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Lack of tax incentives discouraging exploration; activity by smaller firms falls off.

Lack of tax incentives discouraging exploration

There has been a dramatic decline in mineral exploration in the Timmins area over the past two years.

Dennis Prince, president of the Porcupine branch of the Prospectors and Developers Association of Canada, notes that two years ago about $100 million was spent on exploration in the area, but that declined to about $50 million last year.

"This year we might be lucky to hit $25 million at the present rate of spending," says Prince.

Employment in the sector has also declined.

In fact, Prince has heard of one geologist who is leaving the area to open a fast-food franchise in Thunder Bay.

The major cause of the decline has been a fall-off in activity being undertaken by smaller companies, ranging in size from one or two employees to several hundred.

Those firms are involved in such exploration-related activities as shaft sinking, consulting and drafting, among other things.

However, the major companies are continuing exploration at a level similar to past years.

With fewer companies in the field, Prince says there is a lot less drilling and geological work being done.

Many contractors are going out of business and many diamond drills are sitting in yards, he says.

Prince has a simple explanation for the decline.

"It's a tax thing," he says, nothing that the problem dates back even further that the federal government's cancellation of the flow-through share tax incentive scheme.

Prince says the government is slowly strangling exploration.

Before flow-through shares were dropped, the government cancelled a three-year tax break for new mines and also taxed capital gains, he recalls. "That hit investment very hard."

Prince says the government offered partial compensation for those changes with the flow-through share scheme, but investors found exploration was more lucrative for tax breaks than actually finding mines.

Prince believes the government eventually decided to kill the program because it became too popular and began to transfer investment money from the south to the north.

Flow-through shares were replaced by the Canadian Exploration Incentive Program, but that has also been scrapped.

"What we're left with is nothing," says Prince.

Now investors prefer the potential return from bonds and banks, compared to the risky business of mineral exploration, he explains.

The major firms, such as Noranda, Falconbridge, Placer-Dome and Rio-Algom, finance their exploration programs with revenues from their mining activities.

However, even among the majors, Prince says you can count the active players on one hand.

"Maybe two, if you stretch it," he says.

He warns that a stoppage of exploration could lead to no new mining sometime in the future for the Timmins area.

In Canada, 12 years is the average time between a mineral find and mining production, and most mines in the Timmins area have known reserves of less than 12 years.

"We're going to see the crunch come when these mines are depleted," Prince says, noting that would mean a very direct crunch to the economy of the city.

Prince states that the average cost of finding a new deposit is $42 million.

He says the tax system is hurting all of the country, except for isolated areas.

"Canada is generally appearing to discourage mining," he says. "We can't figure out the minds of the politicians in this."

The PDAC has launched a nation-wide lobbying campaign to convince the government to change the tax system.

Meanwhile, many Canadian companies are shifting operations to other countries, such as Chile and Brazil, where greater incentives are offered.

People in the mineral exploration field want to see rewards for exploration, he explains. "They don't want to be supported by the public purse."

Despite the problems, Prince is still optimistic.
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Title Annotation:Timmins Report
Author:Bickford, Paul
Publication:Northern Ontario Business
Date:Aug 1, 1990
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