. ‘I Surface diamond drilling is used for comparison in Table 2 because probably a large part, if not all, of underground drilling is classified as development work. Data from Canadian Minerals Yearbook for diamond drilling carried out by contractors and for total diamond drilling were used’ to determine that 89% of exploration diamond drilling on metal deposits from 1970 to 1972 was done by contractors. During the period 1963-72, exploration the percentage of total continuedonp 105
0 0 0
Yukon
and 0.0592
Territories
0.0144
Territory
0.0965
settled lands or lands close to markets for mineral products; lands underlain by geologic formations favourable for deposits; lands open to mineral exploration and development.
ore
However, such areas are not as easily defined as is the land area of political divisions. Drilling intensity, measured in the total length of drill holes per unit land area, has been calculated for states in the USA and for provinces and territories in Canada. Occurrence models of mineral resources have embodied the concept of value per unit area or unit regional value; search or exploration activity per unit area is an extension of this method of interregional comparison.lE Table 3 gives a comparison of diamond drilling for the USA (1966-75) and Canada (1 970-75).r9 Drilling in Canada has declined at an average annual rate of 2.9%
RESOURCES
POLICY
June
1977
Effect continued fromp 104 diamond drilling for metals done by contractors averaged 87%. with a range of 76.95%. ‘8 The unit regional value concept has been used by several resource analysts; some examples are: T.B. Nolan, ‘The mining districts’, for new search Economic Geology, Vol 45, No 7. 1950, pp 601-608; J.C. Griffiths, The Unit Concept and its Value Regional Kansas, Special Application to Distribution Publication 38, Kansas State Geological Survey, Lawrence, Kansas, 1969; D.A. Singer, Multivariate Statistical Analysis of Unit Regional Value of Mineral Resources, PhD thesis, 1971, Pennsylvania State University, University Park; US Bureau of Mines, Final Report, Grant NoG0190107 (MRE-19). r9Table 3 shows that Arizona was the most intensely drilled state during the past ten years; an average of 0.45 m/km’. Other states that had drilling activity greater than 0.20 m/km’ during the period 1966-75 were: Tennessee 0.37 m/km*; Missouri ~ 0.35 m/km*; Colorado ~ 0.29 m/km2; Minnesota 0.24 m/km’; and Utah ~ 0.203 m/km*. Drilling in m/km* for the entire USA was decreasing until 1973, but that of some states (eg, Colorado, Michigan, Utah), decreased more rapidly than did the drilling national average, whereas intensity has been increasing in other states (eg, Illinois, Maine, Tennessee). The most intensely drilled provinces in Canada during the period 1970-75, on the basis of data in Table 3, are New Brunswick ~ 0.38 m/km’; Nova Scotia and Prince Edward Island ~ 0.30 m/km’; and Ontario ~ 0.27 m/kmz. Annual drilling intensity figures for these provinces are not as high as those for the leading US states, a fact partially due to the inclusion of only contractors’ drilling in the Canadian data - drilling that probably amounts to about 85% of total (mining company and contractor) drilling work. drilling figures some Average for provinces are similar to or even greater than those for neighbouring states across the international border, but average figures for drilling per unit area do not account for the fact that drilling activity is in many places concentrated in the southern part of the provinces. 20 An alternative approach to analysing the annual amount of drilling is to view seasonal changes in drilling from year to year. Changes in drilling activity during peak periods of exploration can then be distinguished from changes in annual which include totals, ambient or background levels of drilling done on a year-round basis. Peaks may occur at the end of the summer exploration season in some areas or in March or Ap:il for areas where drilling is done on the frozen surface before prospects are made less accessible by the spring thaw. The cyclical pattern of exploration is continued
RESOURCES
POLICY
on p 106
June
of tax laws on mineral
exploration
in Canada
