Message From Team North® Leader

For those of you who have received this newsletter before, you may notice a couple of differences. For one, I’m not Peter Pamel, although I will be attempting to fill his very big shoes as the new leader of BLG’s Team North. After five years of service in this regard, Peter handed the leadership reins over to me at the beginning of this year. He will still be extremely active with Team North, but it will be my face you’ll see on this newsletter for the foreseeable future. I’m delighted to lead our ever-expanding Team North team. I have occasion to visit the North half a dozen or so times throughout each year and it’s beginning to feel like a second home to me. My intent is to broaden my visits this year to cover more ground, and to meet more of you.

You also may have noticed that for the first time, there’s a small “R” beside our name. Over the past several years we have been in the processes of registering Team North®. Consider it a sign of our long-term commitment to serving northern Canada, but also as a symbol of our commitment to our brand. Yes, law firms understand the concept of branding, although we haven’t been as sophisticated with its use as many of you may be. But like you, we’ve come to understand how important a brand is to a business. A brand is the declaration and practice of a company’s value systems. And expression of value systems in the delivery of business is particularly important in northern Canada, because business isn’t usual up here. The physical environment, economic climate, rich cultural diversity, distance between communities, and challenges in social infrastructure all result in the requirement a very tailored and considered approach to business.

Enterprises that are more successful in northern Canada aren’t necessarily outlets of successful southern enterprises. That mould can’t simply be transported to the Territories and expected to thrive. Rather, the really successful businesses are often the ones that are home grown and most intimately understand the context of the North.

While BLG is not from the North, we are completely committed to acting as if we were. By that I mean that we focus first on understanding the context in which business decisions must be made before we start to offer advice. In that light, perhaps whenever you see the small “R” beside our name could be seen as standing for “relevant” which is in fact our brand commitment to you.

I hope that the articles we’ve selected for this newsletter are relevant to you, and as always, if there is any content we could provide here in future that would be of value or if you would like to ensure that I or a member of our team visit with you and your company the next time we are in town, please give me a call or send  me an email. Otherwise, I’ll hope to meet many of you at the Nunavut Mining Symposium or other conferences we plan to attend this year.

Sincerely,

Adam Chamberlain
416.367.6172
achamberlain@blg.com

 

Baffinland – Mary River Mine Update

The mining industry in Nunavut continues to be quite active despite recent news of the scope of certain projects being revisited or scaled back.

Through 2012 Baffinland’s Mary River project continued its progress through the regulatory approvals process. First, in July the Nunavut Impact Review Board (NIRB) conducted the environmental assessment hearing for the project and released its report and recommendation to approve it with conditions early in the fall. The federal government approved the project in December and a follow up workshop was held by NIRB with Baffinland and the various agencies involved in the approvals processes shortly before Christmas. Finally, just a few days before the end of 2012 the Project Certificate for the Mary River project was issued by the NIRB which contained the terms and conditions for the approval.

While 2012 was positive for Mary River from a regulatory point of view, the markets for commodities (including iron) continued to soften. As a result of market conditions and the debt position of Baffinland’s parent company (ArcelorMittal), Baffinland announced in the first days of 2013 that it would be proceeding with the Mary River project but on a “phased” basis. This means that the initial plans to build a railway to transport iron ore away from the mine on Baffin Island will be put on hold for some unstated period of time. In the meantime, the mine will be developed but the amount of ore shipped will be significantly less than originally planned and will be shipped out of the Arctic in the summer as opposed to the eventual planned year round schedule.

Time, and the commodity markets, will tell when the further phases of the development proceeds as originally planned to be part of this extraordinary project.

While the Baffinland project is the headline grabber for the Nunavut mining sector, the news out of the annual Nunavut Mining Symposium (held in Iqaluit during April) included discussions of other projects that are either continuing or are being reinvigorated. Among these were MMG’s proposed zinc-copper project at Izok Lake in western Kitikmeot Region, the Bathurst Inlet Road and Port proposal related to Sabina Silver Corp.’s Hackett River silver-zinc mine and AREVA’s proposed uranium mine. While these projects are still early in the regulatory process activity, the NIRB appears to be into a rather busy period.

