Fraser Milner Casgrain LLP, KPMG LLP and its subsidiary SECOR
Inc. have released today a study presenting an analytical framework
for evaluating the different mining royalty regimes which are being
used worldwide. The authors hope the study will provide a framework
for informed debate regarding mining royalty regimes best adapted
to Quebec's economic and mining circumstances. The quest for
such determination has been provoked by an important public debate
that is currently ongoing in Quebec as a result of the recent
launch of the Plan Nord.
The study analyzes four royalty schemes for a standard Quebec
iron mine or gold mine: i) profit-based royalties, ii) ad valorem
royalties, iii) West Australian style of royalties and iv) hybrid
royalties. The study concludes that no scheme is universally
superior to the others and that it must be adapted to the
territory. Given the fact that Quebec's mining sector is
relatively marginal on an international scale (representing less
than 1% of global production), and that Quebec has high production
costs based on the fact that its variable climate, its mining
deposits are generally less concentrated and that it is at a great
distance from the emerging Asian market, the study focuses on the
importance for Quebec to remain competitive.
A profit-based royalty, the current royalty regime in Quebec (at
a rate of 16 %), adjusts to the profitability of the mining
project. Thus, when prices are low and mines become marginal or not
profitable, this regime does not compound the problem. This is
particularly important in regions where production costs are
higher. Avoiding a supplementary burden in such a situation can
help mines pass through a depressed mining cycle, without having to
stop production. When prices are high and profits are up, such a
profit-based scheme gives governments a larger proportion of the
extracted value. However, the royalty amounts collected by the
government will experience greater fluctuations and there is a risk
that they may be nil for some mines during certain years. The ad
valorem royalty facilitates the collection of more constant royalty
levels under various price variations. However, this royalty adds a
significant cost burden to the mining companies when the prices are
low and the mining projects are less profitable. This, in turn,
adds a significant amount of risk to the project and reduces its
net present value relative to the same project subject to a
profit-based royalty. An ad valorem royalty imposes the payment of
royalties even when profits are weak or non-existent. This could
lead to the accelerated closure of mines when prices are low and
the postponement of potential projects. Ad valorem royalties are
much less complex to put in place and are more common in developing
countries, where fiscal administration is not well established. The
hybrid royalty and the West Australian style of royalty combine, to
varying degrees, the advantages and disadvantages of the previous
The study concludes that high mining royalties do not
necessarily translate into revenues as future investment may be
compromised. The study recommends a regime be calibrated to
optimize the benefits for Quebecers in the development of mining
potential with a view not only to government revenues, but to
impacts on investor decisions and regional characteristics of the
Importantly, the study notes Quebec's other mining
investment assets are the quality of the business environment
(political, legal and fiscal), the availability of trained
professionals and workforce, the quality of its geological database
and the potential of a very large territory which has not yet been
For further information please see the attached press release
and study, or contact a member of the FMC mining team.
FMC is one of Canada's leading business and litigation law
firms with more than 500 lawyers in six full-service offices
located in the country's key business centres. We focus on
providing outstanding service and value to our clients, and we
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of where you choose to do business in Canada, our strong team of
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and cross-border matters. FMC's well-earned reputation for
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