during the period 1970-75 compared with an increase of 0.8% per year for the USA over the same period. Declining drilling activity in British Columbia, Manitoba, and Ontario has been accompanied by increased diamond drilling in Yukon Territory, Saskatchewan, New Brunswick, and Nova Scotia and Prince Edward Island. Ontario and Quebec accounted for more than half the total of diamond drilling from 1970-75 and maintained 49-56% of each year’s total during the period. Since 1972, the initial year of major Canadian taxation reforms, Yukon Territory, and Nova Scotia and Prince Edward Isla.nd, have more than doubled their percentage of diamond drilling, and New Brunswick has had a threefold increase, from 1.9% to 5.9% of the national total. Major reductions took place in Manitoba (13.7% to 6.9%) and in British Columbia (13.3% to 7 *2%).20
Claim staking. Though drilling information provides a basis for comparing exploration in the USA and Canada, drilling footage has some drawbacks as a measure of industry’s reactions to changes in the tax laws of a political region. Some drilling for coal is included in the totals for British Columbia, but coal is not subject to the Mineral Royalties Act. Of the myriad indicators published by government agencies in Ontario, or British Columbia (including Quebec, prospectors’ licenses, issues and renewals of development licenses, days, number of reports, and value of assessment work, individual and company miner’s certificates, and number of claims recorded, cancelled, and in good standing), the selection of one that is available in comparable form for a large number of states and provinces is difficult if not impossible. The number of claims staked is available for Canadian provinces, but claim-staking information is not collected by most state governments in the USA. In some states, information on claim staking is available only by contacting the offices of county recorders. Table 4 shows the number of claims staked in Canadian provinces and claims filed in Alaska during the years 1970-75. In British Columbia, where diamond drilling has declined in recent years, claim staking dropped from 78 901 in 1972 to 11 791 in 1975 (claim staking for 1975 in British Columbia is reported in units that are about the same size as pre-1975 claims), an average annual decline of 47% for claim staking in this province from 1972 to 1975. The 40% decline in claim staking in Ontario from 1970 to 1971 has been attributed to the lack of any outstanding discovery that might have precipitated a prospecting rush and to fears of increases in mineral industry taxes proposed by the Federal Government’s White Paper on taxation.21 Claim staking in Quebec during the years covered in Table 4 is well below the 1969 level of 58 757 claims. Claim staking has not been on the wane in all Canadian provinces and territories during the post-1972 period of tax reform. Some of the biggest gains in terms of number of claims have been registered in Nova Scotia and Prince Edward Island, Northwest Territories, and Yukon Territory. The largest percentage increase for 1972-75 was in Newfoundland and Labrador, where claims staked increased by 3 17% per year. Alaska is one state with an agency that collects data on mineral exploration. Each filing for new claims includes some federal (20 acre) or state (40 acre) claims and is thus not identical with the number of
1977
105
Effect of tax laws on mineral exploration continuedfromp
in Canada
105
in drilling data, as most evident exploration drilling in British Columbia, Northwest Territories, and Yukon Territory is done in the summer months. The introduction of the British Columbia Mineral Royalties Act in February 1974 preceded two summers of greatly in that province. In reduced drilling the registered Territories contract, increases in summer drilling in 1974 and 1975. 21 Ontario Department of Mines and Northern Affairs, Ontario Mineral Review 7971,Toronto. 1971, p 13. 22 Although statistics for exploration activity by states are not available in published form for the USA, reviews of mining and exploration activity are released by some state geological surveys. These reports indicate that some of British Columbia’s decrease in mineral exploration may be related to reported increases in exploration in the neighbouring of Washington, states Idaho, and Montana. Information on mineral exploration in the northwestern USA is contained in many of the papers presented by state geologists and others engaged in exploration, at the Annual Northwest Mining Association Convention in Spokane, Washington. The 1975 papers included W.M. Johns, and ‘Mineral staff, exploration and development in Montana ~ 1975’. and W.S. Moen, ‘Some developments in mineral exploration in Washington during 1975’. 