Financial and Political Risks of Conducting Business in the Canadian Mining Industry - Case Study Example

Financial and political risks of conducting business in the Canadian Mining Industry (Name) (Institution) (Course) (Module) (Tutor) 28th September 2009 Canada is recognized as one of the highly developed nations of the world accounting for 2% of gross global product. Her economy is largely dependent on her trade with the USA with similar economic cycles. As of January 2006, the country was enjoying a declining real GDP growth at 3.77%. By March 2007, the economy grew at only 1.82% before picking up again in October same year to hit 2.97%. However, the economy changed course and the GDP shrunk by 3.23% as of July 2009. This course displays a lot of similarity with that of neighbouring US. In the first half of 2006, the US economy was growing at an average of 3% dipping in mid 2007 hitting 1.4% be fore picking up again to stand at 2.7% October 2007. Afterwards, the economy dipped with the lowest being July 2008 at -3.9%. Observing the trend of these two economies, it is evident that they follow the same path either due to close ties in trade or use of similar economic policies (Rudgell, 2009; Statistics Canada, 2009). Therefore, this paper treats Canada from the American perspective reviewing how the different levels of government have responded to the global recession and how their reactions and measures affect political and financial risks in doing business in the country’s mining industry. Canada’s economic decline was most felt by the country’s mining industry which happens to be the oldest. In fact, mining started around 6000 years ago in Canada (Rudgell, 2009). This involved excavation of simple pits to retrieve copper which was used for making simple tools, jewellery and for trade purposes. Commercial of mining of coal in New Brunswick commenced in the early to the mid 17th century. In the 20th century, other mineral deposits were discovered such as diamonds, gold, iron etc. This formed a solid basis for a robust mining industry. As of 2008, the industry contributed C$40 billion to the country’s GDP and source of employment to over 351,000 people. A report by Entrans Consultants in 2008, the industry contributed an estimated C$11.5 billion in royalties to the various level s of governments in 2008 alone (International Mining). However, these figures according to the Mining Association of Canada (2009) were expected to fall due to the prevailing local and global economic conditions, which they did. Canadian Mineral Industry Federation (CMIF) has in the last few months been appealing to the federal government to institute some measures that will protect the industry. This body represents major mining based (exploration, mining and processing) companies in the country. This industry was adversely affected by the financial meltdown in the USA and the world that saw the decline of global demand. As a new exporter, Canada was generally affected with the mining industry being severely affected. According to the CMIF, 32 mines were closed in mid 2008. Industries in the non-metallic category were only operating at 66% of their full capacity with those in the metallic category operated at 71%. The companies also suffered great losses in the stock market (Mining Association of Canada, 2009). Canada’s economic and political stability continues to attract numerous mining investors. However, depletion of natural resources has been a main concern for the government, the community and NGO’s. The Positioning For Growth brief by CMIF says that Canada alone received 19% of the world’s total spending on mining, followed by Australia with14%. Thus, the Canadian economy heavily relies on both local and foreign mining companies which in total account for 19% of Canadian exports. The country prides of over 1000 exploration based companies with operations in over 100 countries around the world. This implies that these companies are subjected to various government polices that affect their operations. These companies have accumulated foreign investments of $67 billion as of 2008 while accumulated foreign direct investment in Canada by foreign companies is $59 billion. A year ago before the recessions, these foreign investments stood at about $110 billion assets globally (Rait, 2009; Mining Association of Canada, 2009). Fear of depletion of natural resources has forced mining companies to focus their investments in emerging and underdeveloped nations more in Latin America and Africa. This has meant that there has been a decline in the growth of mining investments in Canada as competing regions arise. Explorations in Angola, Namibia and Sudan, in Africa, have intensified thus competing for