The Mining Regulatory Environment
Québec, still a regulatory Eldorado?
The 28 critical and strategic minerals that make up Québec’s subsoil have attracted mining firms from all over the world in the past couple of years. The province saw a notable uptick in claim staking and exploration activity in the south, rich in graphite notably. South of the 49th parallel, however, mining is not as well understood as in the North, and projects have faced resistance from municipalities and communities. Initial enthusiasm has been met with issues of social acceptability. In late 2023, such concerns were the subject of two major consultation processes led by the government of Québec, namely the consultation on the harmonious development of mining activities in the province and the consultation on the Government policy directions for land use planning. Discussions led to regulatory action, with the Government amending the Mining Act.
Addressing the post-claims rush anxiety
Can Québec have its cake and eat it too? The question makes sense as the Government and the industry’s aggressive push to develop the province’s critical minerals production has in the south been met with hostility. Between Montréal and Québec, residents of the town of Saint-Elie-de-Caxton lined the street with banners stating "Saint-Elie, incompatible with mining activities", after they saw a helicopter dragging an electromagnetic probe over their subsoil. Mapping the land and doing sampling is one thing, building a mine is another (in North America, an average of 15 years will pass between the two), but try to explain that to someone worried about drill rigs being placed in their cottage.
In May, the National Assembly of Québec announced Bill 63, thus signaling the province's commitment to modernizing mining legislation in line with long-term environmental and sustainable goals. The idea is to develop transparency and early communication with local communities to achieve better social acceptability from the outset. In the words of Maïté Blanchette Vézina, minister of natural resources and forests of the Government of Québec: “As far as amendments to the Mining Act are concerned, one of the major proposed measures would ensure that mining companies go through the BAPE process (public hearings), which is a positive step for the industry, as it will create greater social acceptability.”
Over the past year, the Québec regulatory scene has evolved by providing a more controlled framework for exploration activity. For instance, another key component of the amendments to the Mining Act (which will be further worked upon in August 2024) will allow municipalities to have the final say on withdrawing mining exploration activities from certain areas. Andrew Disipio, head of mining at Bennett Jones, explained how recent legislative reforms reinforce rather than harm Québec’s investment attractiveness: “Québec is strategically positioned to help deliver sustainable energy goals thanks to its favorable regulatory environment. Moreover, its attractive tax incentives and focus on critical minerals to supply its EV battery hub make it appealing to investors.
In the meantime, the government added a permitting requirement for “impact-causing exploration work in Québec” in early May. While the timing of this requirement raised questions (with explorers enquiring if the “right time” is ahead of the summer drilling season), it appears coherent with the province-wide efforts to improve the regulatory process for Indigenous and community consultation. Simply put, it creates a framework for social acceptability related to exploration.
“In Québec, updates to the Mining Act and environmental assessment regime are expected to improve social acceptability and accelerate the energy transition, while ensuring environmental protection.”
Louis-Nicolas Boulanger, Partner, McCarthy Tétrault
Unparalleled regulatory ecosystem for critical and strategic minerals
Québec is renowned for providing tax incentives beyond those available in the rest of Canada, such as a refundable tax credit on a portion of exploration expenditures. Additionally, both the Canadian and US governments have emphasized the importance of securing domestic and allied critical minerals, further enhancing Québec's significant mineral exploration potential.
Tax incentives further evolved in recent months after proposals to streamline lithium exploration in the province included a targeted change for explorers in “hard rock” lithium, much more common than brines in Québec. These proposals involve revising the definition of “mineral resources” to consistently include traditional hard-rock lithium in the list specified in section 248 of the Income Tax Act (the “Act”). Such regulatory amendments are timely as several juniors that were traditionally exploring for gold in the province – such as Harfang Exploration, Québec Precious Metals, or VIOR – shifted their focus to the lithium present on their properties in 2023.
The Federal Government’s 30% tax credit and Québec incentives that are accessible to investors who incur mining exploration expenses for critical metals will remain a game changer for the province’s investment attractiveness. As put by Josianne Beaudry, partner at Lavery: “All these mineral tax credits are helping finance exploration activities. Exploration firms need funds to develop their projects, so these incentives are keeping investors interested in the industry. It has been more challenging post-COVID to raise funds, so those tax credits are key to helping firms attract the necessary funding to carry on their exploration work.”
The draft legislation proposal for an investment tax credit (ITC) in clean technology manufacturing, announced in the 2023 federal budget, is significant. This ITC, up to 30%, encourages investment in zero-emission manufacturing and the extraction and processing of six key critical minerals. For instance, the ITC offered a 30% credit on 80% of Nouveau Monde Graphite’s CapEx, totaling about C$300 million. A significant help in NMG’s plans to become North America’s largest integrated natural graphite producer.
Beyond tax incentives, Québec also makes the point of allowing explorers to explore. Indeed, getting the necessary permits for exploration work in two months or less is quite the ask these days in North America. But if there is one place where it will happen (relatively) smoothly, particularly in the critical and strategic minerals space, it is Québec. Jonathan Buick, president and CEO of Champion Electric Metals, who is currently advancing its lithium property in James Bay, got a permit in record time ahead of the drilling season. He shared: “Québec’s ambition is to create an electric corridor and feed products into the US market. As explorers, we are benefitting from that desire. To the credit of Québec, their push for critical minerals means that they are pushing permits faster. We got a drilling permit for the past season and the upcoming drilling season in less than 30 days.”
“Québec is among Canada's most favorable mining jurisdictions, with a friendly regulatory framework and leading tax incentive regime for investors. The province is particularly focused on critical minerals and is also positioning itself to become one of the leading North American EV battery hubs.”
Andrew Disipio, Head of Mining, Bennett Jones
Potential hurdle: Dissonance at the federal level
Two years after the 30% Critical Mineral Exploration Tax Credit (CMETC) received Royal Assent, new alternative minimum tax (AMT) rules could seriously harm exploration in Canada. Should Ottawa go through with the latter, exploration finance will decline by at least a third from about C$1 billion to around C$700 million, according to PearTree. The Critical Mineral Exploration Tax Credit (CMETC) exemplifies the effectiveness of tax incentives. In its first year, the CMETC facilitated the raising of over C$350 million in additional investment for 38 critical mineral projects.
Beyond AMT, the federal government also made effective in June a hike on capital tax gains. More than a “tax on the rich”, it resembles another barrier to the country’s economic growth by taking the form of a tax hike on investing. Indeed, exploring for mineral resources is venture capital at its riskiest, and when considering that Canada’s juniors had only raised C$240 million in March, an almost 80% decrease YoY, the country desperately needs measures to help capital flow,. Frank Mariage, partner at Fasken, raised the question: “How can the Federal Government say that they want to help build critical mineral projects and at the same time hike the capital gains tax? The Québec government followed the Federal government and also hiked the capital gains tax. This gives the impression that there is no coordinated effort to build that value chain.”
Overall, Québec remains one of the best places to be in the mining space globally, ranking 5th on the Fraser Institute’s annual survey. Dozens of foreign firms highlighted to us that Québec’s regulatory environment was a big reason behind their decision to put their capital at risk in the province. However, some federal government decisions that were seconded by provincial authorities left a bitter aftertaste for miners. For an industry that is highly dependent on risk capital, regulators and legislators will have to strike a balance in order not to hurt access to capital and the willingness to take risks.
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