23 British Columbia’s Premier appointed a new Minister of Mines to reassess the mining tax system, but this evaluation redirected by a was change of government in the December 1975 election. The new government has introduced a bill to repeal the royalty legislation in favour of profit-based taxes in order to. restore the province’s competitive position in the market for mining companies’ exploration dollars. See Canadian Institute of Mining and Metallurgy ‘New Bulletin. British Columbia mining legislation’, Vol 69, NO 772. 1976, pp 17-18; and M. Chender, ‘Copper exploration restrained by resource nationalism and low metals prices’, Engineering and Mining Journal, Vol 177. No 8, 1976, pp 77-80. The Ontario Government amended its Mining Tax Act in 1974 to provide new processing allowances and other incentives. Further concessions to the Ontario mining industry were made in December 1975, when the Mining Tax Act was amended to allow mining companies, in calculating taxable income, to deduct for 5 years the cost of mineral processing done outside Canada. See Wall Street Journal, ‘Ontario sets tax break for mineral processing in offshore operations’, 26 December 1975, p 16. 24 It is an interesting coincidence that 2 days after British Columbia’s December continuedonp
106
107
Table 4. Claims staked in Canada and Alaska, 1970 Newfoundland Labrador
1972
1973
1974
1975
and
Nova Scotia and Prince Edward island New Brunswick Quebeca Ontariob Manitoba Saskatchewan British Columbiad Northwest Territories Yukon Territorye Alaskaf
1971
1970-75
9 33 500 12800 25 474 40 693 800 I 800 69 546 14 600 8 400 7 469
42
35
490
1 443
600 000 746 410 800 100 778 700 872
25000 9 300 30 156 19 267 500 1 300 78 901 5 600 7 358
50000 9 100 26 949 18 170 650 600 35 659 15300 IO 368
62311 10 000 24 479 22 097 230 2 000 16 972 12 180 13 038
34 517 12600 26 204 I9 761 78;198’ 248;528’ 11 791 21 049 8 559
6 472
7 484
5 852
10 623
11 383
19 11 21 24 I 57 6 5
Source: D.J. Worth, ‘Pros and cons of mineral exploration in Canada a banker’s viewpoint’, Denver, Colorado, AIME Fall Meeting Preprint 76-l-349, 1976, except as otherwise noted.
a Registered claims reported in Mining Industry in Quebec, 1968-l 974 editions; 1975 figure from Quebec Department of Natural Resources. b As reported in Ontario Mineral Review and its predecessor volumes, 1970.74 editions,
c TWO types minimum 960
of claims blocks acre.
2 537
40
acres
and
d As reported in British Columbia Minister and Petroleum of Mines Resources Annual Report, 1973; 1974 figure from British Columbia and Yukon Chamber of Mines. e As reported by Fred Higgs, British Columbia and Yukon Chamber of Mines, Vancouver, oral communication, 1975. f As reported by Carole Stevenson, Geological and Geophysical Survey, Dept of Natural Resources, College, Alaska, oral communication, 1976.
claims staked. Nevertheless, these data do indicate the extent of exploration in Alaska, and they show a marked increase in 1974 and 1975, when drilling and claim staking figures declined in neighbouring British Columbia.22
Further changes in resource tax laws In response to economic and political pressures, the federal and provincial governments in Canada have altered some of their tax reforms by providing a federal resource allowance, some increased allowances for processing and fabricating assets, and incomeaveraging provisions.23 The changes in laws and political leaders in Canada seem to reflect a desire for economic results different from those created by the post1972 taxation reforms. The interaction of federal and provincial statutes had some effects on the mining industry that were not predicted by legislators, especially in British Columbia.24 In contrast to changes in resource tax laws in Canada and Australia, several state governments in the USA have made proposals to initiate taxes based on the gross value of mineral production. The Colorado Government proposed a 6% severance tax on gross income from mineral production. 25 Tennessee’s plan for a 4% tax on gross revenues before federal taxes would take an estimated 50% of zinc companies’ before-tax profit in that state.26 Proposals for the Alaska state legislature ‘would strongly increase the state’s severance tax on oil and gas and would institute an “excess value” tax aimed at limiting so-called windfall profits’.”
