October 10th, 2012
Trouble ahead for Canada's Gold Mining and other resource producers...?
Mining Analyst Eric Lemieux joined Laurentian Bank Securities in 2008, after working for nine years as a consultant in the mining-equity space.
Lemieux has worked at the Montreal Exchange, and prior to that managed exploration projects for Cambior, Noranda and Soquem. He holds two master's degrees, in mineral economics from the Colorado School of Mines and in metamorphic-structural geology from Laval University.
Here The Gold Report asks him about the return to power of the Parti Québécois, and whether it might signal the end to the province's mining-friendly policies...
The Gold Report: Eric, you primarily cover mining companies in Québec, one of Canada's most mining-friendly provinces. However, last month the Parti Québécois (PQ) won a minority mandate. Are the glory days for Québec's mining sector over?
Eric Lemieux: Without saying the glory days are over, the election of the Parti Québécois will definitely put things on hold. The PQ has a very pro-environment and anti-mining perspective based on the personal convictions of certain ministers.
I think the PQ will change some of the priorities in Québec. I do not know if it will turn out to be effectively anti-mining. I think its people will just want to do things differently or give the perception that they are doing things differently. Recall the PQ held a very pro-ecological, anti-mining electoral stance that went in-line with the "printemps érable" (Maple Spring Arising) with the student protests.
At the end of the day, I am optimistic that Québec will continue as a favorable jurisdiction, just maybe not as favorable as it used to be.
TGR: Do you think Plan Nord – the initiative to build a road to several mining projects in the northern part of the province – will be canceled?
Eric Lemieux: I do not. The PQ has said it believes in some elements of Plan Nord.
Plan Nord has wealth-generating elements; it is indeed the plan of a generation, so a long-term view is essential. Some parts of the plan have started to move forward on the infrastructure side. It would be counter-productive to stop road construction after having cut down so many cubic meters of trees. The PQ will have to analyze situations like that and come up with a balanced approach, perhaps case by case.
In many ways, the PQ's stance does not hold up. It wants to fully develop Québec and it favors entrepreneurship. But it also wants to increase taxes and change the rules of the game. That damages a stable business environment. I believe certain proposed infrastructures of the Plan Nord should go ahead either for practical reasons (investments mobilized) or because they may fit with the PQ "Maître chez-soi" doctrine. I think there will be a fine-tuning of the Plan Nord.
TGR: Will the sovereign investment funds in Québec have a say in what happens with Plan Nord?
Eric Lemieux: I believe so and would expect that their expertise and experience would hold some sway. Eventually, the sovereign funds should have a word with the PQ and explain that if the PQ wants them to invest in Québec companies, the PQ must give companies the occasion and encouragement to move forward in a stable framework and conducive business environment.
TGR: Junior mining companies operating in Québec get roughly half of their exploration tax back through tax breaks. Will those disappear?
Eric Lemieux: Probably not, largely because of the potential backlash from the regions that really profit from those tax breaks. I am talking about regions such as the Abitibi, which, incidentally, voted for the PQ. I think companies there, such as service providers, would stand up and argue that rolling back tax breaks would be going too far toward killing the golden goose.
As much of an advantage as the tax break is for the companies, it also has a larger ripple economic effect – the employment created and sustained by exploration activities. For example, Val-d'Or has been very vibrant in the last two years because of just that second-stage effect. If the PQ starts to play around with that, the people in the regions will say, no, we need this help to sustain the activities. This is all the more reason that there is a certain cooling of activities in light of current economic uncertainty and cycles in commodities prices.
TGR: You seem to favor companies near existing mines or developing projects. What are other aspects of your investment thesis?
Eric Lemieux: One key element is the quality of the management. You need to know who management is, what their track records are, what the industry sentiment is about them.
I also appreciate focus – on specific projects and geological models – that will lead the pack that goes beyond looking right next door to another company's recent discovery.
That being said, I do favor companies near existing mines or developing projects. I think you can often seize occasions when you understand what is happening in a certain area. That is how I make the relationship between existing mines and developing projects. I also highlight that the partnership model has its merit; in tough times this is a great way to remain active and keep some measure of cash and survive for another day.
Finally, I appreciate the under-promising and over-delivering mantra.
TGR: You recently visited mineral exploration projects in the Yukon. That was a hot region a few years ago, and then it cooled off. What is happening there now?
Eric Lemieux: I was there in mid-September. There has been a slow down, which is somewhat typical. The first discovery happens, followed by excitement, which then quiets down; it is the natural process I believe.
But, putting it in context, the Yukon is remote. It is not that easy to work. The Yukon Territory would probably benefit from a pro-mining policy to build infrastructure similar to what Québec has done by building roads and hydroelectric plants. If the Yukon Territory could build a power plant in conjunction with mining projects, it would have end-users to buy the power. That makes practical, political and governmental sense.
TGR: But Hydro-Québec had a strong tax base to draw on and pay for its development in Northern Québec. The Yukon has one-twentieth of the population.
Eric Lemieux: True, but I am not talking about the same scale. For example, if you dam a river for a hydroelectric plant in the Yukon, mining companies would be your first customers, but the supplemental power generated could be fed to communities farther away. That would be a forward-thinking policy that is win-win for all parties.
TGR: Eric, thank you for your time.
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