Subcommittee on Canadian Industrial Sectors Committee on May 14th, 2009

[The Chair, Conservative, Dave Van Kesteren]

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

Recently we had job numbers come out--net new jobs--that were kind of surprising. I think there were 36,000 net new jobs, and many of them were self-employment. I found that kind of interesting. I found it interesting that on the political side we took a little bit of heat from the opposition, who were almost making light of the self-employed component of it. But I was kind of struck thinking about what happened there.

I was thinking back to the tech crash and sort of what happened in the circumstances there. It seems to me, based on what I've heard, and you can correct me if I'm wrong, that there was a lot of focus on the crash or the bursting of the bubble, so to speak, at that time. But one of the things there wasn't as much focus on was what happened to a lot of the people who lost their jobs during that time. They went out and started new small, self-employed situations at the beginning, which have now actually turned into pretty strong companies in the IT sector.

I see in those job numbers that were recently announced maybe something similar happening, maybe on a broader level than just IT. But certainly, in both your areas, there might be a kind of component of that. We also see it happen, in a sense, when companies in the biotech field, for example, are sold, and the original founder of the company that was sold goes out and starts a brand new venture that winds up being successful as well. In all the darkness of the global economic crisis, that is to me something to grab on to. There is some opportunity there. Maybe something positive that's coming out of this is that people are taking the initiative to go out and start on their own.

There are obviously some challenges. We talked about venture capital. That's going to be a challenge for some of the folks, but we do have government programs through BDC, and not only on the venture capital side. There are also consultants who will help guide someone through the process, someone who is maybe more IT-related or more science-related but not so business-oriented, to kind of navigate through the other granting councils. We have business incubators and things like that to help people through that process.

Maybe you could speak a little bit to the potential opportunity that arises out of this, and then talk about what you see as the government's role in fostering this in balance with industry's role in fostering this.

[Bernard Courtois]

I've been seeing this as a phenomenon for quite some time, and to some degree, our technology enables that. People can retire early or they can leave a job with a larger organization, and they can start a consulting practice or start another business. It's a lot easier today than it used to be. Those people actually have sustainable commercial activities, and they do contribute to the economy, and those are good jobs.

What has happened in the past, as you pointed out with respect to the crash of the tech sector, and it happens in other areas.... It's not only in the tech sector. There's a business in Ottawa, Lee Valley Tools, that is an extraordinary business started by a former civil servant in his home. It is an extraordinary success story.

In the tech area, it's part and parcel of the revitalization of that whole sector. It happens all the time. Therefore, it's doubly important at the present time to be conscious of the venture capital shortage and to address that, because that's going to be a barrier to realizing that potential.

[Dr. Rainer Engelhardt]

What you mentioned before about revitalization and the spinoff and existence of serial entrepreneurs, that's all real. But I think we are, at the moment, in a particular crunch for new venture formation, because capital isn't in place.

So if we do have the attrition we expect to happen--and you asked, Mr. Thibeault, what happens if half our new companies are going to be dying off--I cannot see that if it is 50% in the course of a year, and there is no new capitalization possible, that those 50% would readily take up a new enterprise. This is an unusual circumstance right now.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

The tightening of capital is understandable for anybody watching the situation. It makes sense that people who would be investing would be more cautious in the circumstance we're in globally, and that banks would be far more cautious in their lending than they have been in the past, given the global uncertainty out there.

Do you see, in a sense, a sharpening of the pencils on the business side by your members? Is there an increased focus on making stronger business cases and on really ensuring the case for financing when they're going out and trying to sell their expertise and skills and the future potential benefit of their products? Do you see an increased focus on making that business case? I would imagine that's going to be the defining characteristic of the companies that make it, versus the companies that don't.

[Bernard Courtois]

Well, I would say that's been one of the underlying problems of the thinner venture capital markets and lesser maturity in Canada. People do have to keep sharpening their pencils, and not just the lenders or the investors, but also the companies coming and preparing their business cases. That's an ongoing maturity problem we have, and it's just going to keep coming with time.