investments with Canada and other developed nations. To counter these developments, the federal government has instituted several measures. The main one in regards to the mining industry was through lasts year’s budget through which Prime Minister, Stephen Harper, delivered $100 million for a new Geo-mapping for Energy and Minerals (GEM) Program for public geoscience, intended to complete the geomapping of the country’s northern region (Rait, 2009). On the other hand, the global financial crisis has not been as intense on underdeveloped nations as the developed ones. A report by the IMF shows that majority of countries in Africa reported growth in their economies in 2008 though at slowed rated. Projections are also bright. This has caused Canadian based companies with the assistance of the government to invest in these countries that have displayed little financial risks. Unfortunately, these markets have high political risks. In Canada alone the global recession had an array of impact from mine closures and lay offs to reported losses. The government responded through the Economic Action Plan which the IMF described as being “prudent” and “proactive.” This plan was designed to empower the Canadian economy, heavily reliant on the mining industry to overcome the negative impact of the recession (Rait, 2009). Rait (2009) explains that by increasing government expenditure, households and firms have access to money that will keep local aggregate demand up thus sustain the economy. Thus, the action plan provided funds in excess of $1 billion to a Community Adjustment Fund to counter the short term effects of the recession. A similar amount of money was also provided to help communities diversify their economic activities away from employment in the mining industry. The result could imply that the mining industry will loose some of their skilled employees to other industries. Consequently investment in human resource development in the mining industry will be wasted. From another perspective, the psychological warning sent out by such programs to the people implied that the mining industry was headed for collapse. In 2007, the Quebec government introduced a compensation program for manufacturing and mining firms. The program entails a refund of 30% on cost of employee training within one year (Blakes Tax Group 2009). These refunds were instituted to save participating firms from the cost of retaining their employees (Blakes Tax Group 2009). The financial meltdown also led to restructuring in company operations. The recession era was characterized by mergers and acquisitions in both foreign and domestic operations by some companies. Rio Tinto and BHP Billiton are in discussion aimed at merging their Canadian diamond operations which happen to be flanking each other in the Northwest Territories. Again, the Amapari gold mine in Brazil has attracted the merging of operations in that particular mine and others by two Canadian based firms. Vancouver based New Gold and Toronto based Metalica Resources agreed to combine their gold mining resources in Brazil and Australia in an effort o cut down costs (NY Times, 2008). Another example of a merger necessitated by the recession was the Toronto based Intrepid Minerals and Australia’s NuStar Mining (Ragsdale, 2009). Conventionally, mergers and acquisitions have a negative effect on employees, and remains as the most conspicuous effect. Since their machinations are bent on cutting costs, employees loose their positions due to multiplication of roles within the new formation. This thus contravenes government’s policy in creating employment. Gordon Peeling, President and CEO of the MAC, says that “the Canadian industry faces competitiveness challenges, both at the raw materials and value-added processing stage. By focusing on the priority areas, Canada’s Mines Ministers can contribute significantly to a stronger Canadian industry” (International Mining, 2009) Other than action plan, the government has made a more mining-specific resolution by maintaining the 15% Mineral Exploration Tax Credit up to March 2010. This measure will help junior mining companies access the venture capital they need for financing their exploration activities. This will boost competitiveness in the industry and also open up avenues for new entrants in the market (Rait, 2009). The Quebec provincial government on the hand has supported these efforts by proposing 0% royalties for new natural gas wells operational before January 1 2011 in that region for a period of five years. Before then, the Quebec government under the Quebec Mining Act charged 10-12.5% the value of production at the well. This was in reaction to the fall in global oil prices, global recession, fall in investments