A STUDY BY KPMG AND FRASER MILNER CASGRAIN LLP (FMC)
MONTREAL, July 31, 2012 /CNW Telbec/ - The strategic management
consulting firm KPMG LLP (KPMG) and the law office of Fraser Milner
Casgrain LLP (FMC) published today a study which presents an analytical
framework permitting the evaluation of mining royalty regimes currently
in place around the globe.
"After several months of research and analysis, this study has been
developed as a reference to identify the key issues that need to be
considered in the search for an appropriate mining royalty scheme for
Quebec. In an internationally competitive context, Quebec will only
profit from its mining legacy to the degree that the industry's fiscal
regime is adapted to the distinctiveness of our mining sector in
Quebec", emphasized Mr. Renault-François Lortie, partner with KPMG and director
of the study.
This analytical framework allows for the study of the ramifications of
different proposed mining royalty schemes which could be applied in
Quebec and seeks to reach as such all stakeholders, including the
government, mining companies, and civil society stakeholders, who are
engaged in the ongoing debate.
"The model that has been developed is based on an exhaustive review of
regimes currently in place in the principal mining regions of the world
and reflects the output of discussions and exchanges with numerous
specialists in the sector, including fiscal economists, financial
analysts, as well as many industry decisions makers. We have thus been
able to take into consideration the key rules and practices related to
investment decision making," highlighted Mr. Michel Brunet, Chair of FMC and co-signer of the study.
"The analytical framework takes into account the complete mining cycle,
which is characterized by significant price fluctuations on a global
scale, while costs are generally project specific and much less
volatile than pricing. This document is a valuable tool intended to
further nourish the dialogue between stakeholders on this topic and
enable Quebecers to put in place an optimal mining royalty scheme for
our economic development," concluded Renault-François Lortie.
The study was completed by a team of professionals under the direction
of Mr. Renault-François Lortie, partner with KPMG. The content was
validated by a review committee comprised of Mr. Daniel Denis,
economist and partner at KPMG, Mr. Marcel Boyer, associate-economist at
CIRANO and Mr. Pierre Lortie, Senior Business Advisor at Fraser Milner
SUMMARY AND KEY FINDINGS
The Context in Quebec
The launch of the Plan Nord by the Quebec government has provoked an
important debate over the mining royalty regime in Quebec. Although the
current scheme has only been in place for a few years, several
alternative models have recently been proposed. The KPMG/FMC analytical
framework allows for the comparison of the impacts of these different
Any comparison of different regimes and their impacts must take into
account three factors: (i) the unique situation of the mining sector in
Quebec; (ii) the decision making process of mining companies, which
considers industrial projects with a lifespan of 10 to 30 years; and
(iii) the volatility of metal prices on a global scale.
Notwithstanding the strong mining potential in Quebec, and the breadth
of media coverage on the Plan Nord debate, Quebec remains a region of
secondary importance on the global scale. With 15 mines in production,
of which only 11 are of significant size, and a production totaling
$7.7B in 2011, the Quebec mining sector ranks fourth in Canada, after
Ontario, Saskatchewan and British Columbia. The total value of
production in Quebec represents less than 1% of global production.
Among the 200 principal mining projects currently in development or
under study globally, only four are situated in Quebec.
In addition, known mining deposits in Quebec are generally less
concentrated than those in principal mining regions and associated
costs remain higher.
Quebec is in constant competition with numerous mining regions across
Canada and elsewhere in the world. From 2002 to 2011, Quebec's share of
the total value of mining production in Canada changed from 18.7% to
The analytical framework developed here compares profit-based royalty
regimes, common in North America and currently in place in Quebec, with
ad-valorem royalty schemes, based on the value of the mineral
extracted, used in several countries in the Southern Hemisphere and
proposed by some as an option for Quebec.
The Current Royalty Regime in Quebec
The current royalty rate in Quebec, 16% of mining profits, places the
region among those with a high profit-based royalty rate.
The nature of the current scheme results in more balanced risk for
investors during low mining cycles and therefore favors investments in
mining projects located in a region of secondary importance such as
Given the modifications brought to the regime in 2010, Quebec has become
one of the only jurisdictions having profit-based mining royalties
adjusted on a mine by mine basis. Calculations in other jurisdictions
are generally completed on a consolidated basis.
The Comparative Analysis
Royalty rates calculated on extracted value (ad-valorem) are less appropriate for regions where production costs are high
because risk of mine closure is much higher during bearish cycles (for
In fact, in periods when prices are low, unavoidable for a mine with a
lifespan of 10 to 30 years, ad-valorem royalties profoundly affect the profitability of a mine which has high
production costs. Any investment decision must take into account
periods of both high and low prices.
These conclusions align with those of a study on the same topic
published by the World Bank in 2006, which stated that profit-based
royalty regimes are predominantly applied in developed countries where
fiscal administration is well developed (which is the case in Quebec).
On the other hand, ad-valorem royalties are much less complex to put in place and are more common in
This analytical framework concludes that high mining royalties do not
necessarily translate into higher fiscal revenues over the medium and
long term. In other words, such initiatives could compromise future
In order to optimize benefits for Quebecers in the development of its
mining potential, the chosen royalty scheme must take into
consideration impacts on investors' decisions, as well as impacts on
With regards to the choice of an optimal regime for Quebec, the
following must also be taken into consideration: (i) the unique
characteristics of the Quebec mining sector; (ii) the competitive
position of the sector compared to other producing regions; and (iii)
the evolution of price over the entirety of mining cycles, including
periods of elevated prices like those that prevailed in 2010 and 2011,
as well as low prices, like those several years ago, which will
inevitably return in the future.
A copy of the study is available at: http://www.secorgroup.com/files/pdf2/SECOR-KPMG-FMC_Les-redevances_minieres_au_Quebec_Version_finale.pdf
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian
limited liability partnership established under the laws of Ontario, is
the Canadian member firm of KPMG International Cooperative ("KPMG
International"). KPMG member firms around the world have 145,000
professionals, in 152 countries.
The independent member firms of the KPMG network are affiliated with
KPMG International, a Swiss entity. Each KPMG firm is a legally
distinct and separate entity, and describes itself as such.
ABOUT FRASER MILNER CASGRAIN (FMC)
Fraser Milner Casgrain S.E.N.C.R.L. (FMC) is a leading law office in
business law and litigation in Canada. FMC has more than 500 lawyers
and offices in Montreal, Ottawa, Toronto, Edmonton, Calgary and
Vancouver. Thanks to its national network of lawyers and associate
experts, the office has all the necessary competencies for a complete
understanding of the issues facing clients in various sectors of
activity, wherever they may be located.
CIRANO brings together over 180 professor-researchers active in a
variety of disciplines, including economics, finance, management,
information systems, computer science and operational research,
psychology, sociology, political science, law, history, and medicine.
These researchers belong to eight Québec academic institutions and more
than ten institutions from outside the province in Canada, the United
States, and Europe. Recognized internationally, they produce
high-calibre scientific work and publish in the best journals — over 20
of them hold research chairs.
SOURCE: Ryan Affaires publiques
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