Diamond royalty imposed.

A back-page Ontario budget item imposing a diamond royalty sends the "wrong signal to the investment community," says Ontario Mining Association president Chris Hodgson.

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The former Northern Development and Mines Minister says changing the rules for De Beers Canada, one year prior to the opening of Ontario's first diamond mine, doesn't enhance the province's international reputation as a favourable place for mining and exploration investment.

Hodgson says it's unfair to retroactively impose a royalty after De Beers has gotten government approvals and the company's business case and development costs were based on an earlier tax rate assumption.

"One of the advantages Ontario has had is clear rules for investment," says Hodgson. "The challenge is changing the rules for a company (project) that's already been approved, committed to and is spending a $1 billion that will have a huge (spinoff) impact on Northern Ontario."

The mine begins production in the first half of 2008.

Ontario's reputation as a stable mining-friendly jurisdiction has been slipping in recent years according to the Fraser Institute, says Hodgson, "and this isn't going to help."

"The whole world's open for production and we want to have some consistency on our input costs."

The proposed royalty applying to diamond producers could range between five per cent and 13 per cent depending upon annual diamond production.

De Beers spokeswoman Linda Dorrington told Reuters there was no pre-budget discussion between Ontario government officials and industry. She said the arbitrary nature of the announcement causes De Beers some concern about the stability of Ontario's tax regime.

Royalties could potentially affect 16 companies in varying stages of exploration in the James Bay Lowlands and northeastern Ontario.

Minister of Finance Greg Sorbara has said the royalty falls in line with legislation in other areas of Canada, including the Northwest Territories.

Others in the mining community say changing the tax structure by introducing royalties could not only chill mining investment, but affect marginal operations.

Bill MacRae, president of the Porcupine Prospectors and Developers Association in Timmins, says royalties will have a "moderate impact" for large miners like De Beers, but smaller junior explorers may question the feasibility of proceeding with building a mine.

"There's just no assurance (from the province) that the tax structure will stay stable."

Besides adding to De Beers' production costs, MacRae says the royalty will impact on revenue-sharing agreements with the At-tawapiskat First Nation and other nearby Aboriginal communities in the Far North.

MacRae worries Queen's Park may target other profitable mining operations and mineral sectors.

He cites recent changes in Ontario's Aggregate Resources Act, announced last fall without warning, that doubled fees and royalties to aggregate producers from $9 million to $18 million.

The hike will return a portion of those revenues to select Ontario communities where aggregate excavation takes place.

In the past, MacRae says government finance officials would often meet with the industry groups during pre-budget consultation sessions to discuss legislation that might impact business. Not this time.

"It's just a shock that they would do this sort of thing."

He's also upset royalties were introduced outside of the Ontario Mining Act. "No other (Canadian) jurisdiction does that."

Hodgson says the industry already pays its fair shares of taxes and contributes significantly to Ontario's economy.

The current Mining Act tax is a 10 per cent levy on individual company profits in excess of $500,000. Mines in Ontario's Far North or in remote areas are eligible for a five per cent rebate.

According to Ministry of Finance figures, mining companies paid $52 million last year in Ontario mining taxes.

The revenues are dumped into the province's general reserve fund.

In the last decade, starting in 1996-1997, Ontario's mining sector paid between $23 million and $94 million in annual taxes.

As to how much money the royalty will generate from Ontario's fledgling diamond industry, Ministry of Finance spokesman Scott Blodgett said, in an e-mail, it's difficult to predict the level as the industry matures.

"Since diamond mining is new to Ontario, the expected royalty payments over the first few years would be minimal.

"The diamond royalty is based on the value of output, so, as with any new investment, diamond mining operations are expected to incur large expenses in the early years, which would reduce the royalty base."

As a cabinet minister, Hodgson says he reduced the province's mining tax from 12 to 10 per cent to encourage investment.

But royalties and mining taxes are only the "tip of iceberg" of the real wealth mining generates to Ontario's economy through corporate and payroll taxes, equipment bought and jobs created.

Hodgson adds most Ontarians and Queen's Park are supportive of the industry realizing its collective wealth supports social programs and provides products for the modern world.

"I don't think it was done out of malice. They (government) just didn't realize the implications.

"I will stress to government the importance of mining and why we need to remain competitive and taxes are a part of that."

By IAN ROSS 

Northern Ontario Business