Finally, outside Nunavut in the Northwest Territories, Harry Winston announced in the fall of 2012 its plans to purchase the Ekati Diamond Mine and, in early 2013, to sell its retail operations. BLG works closely with Harry Winston in relation to its mining operations and the related transactions and will be close to these and other events in the sector as they develop in 2013.

BLG is an established presence in the Arctic mining sector (across all three territories) and we continue to monitor and work on many projects under  development.

 

Changes to “Duty To Consult”

This recent decision by the Yukon Court of Appeal has major implications for the current “open entry” system for staking claims.

On December 27, 2012, in Ross River Dena Council v. Government of Yukon (2012 YKCA 14) the Yukon Court of Appeal unanimously found that the Government of the Yukon (“Yukon”) has the duty to consult with an Aboriginal rights and title claimant before recording  a mineral claim staked by a private prospector, and that mere notice to the Aboriginal claimant would not necessarily be sufficient to discharge that duty.

The Ross River Dena Council (“Ross River”) sought a declaration that Yukon had a duty to consult them with respect to the recording of mineral claims under the Quartz Mining Act. Under that statute an individual could acquire mineral rights simply by physically staking a claim and then recording it with the Mining Recorder. Once a mining claim was recorded, the individual was entitled to the minerals within the claim and could conduct certain exploration activities on the land without further authorization or notice to the Government.

The trial judge found that Yukon’s practices in respect of new mineral claims did not pass constitutional muster. He considered, however, that a scheme under which Yukon provided monthly notice to Ross River of newly-recorded mineral claims within its traditional territory would be sufficient to meet its consultation  obligations.

Ross River appealed, asserting that consultation had to occur before the recording of mineral claims, and that consultation required more than mere notice of new claims.

The Court of Appeal agreed with the trial judge that the recording of a mineral claim triggered Yukon’s duty to consult. The main issue on appeal was whether the recording of a claim constituted “Crown conduct”. The Yukon argued that there was no Crown conduct because the statute did not give the Mining Recorder any discretion in respect of the recording of such claims. The Court of Appeal, however, held that “[f]ar from being an answer to the plaintiff’s claim in this case, the failure of the Crown to provide any discretion in the recording of mineral claims under the Quartz Mining Act regime can be said to be the source of the problem.”

The Court then considered the conclusion of the trial judge that the Crown’s duty to consult could be met by providing Ross River with a monthly report. It agreed with Yukon that “the open entry system continued under the Quartz Mining Act has considerable value in maintaining a viable mining industry and encouraging prospecting”, and also acknowledged that “there is a long tradition of acquiring mineral claims by staking, and that the system is important both historically and economically to Yukon”. Nevertheless, it found that “mere notice cannot suffice as the sole mechanism of consultation”, and that the open entry system had to be modified.

The Court of Appeal observed that it was neither necessary nor appropriate for it to specify precisely how the regime could be brought into conformity with constitutional requirements, but that the consultations had to be “meaningful” and “allow for an appropriate level of consultation before Aboriginal claims are adversely affected.”

The Court recognized that to some extent consultation had already taken place. It noted that  in 1988 as part of treaty negotiations the Crown had given interim protection to lands claimed by Ross River and that under the existing legislative scheme many categories of exploration activity were already subject to governmental discretion and environmental review, thus providing opportunities for First Nations to engage in consultation. However, the Court also noted that the duty to consult was ongoing and that certain exploration activities could be conducted on mineral claims without any opportunity for prior consultation with Ross River.

Accordingly, the Court allowed the appeal and declared that Yukon had a duty to consult with Ross River in determining whether mineral rights on its claimed lands are to be made available to third parties, and to notify and, where appropriate, consult with Ross River before allowing mineral exploration activities to take place, to the extent that those activities might prejudicially affect Aboriginal rights claimed by Ross River.

The Court of Appeal suspended the effect of its judgment for one year in order to give Yukon time to make the necessary changes to bring its legislative regime into conformity with the Court’s decision. Yukon has applied for leave to appeal this decision to the Supreme Court of Canada.

The full text of the Court’s judgment is available online at: http://www.canlii.org/en/yk/ykca/doc/2012/2012ykca14/2012ykca14.pdf.

