Led by Minerals and Mining… Natural Resources Poised For a Rebound

By Angus Gillespie

Coming out of this year’s Prospectors and Developers Association of Canada annual event in downtown Toronto it was quite apparent there was loads of optimism within the oil and gas and mining and minerals sectors. That optimism seems to be spreading throughout much of the natural resources industry, not only in Canada but worldwide.

PDAC is the world’s leading convention for people, companies and organizations in, or connected with, mineral exploration and finance and it has grown immensely in size, stature and influence since that first year in 1932. This year there were more than 900 exhibitors at the four-day annual event, which attracted 24,162 people.

“The mineral exploration and mining industry is cyclical in nature and has faced a variety of economic challenges over the past several years, but optimism has always remained and it’s fantastic to see this being reflected at the PDAC Convention,” says PDAC President Glenn Mullan, referring to sold out exhibitor space, investor meetings, Short Courses, Mineral Outlook Luncheon, and Awards Gala. “There was an upbeat vibe throughout the convention—a positive sign for the sector going forward.”

PDAC, in partnership with the World Economic Forum, hosted the International Mines Ministers Summit (IMMS) for the second year, bringing together 25 ministers responsible for mining from around the world. The event, hosted at BMO, provided an important setting for the global mining community to explore challenges and opportunities affecting the industry. This year’s summit focused on innovation in the mining industry and the clean innovation agenda.

“PDAC is seen as the voice of responsible mineral exploration and mining, not only in Canada but also abroad,” says PDAC Executive Director Andrew Cheatle. “We must continue to build strong working relationships, both nationally and internationally, and the PDAC Convention is the best opportunity to make these connections and showcase our industry and its importance to social-economic development.”

Jim Carr, Canada’s Minister of Natural Resources, announced at the event the renewal of the Mineral Exploration Tax Credit (METC) for one year, along with the maintenance of the flow-through share system. Overall, over 20 parliamentarians attended including three cabinet ministers.

The Canadian government has consistently played a major role in ensuring the mining and minerals industry continues to prosper. Given its widespread economic GDP impression, it’s an industry that must remain healthy. It supports the taxation policy including investment incentives such as the mineral exploration tax credit (METC). The METC is designed to assist mineral exploration companies to raise equity funds.

The METC is a 15% non-refundable tax credit on eligible expenses. Companies can apply it against the federal income tax that would otherwise be payable for the taxation year in which the investment was made. The credit can be carried back three years and carried forward 20 years. A taxpayer claiming the METC may also claim the 100% Canadian Exploration Expense (CEE) deduction, which applies for both federal and provincial/territorial income tax purposes.

“It responds the constitutional obligations with respect to Aboriginal and treaty rights and encourages economic development through training initiatives and investment in infrastructure and geo-science research,” says Mullan. PDAC recognizes this important role and we continue to represent our members in making recommendations to the government regarding policies, legislation, regulation and budget consultations.”

In an opening address to delegates at PDAC, Minister Carr took the opportunity to take stock of where the industry currently stands. “We continue to build upon our relationship with Indigenous communities and our understanding of the importance of corporate social responsibility,” he begins.

In addition to the more than 24,000 delegates from around the world representing 150 countries there were 26 ministers of mining in attendance to share ideas and potential opportunities.

“There are encouraging signs for the future of mineral exploration and mining. Some commodity prices have finally started to rally and rebound while investor confidence appears headed in the right direction,” adds Carr.
One quick example of the turnaround can be found in an annual survey of spending intentions, which reveals that Canada’s miners, including the junior exploration sector, are planning to increase their investments this year. That’s something that hasn’t been witnessed since 2011 and is further testament to the resilience of Canada’s prospectors and mineral project developers.

“We have reached a pivotal moment – a time when climate change has emerged as one of the great challenges of our generation. Environmental responsibility is essential to economic development,” says Carr.

Canada’s explorers and miners have a long tradition of rising to such challenges by focusing on innovation, environmental performance, Indigenous engagement and corporate social responsibility. The requirement is not to just embrace the future, but shape it.

“The urgency of innovation is critical and the ways that we as governments, nations, industries and communities can work together to accelerate the global transition to a lower carbon economy. Canada is endowed with vast mineral resources but it’s the ingenuity, expertise and sheer determination that have unlocked them,” says Carr. “Our government is eager to help by providing incentives for new investments, supporting new mineral discoveries and encouraging sustainable mineral resource development. All of this is built on a commitment to investing in clean technologies, building new infrastructure and ensuring regulatory certainty.”

It is vital that full support is shown to grassroots exploration companies in order to secure tomorrow’s mines and the employment that goes with them. The federal government is joining the Ontario government to release new geology maps and related data for the Ring of Fire. This type of material is critical for junior mining companies that are keen to explore a region that is rich in minerals and represents a generational opportunity to create new jobs.

Canada recently received the Best Country award at the Mines and Money Conference in England. It was a recognition that was further confirmed with the recent release of the Fraser Institute’s annual mining survey.

“More than 350 mining companies from around the world ranked Saskatchewan and Manitoba as the top two places for mineral exploration and Quebec jumped two places to sixth spot overall,” remarks Carr.

When resource development is done properly its benefits ripple through economies with good paying jobs, new infrastructure and greater social benefits.

“Innovative companies such as Tesla and Google are already reviewing their value chains. They are looking to buy their raw materials from countries with stable democracies and a respect for property rights in the rule of law. Canada is one of those countries,” states Carr.