During the current crisis, however, things have fallen off a cliff, so you're not even there at some point. We have very successful companies that actually have sales, have extraordinary major clients, and all of a sudden they cannot get money. They have very successful business plans, but things have just been disrupted beyond normal at this point.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Right. Thank you very much.

[The Chair, Conservative, Dave Van Kesteren]

We have to keep moving.

Mr. Thibeault, this is the last question.

[Glenn Thibeault, NDP, Sudbury, ON]

There's no pressure. Keep moving. Fair enough.

I really like your blueprint, entitled “The Canadian Blueprint: The Time for Action Is Now”. One of the things I like is on page 11. I'm not going to ask you to quote it, but I'm going to read something: “The biggest challenges facing biotechnology in Canada today are attracting investment for commercialization, building the business case to do more here, attracting and retaining the high-quality people necessary to expand our research....”

From the start of this committee, I could have put each of those statements into any sector, from forestry to oil and gas to energy. One of the important things we need to do is stated in your line that the time for action is now. All these challenges can be overcome if governments, private enterprise, and the research community choose action over hesitation and decisiveness over delay.

We've heard a lot about knowledge infrastructure. Would it not be the time to be decisive and to do the action in the knowledge infrastructure? If one of these companies that is potentially closing in 2009 is one step away from finding the little epiphany when the light goes on, and we've found the biofuel that's actually going to help us with the green economy, is it now time to put more of our investment into the knowledge infrastructure to help us down the road?

I'll open that up.

[Peter Brenders]

I'll kick it off on that one.

The short answer is yes. It's not just the action on that one. It's also having the collective vision--from the industry, from the government, from the public, from everyone--that, you know what? Canada will be that knowledge economy. This is our vision. This is our man-on-the-moon shot. This is where we're going to take it. We're going to align our programs behind that one.

We can reinvigorate traditional industries. We can be that prosperity for our new industry. There are literally hundreds of thousands of jobs that are going to come from this one if we choose to accept it and get beyond, oh, we're Canada; we're a good place for a vacation; we'll do okay; we'll dig it, we'll sell it, we'll mine it.

No. We have to want it. We have to start to align and to ask that question in all that we do: does this help innovation?

We think the bio-based economy is a competitive advantage for Canada. ICT is competitive. There are others out there, but at the end of the line, is it still going to be the same fundamental underlying characteristics, as you've pointed out? Do we have the environment that says, yes, we're going to drive innovation, that says we're not going to be the same as the U.S., we're going to be better?

You know, is it so wrong for us to want to go for the gold medal?

[Bernard Courtois]

On the whole issue of knowledge infrastructure, I want to commend the government for recognizing in its February 2009 budget that infrastructure goes beyond bricks and mortar. Broadband, which we've talked about, looks like a civil engineering project, but it's obviously an economic enabler.

E-health, the electronic health record, the electronic medical record, may look like an IT project, but it's not, really. It's a fundamental infrastructure to run a modern health care system; otherwise it's going to soak up all our society's revenues and it's not going to function. But with the proper, modern, 21st century infrastructure, doctors and nurses can treat more patients, we can avoid errors, and we can improve efficiency.

It's the same thing with trying to digitize a lot of our archival content in Canada; that's fundamental infrastructure. ICT and how we run government, that's fundamental infrastructure. And the knowledge infrastructure investments in the budget in science and technology, in university research capabilities, those are the kinds of thing we need to have. Knowledge infrastructure and 21st century infrastructure applies and it really is useful all across our economy.

[Glenn Thibeault, NDP, Sudbury, ON]

I know we've been using the race analogy throughout this, that it's a race that's ongoing. I do want to thank you for the information today. It's been very helpful for me to learn a little more about the high-tech industry. Hopefully we can be the guys with the glasses on the side of the road, while you're running, to make sure you're successful.

With that, thanks.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Thibeault.

Thank you all for your excellent presentations. We picked up some new terms today, I think. We heard “recovery through innovation”. “Serial entrepreneurs”; I've never heard that before, Dr. Engelhardt. That's a good one as well.