due to the collapse of financial institutions in Britain and the USA. However, this tax break has a maximum of C$800,000 per well. This measure is aimed at accelerating investment in gas exploration, mining and minimizing the political risk for investors in the region (Blakes Tax Group 2009). Rait (2009) says that the Canadian government is keen on increasing capital cost for corporations’ equipments and machinery within the first two years. This is aimed at attracting more investors in the country as measured against other members of the G8. Rait (2009) says that the aim is to have the lowest taxation levels for new investments in all major industries. This strategy is backed by the Extraordinary Financing Framework plan that has targeted to use $200 billion in helping new investors to access credit and develop thereby creating jobs to cater for the rising unemployment levels. Provincial governments have been keen to exercise their powers in fighting the effects of recession. For instance in Quebec, firms are faced with proposed increase in sales tax to offset budget deficit For the first time in ten years, Quebec posted a C$3.9-billion deficit in the 2009-10 financial year with a further projected deficit of C$3.8-billion in 2010-11. Thus the budget presented earlier this year by Quebec’s Finance Minister Monique Jérôme-Forget, proposed an increase in sales tax by 1% starting form January 1 2011 given that the growth in government expenditure will not exceed the projected 3.2% annually. The budget also promised to be harsher on tax evasion and tax defaulters (Blakes Tax Group 2009). Still in Quebec, corporations under the Quebec Mining Duties Act are now required to file profit and loss return plus financial statements with the Quebec government. This regulation complements the Canadian Income Tax Act that was amended earlier that allowed companies to submit their financial reports for tax purposes in any other currency other than the Canadian dollar subject to certain conditions. Before this, firms were forced to have two set of financial reports as the Federal government allowed use of other functional currencies for taxation filing while the Quebec government did not (Blakes Tax Group 2009). From the above discussion, it obvious that governments are faced with a dilemma on choosing the best polices to guard their economies and the socioeconomic well being of her people. In the case of Canada, the government is set of protecting her people from unemployment by funding corporations while at the same time excessive government spending will lead to inflation. On the overall, Canada has managed to protect both her people and mining industry from the strenuous and economically repressive effects of the global recession. As the global economy picks up, Canada is expected to be leading the recovery as promising signs are being sighted by various economic analysts. References The Mining Association of Canada, 2009, (Accessed online on 27th Sept 2009 from) http://www.mining.ca/www/index2.php International Mining 2009, (Accessed online on 27th Sept 2009 from), http://www.im-mining.com/2009/09/02/canadian-mining-sector-provided-c40-billion-to-gdp-in-2008-%E2%80%93-facts-and-figures-2009-report/ Mining news, Rio Tinto and BHP mull Canada Merger, 2009. (Accessed online on 27th Sept 2009 from), http://www.miningne.ws/pg/mining/news/6472/rio-tinto-bhp-mull-canada-diamond-merger-report Rait, Lissa. Speech to the Canadian Institute of Mining, Metallurgy & Petroleum Annual Conference, Toronto, Ontario May 11, 2009, (Accessed online on 27th Sept 2009 from), http://www.nrcan-rncan.gc.ca/media/spedis/2009/200949-eng.php New York Times, Mining Companies In a Merger, April 1, 2008 (Accessed online on 27th Sept 2009 from) http://query.nytimes.com/gst/fullpage.html?res=9C02EFDE1330F932A35757C0A96E9C8B63 Ragsdale, R. Recession drives miners into mergers: Tough economic conditions precipitate flurry of consolidation among majors, juniors that do business in Alaska, Northwest Canada, Mining News, 2009, Vol. 14, No. 35 Blakes Tax Group. Canada: 2009-2010 Quebec Budget Highlights, 2009. (Accessed online on 27th Sept 2009 from), http://www.mondaq.com/article.asp?articleid=76664 Rudgell, P. History of mining Canada: State of the Industry Review, 2009. (Accessed online on 27th Sept 2009 from), http://www.infomine.com/countries/SOIR/canada/ Mintz, Jack. Regulating Canada’s new financial risks, Financial Post, February 04, 2009, (Accessed online on 27th Sept 2009 from), http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/02/04/jack-mintz-regulating-canada-s-new-financial-risks.aspx Statistics Canada, 2009, (Accessed online on 27th Sept 2009 from) http://www.statcan.gc.ca/start-debut-eng.html Read More