There are currently 380 active agreements between mining companies and Indigenous communities, which lead to benefits such as training, employment, business development, procurement and environmental protection. The result is that Canada’s mining industry is the nation’s largest employer of Indigenous people with more than 10,000 working in the industry. IN echoing Mullan’s comments, the METC being extended by another year until March, 2018 is another major plus.

“In 2015 alone more than 200 companies issued flow-through shares that were eligible for this credit and more than 10,400 individual investors benefited from it. Measures such as this not only create good jobs, but bolster our global competitiveness, and further cement our reputation as a prime investment destination and a global financing centre for exploration. “There are still challenges to be overcome. The recovery in commodity prices is far from complete,” notes Carr.

The New Norm

It seems unlikely the world is going to see $115 barrels of oil anytime soon in light of the United States sticking to its plan to remain energy self-sufficient. But in order to do that it relies heavily on shale drilling and fracking techniques. Currently hovering at about $50 per barrel, many analysts believe oil may top out at about $70, but the days of triple-digit values are likely gone – at least for the foreseeable future. Why? Once the price of a barrel moves beyond $65 to $70 it then becomes economically viable for the U.S. to start up its shale drilling, which tends to be more expensive than conventional drilling methods. This protracted battle with OPEC is definitely taking its toll, with a number of member nations preferring to sell their commodity for whatever price they can.

Crude market sentiment is under pressure as OPEC sends mixed messages about its deal to cut oil output.

The Organization of the Petroleum Exporting Countries reached a historic accord with 11 other exporters late last year to reduce total production by 1.8 million barrels a day in a bid to reduce increasing stockpiles of crude.
Oil surpassed $50 a barrel for the first two months of 2017 but more recently the oil cartel’s united front began to fracture at CERAWeek by IHS Markit, one of the world’s most closely watched energy industry conferences.

Saudi Arabia, OPEC’s leading international exporter, has repeatedly vowed to defend the accord at any cost, but the kingdom’s oil minister has expressed disappointment in Russia’s output cuts. The Saudis have invoked most of the cutbacks while countries such as Russia and Iraq continue to pump above their quotas, figuring that any money is better than no money. Again, all this chaos is due largely to the United States increasing its fracking production, pushing the country’s crude stockpiles to record highs and upsetting OPEC’s plans to reduce global inventories. In other words, the U.S. and OPEC continue their high stakes game of chicken.

Complicating matters further for Saudi Arabia and OPEC in general is that Iraq’s oil minister said Baghdad could raise output in the second half of 2017 to 5 million barrels a day. That has raised red flags because Iraq has committed to cutting production to 4.4 million barrels per day for the first six months of 2017. Iraq produced almost 4.5 million barrels a day in January.

The Organization of the Petroleum Exporting Countries’ latest monthly report revealed that Saudi Arabian crude oil production rose to 10.011 million barrels a day, up from 9.748 million in January while the report also forecast a rise in production from non-OPEC members in 2017.

However, the increasing pace of U.S. oil production continued to worry investors, as output soared to 9 million barrels a day in February, up 430,000 barrels a day from September 2016.

Resurrection of Pipelines

TransCanada Pipelines CEO Russ Girling had a great day recently when U.S. President Donald Trump officially approved the Keystone XL pipeline project, but Girling and other executives at the company are still aware that additional hurdles must still be cleared. Nonetheless, the new U.S. government’s decision was music to Girling’s ears.

“This is the safest way to transfer our product to market and it will create thousands of jobs,” said Girling, while standing with Trump in the Oval Office at The White House.

“You’ve been waiting for a long, long time,” Trump said to Girling. “It’s a great day for American jobs and a historic moment for North America and energy independence.”

The project was originally developed as a partnership between TransCanada and ConocoPhillips, but TransCanada is now the sole owner of the Keystone Pipeline System, as TransCanada received regulatory approval on August 12, 2009 to purchase ConocoPhillips’ interest.

The pipeline would send oil from Hardisty, Alberta to the southern tip of Texas on the shores of the Gulf of Mexico. However, environmentalists vow to hold up the project through additional court orders.

Meanwhile, Cenovus Energy plans to swallow most of the Canadian assets belonging to ConocoPhillips in a C$17.7 billion blockbuster acquisition that builds upon a recent trend of Canadian consolidation in the oilsands.
The deal makes the Houston-based ConocoPhillips the latest international player to reduce its exposure to Alberta’s oilpatch.

“In a low oil price environment, economies of scale are important,” Cenovus CEO Brian Ferguson said. “This deal about doubles the scale of the company and this will give us a greater competitive edge.”

The sale announced after the close of markets includes ConocoPhillips’s 50% interest in the FCCL Partnership in northern Alberta, made up of the Cenovus-operated Foster Creek and Christina Lake oilsands projects — which in total produce about 390,000 barrels per day — and a proposed third major development called Narrows Lake.

Calgary-based Cenovus is also buying the majority of ConocoPhillips’s Deep Basin conventional assets in western Alberta and northeastern British Columbia, boosting its conventional output from 112,000 to 232,000 barrels of oil equivalent per day this year.

It said it expects to generate total 2017 production of about 588,000 boe/d if the sale closes, more than double its forecast of 290,000 boe/d.

All of this news should bring hope to provinces such as Alberta, Saskatchewan and New Brunswick, which have been hardest hit during the downturn.

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