Ken Tyler
ktyler@blg.com
604.640.4185

 

Quebec’s Plan Nord Experiencing Growing Pains

Quebec’s Plan Nord, hailed as the project of a generation when first unveiled in May 2011 by the former Liberal government of the province, now faces some uncertainty surrounding the degree of commitment of the new Parti Québécois government to the grand design of Jean Charest and his colleagues of the previous administration. In addition, economic realities are adding some complications for businesses anxious to start or expand operations in northern Quebec, and some public protests have added political fuel to the economic fire. Yet, in a few years hence, it is possible that these initial difficulties will be seen in retrospect as mere growing pains experienced by Plan Nord and its early promoters.

Probably the clearest barometer of the uncertainty surrounding some aspects of the Plan Nord is the recent decision of Canadian National to put on hold, until at least next June, its feasibility study of the proposed new rail link extending northwards from Sept-Iles to Schefferville. That new railway was intended to facilitate the transportation of iron ore for six mining companies operating or planning operations in the Labrador Trench down to Sept-Iles, where the product can be loaded aboard bulk carriers bound for foreign blast furnaces. In March 2012, then Liberal Finance Minister Raymond Bachand announced that CN would study the possibility of building the 800-km. line, at an estimated cost of some 5 million dollars, with the Caisse de depot et de placement (the fund that administers Quebec Pension Plan contributions) to pay about one-third of the total bill. Recent declarations by the Minister of Natural Resources about reviewing the business model so as to ensure the responsible development of northern Quebec have not lessened the climate of uncertainty that affected CN, although Premier Marois, in her message to the New York City business community in December 2012, stressed that Quebec remains open for business.

A good part of the uncertainty surrounding the Plan Nord results from delays in tabling amendments to Quebec’s Mining Act. Mining companies fear that such changes could result in major increases in royalties payable to the provincial coffers, threatening the profitability of some of their planned ventures, especially given the stresses in the present world economy. The forest industry is experiencing similar anxieties about the new “forest regime” to be  adopted by Quebec in April 2013. The Quebec Forest Industry Council worries about the costs of the new regime for the industry and the maintenance in Quebec of the world-recognized certification system of the Forest Stewardship Council. The aspect of the Plan Nord calling for one-half of the designated territory to be a protected zone also gives rise to concerns in the forestry industry.

Meanwhile, on February 8 and 9, the meetings of the Salon des ressources naturelles at Montreal’s Palais des Congrès were disrupted by street demonstrations by several hundred protesters objecting to the Plan Nord as a whole. Windows were broken, police officers were assaulted and 36 demonstrators were arrested.

Start-up challenges are also being faced on the economic front, particularly by mining companies seeking capital to finance their respective northern visions. Stornoway Diamond Corporation, for example, needs to raise 800 million dollars if it is to open next summer its Renard Diamond Project, approximately 350 kms. north of Chibougamau in the James Bay region of north-central Quebec. Renard is touted as Quebec’s first diamond mine. Meanwhile, Champion Iron Mines is trying to locate funding for its Fire Lake North project, in the Fermont Iron District, some 250 kms. north of Port Cartier. Adriana Resources Inc., for its part, had indicated that changes to Quebec’s royalty regime could have a significant impact on the future of its iron ore mega project at Lac Otelnuk, 170 kms. north of Schefferville.

The overall picture of Plan Nord is far from negative, however. On February 9, the newspaper Les Affaires published a short summary of the current status
of northern Quebec mining projects, including the following information:

Xstata’s Raglan Mine is pursuing its 530 million dollar expansion program announced in 2011, with the building of a second nickel mine and the opening of
a new zone of operations.

Nunavik Nickel, owned by Jien Canada Mining Ltd., a wholly owned subsidiary of Jilin Jien Nickel Industry Co., Ltd. of China and Vancouver-based Goldbrook Ventures Inc., is due to start operations in the near future.

ArcelorMittal Mines Canada is continuing to expand its mining complex on Quebec’s North Shore, although it has abandoned for the moment its plan to build a new pellet plant.

Tata Steel Minerals Canada Limited, the first majority Indian-owned mine in Canada produced its first 200,000 tons of iron in the summer of 2013. The company is a joint venture established in October 2010 by Tata Steel Ltd. and New Millennium Iron Corp. and hopes to produce 2.0 million tonnes in 2013, in its Direct Shipment Ore Project near Schefferville.

Resources Métanor, the first gold mine 100% owned by Quebeckers, is set to begin commercial production in 2013 at Bachelor Lake, located about 225 kms. Northeast of Val d’Or.