RESOURCES
POLICY
June
1977
Effect
of tax laws on mineral
exploration
in Canada
Conclusions
continued
fromp
106
1975 election. resource policy played a major part in a sweeping victory for a Australia. coalition in conservation Estimates were that exploration in Australia had been halved under the former Labour Party government. See Journal, ‘Australia’s Wall Street conservative coalition wins a sweeping victory in national election,’ 15 December 1975, p 8; Engineering and Mining Journal, ‘Debate on Connor resource policy reaching boiling point in Australia’ Vol 176. No 9,1975, I, 178. 25 Engineering and Mining Journal, ‘Mining industry views proposed Colorado severance tax as a disaster’, Vol 176, No 5. 1975, p 21; Engineering and Mining Journal, ‘Colorado’s proposed tax sparks interest in other states’ mining taxes’, Vol 176, No 6, 1975, pp 32 and 37. 26 f nqineerinq and Mining Journal, ‘Tennessee’s proposed minerals tax creates storm of opposition’, Vol 176, No 9. 1975, pp 41 and 44. 27 C.J. Elia. ‘Tightening squeeze facing Alaska oil profits pushes investors into even deeper quandary’, Wall Street Journal, 14 January 1976, p 33. 28 For example, the costs of exploration may be less in areas where the results of earlier investigations or geological topographic base mapping are available provincial, or federal from state, geological surveys.
RESOURCES
POLICY
June
Further investigation is needed to separate the effects of taxes and price changes, but the conclusions are that tax law variations, rather than differences in commodity price changes, have been responsible for shifts in mineral exploration from one political region to another. This view is substantiated by the fact that decreasing mineral exploration in certain parts of Canada has coincided with increased mineral exploration in areas of the USA and in other parts of Canada, and with diversification by mining companies into non-mining activities. It is difficult to analyse separately the effect of all the different considerations facing the managers of exploration budgets. These decision-makers are concerned with the possibility of discovering ore deposits by using available methods; with the costs of finding, mineral marketing developing, producing, and acquiring, commodities; and with expected revenues from product sales. Budgetallocation decisions by those engaged in exploration are influenced by many characteristics of a region including: geology, topography, climate, population density, political structure, applicable legislation on zoning, taxation, and environmental controls, and transportation facilities.‘* The decline in mineral exploration in Canada, particularly in British Columbia, which followed increases in taxes for mining companies has provided policymakers with several examples that should be considered in the development of future mineral policies. First, economic analysis has shown that if the goal is to increase tax revenues for government and to maintain output and employment at favourable levels, then industries that face prices set in competitive world markets are a poor choice for increased taxation. For instance, the copper industry in British Columbia sells its product (copper concentrate) on world markets, and higher taxes imposed on British Columbia copper producers by federal and provincial governments have caused a decrease in new investment in exploration and development relative to some other areas. Secondly, taxes on gross revenue that prevent a company from recovering the average fixed cost component of the value of the total product will cause that company to leave the industry. The British Columbia Mineral Royalties Act of 1974, which was based on gross revenue, not profitability, had the effect of taking over 100% of some companies’ profits as taxes. Finally, the serious nature of exploration cutbacks and unemployment in British Columbia’s mining industry has shown the need for coordinated informed decisions on mineral policy. Action concentrated on the problems of the moment - whether environmental degradation, soaring prices, monopoly profits, domestic shortages and embargo threats, or decline in domestic production because of overseas competition - can lead to unpredicted disastrous and when results imposed simultaneously. Multidisciplinary analysis of mineral resource policy problems should consider the effect of simultaneous imposition of policy actions before these actions are taken.
1977
107