Rio Tinto Fer et Titan is continuing its 200 million dollar investment over five years in the expansion of its iron and titanium mine near Havre-Saint-Pierre.

In many of the mining projects, there is an ongoing dearth of qualified manpower (miners, heavy equipment mechanics, geologists, electricians, nurses, teachers, managers, etc.), which some companies attempt to remedy by importing skilled workers from abroad. Quebec must invest more heavily in training its workforce to meet the occupational challenges generated by the kind of economic developments that the Plan Nord envisages.

Despite the many challenges, however, and provided that world markets make the exploitation of Quebec’s northern resources profitable to the private sector, it would seem that the Plan Nord will survive and surmount its present growing pains and realize, at least in part, the hopes and dreams of its founders.

Peter Pamel
ppamel@blg.com

514.954.3169

 

Update on Russia’s Arctic Development

Despite being 100% dependent on Russia for its natural gas needs, the government of Bulgaria was able to negotiate a 20% discount on the price it pays during contract negotiations with Russian energy giant, Gazprom. The reason speaks to the surging challenges Russian energy production will face in the next 5-10 years with important implications for Russia’s arctic development.

The growth of “fracking” gas extraction, a hydraulic method of drawing natural gas from shale rock beds, has seen global gas supplies surge as more countries unlock domestic reserves. While states like Bulgaria still imports all its gas, the supply boon in others including the USA, Qatar and Australia, along with the growth in liquefied natural gas (“LNG”) transport, has placed downward pressure on gas prices worldwide. Accordingly, Russia, who once essentially dictated gas prices is increasingly forced to negotiate with its longtime customers in Eastern and Central Europe as well as in newer markets.

This has important implications for Russia’s arctic development for two reasons. First, 93% of Russia’s natural gas reserves are located in the arctic regions of the country. While a number of new gas fields are coming online in the high north, many others, including in the Yamal peninsula site, remain in the exploration phase. The isolation of these sites will require significant capital investments making it a challenge for Russian gas prices to stay competitive against fracked gas produced by a growing number of states (many of whom are currently Russia’s best customers) who not only address some of their domestic gas needs but may even grow to become exporters  themselves.

Second, energy extraction and transport plays a central role in the broader development and success of Russia’s arctic development strategy generally, and the Northern Sea Route (“NSR”) in particular. The first winter crossing of a LNG tanker from Russia to northern Japan this past November highlights Russia’s desire to showcase the NSR as a viable year-round alternative to the Suez for global energy shipping. However, the huge capital investments required to develop LNG facilities along the arctic coast and to replace that country’s rapidly aging fleet of nuclear-class icebreakers, means that regular year-round use of the NSR remains a number of years away. This will likely add further pressure on Russian gas prices, Gazprom’s market share and arctic infrastructure development.

Nevertheless, given the prominence arctic growth and development plays in the Putin government’s vision for Russia’s geopolitical and economic future, we would anticipate the steady stream of investment into this region to continue.

Damian Hornich
dhornich@blg.com
416.367.6747

 

Changes Within the Arctic Council

As the Arctic Council (“AC”) moves towards Canada’s assumption of the chairmanship in May, 2013, it is likely to generate a good deal of interest and possibly some controversy.

The permanent members of the AC seemed to have warmed somewhat to the possibility of expanding  the ranks of states eligible for non-member, observer status. One of the higher profile rows was between Norway and China, the later being a vocal proponent for a broader umbrella of AC observer states.
Though initially opposed, Norway has now openly supported China’s bid to gain permanent observer status. Part of the reason for the change in position, according to the Norwegian Foreign Ministry, was an acknowledgement that issues like arctic navigation and climate change were not regional but global issues that effect states beyond the arctic itself. It remains to be seen how the AC under Canada’s lead will respond to requests from other states vying for status generally believed to include Japan, India and South Korea.

The Emergency Preparedness Prevention and Response working group (“EPPR”) is one of the AC’s six original committees. One of its most recent, and better known tasks has been the development of an Agreement on Marine Oil Pollution Preparedness Response in the Arctic, a document meant to provide legally binding guidelines on the safe handling of pollutants in the arctic environment as well as standards for emergency responses. The EPPR has provided the AC with two drafts of the instrument, the specific terms of which have, by and large, been kept confidential. While the final instrument is scheduled to be released in the early spring, recent drafts obtained by media outlets have been criticized for a lack specificity and detail particularly with respect to offshore oil leak response and disaster prevention. Once the full text becomes available, there is sure to be a good deal of additional commentary on the implication of the instrument on arctic economic generally and the future role of the AC within that development.

BLG continues to be actively engaged in monitoring these developments and the opportunities and challenges they present for Canadian businesses and various branches of government. If you would like to learn more about BLG’s Russia and Arctic Council Initiatives or Team North, please contact:

Peter Pamel
ppamel@blg.com
514.954.3169

 

Taxation Polices Key to Mining in the Far North

Two recent studies on the Canadian mining industry show how critical mining is to the future  of Canada’s Far North, and the important role of taxation policies in encouraging this industry’s valuable economic activity while ensuring that the region’s residents enjoy their fair share of the resulting benefits.

On January 30, 2013, the Canadian Chamber of Commerce released its comprehensive review of Canada’s mining industry, in a report entitled Mining Capital: How Canada Transformed Its Resources Endowment Into a Global Competitive Advantage. This report (the CCC Report) describes how Canada has created a competitive advantage in this key sector of the economy by using various policy levers to go beyond the mere extraction of minerals and create a knowledge-based industry that allows Canada to be a world leader in the exploration, development and processing of natural resources.

The same week, The Centre for the North, a research initiative of the Conference Board of Canada, issued The Future of Mining in Canada’s North. The major conclusion of this document (the CFTN Report) is  that mining is the key driver of future economic development in Canada’s Far North, but that a number of important regulatory challenges will need to be met in order for the vast potential of this opportunity to be realized.

Taxation issues feature prominently in both reports. Mining exploration is an expensive, high-risk undertaking, particularly in remote environments  such as Canada’s Far North. Even if a viable discovery is made, the challenges of successfully bringing an operating mine into production and transporting extracted materials to market are daunting and costly. Mining companies are subject to income tax at the federal and provincial/territorial level and to provincial/territorial mining taxes as well. Unless these levies are designed to fairly reflect the costs and risks of mining exploration and development, they risk discouraging investment.

The CFTN Report identifies the corporate fiscal environment as one of five key business factors related to mining development in Canada’s Far North. In particular, this document identifies the importance of specific tax incentives such as flow-through shares in allowing mining exploration companies to raise capital needed to fund the search for new mineral resources. In comparing the overall tax burden on base metal mining in different provinces and territories of Canada relative to each other
and to other countries, the conclusion reached is that Canada is quite competitive internationally, particularly at lower levels of mine profitability. This last point is especially important, since it especially discouraging for mining companies to be paying taxes when the underlying operations are not profitable.  The CFTN Report encourages Canadian federal/ provincial/territorial governments to maintain their international tax-competitive position.

The CCC Report also identifies the importance of flow-through shares in financing mining exploration, noting that the mining expenditures created by flow- through shares far exceed the federal government’s cost of this tax measure. However, this document also notes with concern government tax measures taken in 2012, such as the discontinuance of the exploration and development investment tax credit. The CCC Report recommends the introduction of an exploration tax credit specifically for remote regions such as the Arctic where exploration costs are prohibitive, which would certainly be welcome for mining companies looking to recover some of the costs involved in this high-risk activity. Among the other tax recommendations made in the CCC Report are the following:

  • Reviewing the extent to which costs of aboriginal consultation and environmental regulatory compliance should be included within deductible “Canadian exploration expenses”;
  • Reducing the administrative burden of complying with multiple differing tax jurisdictions by exploring options for streamlining and harmonizing taxes across provinces and territories;
  • Reversing the action taken in the 2012 federal budget to exclude capital expenditures from the scope of expenditures eligible for the scientific research and developmental tax credit; and
  • Making the mineral exploration tax credit permanent (currently it is renewed on a year-by-year basis).

Steven Suarez
ssuarez@blg.com
416.367.6702

Authors

Steve Suarez 
SSuarez@blg.com
416.367.6702

Kenneth J. Tyler 
KTyler@blg.com
604.640.4185

Peter G. Pamel 
PPamel@blg.com
514.954.3169

Other Authors

Damian Hornich
Adam Chamberlain

Expertise

Team North®