Mr. Courtois, I want to thank you for your vision. I think you're absolutely correct in saying we have the capability; we've got all the things in place. We've got a highly innovative people who are educated, so we've got the infrastructure, and now is not the time to shrink back. And we thank you for that vision as well.

I also want to thank the new witnesses who are coming in for allowing us to take this bit of extra time.

[The Chair, Conservative, Dave Van Kesteren]

Welcome. Again, thank you so much for your patience and allowing us to continue.

This is a very important study we're undertaking. Sometimes this happens, we just haven't exhausted all the questions, and so I hope we'll have the same wonderful response from the Mining Association and Canadian Association of Mining Equipment and Services for Export.

We have with us today, from the Canadian Association of Mining Equipment and Services for Export, Jon Baird; and from the Mining Association of Canada, Paul Stothart.

We certainly appreciate your coming, and we're looking forward to your testimony. We usually give you about 10 minutes if you have opening remarks. After that we will open up our line of questioning.

Go ahead, sir.

[Paul Stothart, Vice-President, Economic Affairs, Mining Association of Canada]

Thank you very much. It is a great pleasure to be here this morning. I have some slides as a basis for our presentation. I believe the Clerk has circulated bilingual copies of those.

Thank you very much. I'd like to quickly go through five or six slides.

[The Chair, Conservative, Dave Van Kesteren]

Are they in both official languages?

[Paul Stothart]

Yes.

The Mining Association of Canada is the national voice of the mining industry. We have three or four dozen full members, which are the larger mining companies that you're aware of, and around 30 or 40 associate members, which include some engineering firms, some financial firms, and some environmental firms, etc.

As you can see from the first table, it's a fairly large industry, contributing about $42 billion to Canada's GDP. These figures are for 2007, which is the most recent year available. We produce a document called Facts & Figures, which I believe you have. If you don't, we have some copies here in both French and English that contain a number of these pieces of information.

Let me touch very quickly on a couple of these points.

The industry pays around $10 billion per year in taxes and royalties to Canadian governments. It makes exploration expenditures, to which Mr. Baird, my colleague, will speak in more detail, of about $2.5 billion to $3 billion per year. The industry contributes about 19% of Canada's goods exports. It employs around 360,000 employees. There is also a significant supply network that feeds into this industry: around 3,000 companies supply goods and services to Canada's mining industry. For example, in the railroad sector, the industry accounts for about 55% of Canada's freight rail revenues. And there are a good number of mines, obviously.

Interestingly, in this sector there are strengths in every Canadian region, right from the east coast through Quebec, Ontario, Manitoba, Saskatchewan, Alberta, B.C., and northern Canada. Each region has different strengths in this industry. We can certainly talk to that in more detail.

The Toronto Stock Exchange has also carved out a very strong niche in the mining sector. Companies internationally tend to go through the Toronto Stock Exchange for their financing, both large companies and others: the TSX has also carved out a very strong position for helping smaller and medium-sized companies raise financing.

Touching quickly on some of the issues that are facing the industry, I'll talk to mineral prices and the global recession on the next slide.

It's a very important industry in terms of relationship with the aboriginal communities. It's the largest private sector employer of aboriginal Canadians. This tends to be a relationship that works very well. Our industry association, for example, about a month ago signed an MOU with the Assembly of First Nations, and we have a work plan associated with it. That's an important area. There is probably potential to do more with aboriginal Canadians in terms of future employment and future skills.

That leads to the next point. There is going to be a human resources crunch in this sector, as in many other sectors in Canada. Something like 65% of our geoscientists will be over the age of 65 over the next decade, so there is a need to fill that skill gap. Overall the sector's human resources council estimates that about 60,000 to 90,000 new workers will be needed in this sector by 2017. I think those figures are adjusted to reflect the happenings of the past half year.

Mineral reserves are an issue for this industry. Canada's proven and probable reserves of base metals and some others have gone down over the last quarter century. There's a need to reverse that and turn it back up. We can talk about that in more detail.

A number of obstacles face the global supply of minerals. There is the potential, actually, for significant price spikes over the coming years if some of these supply obstacles are not addressed. I can talk more about this in the questions and answers, but this relates to regulatory barriers, in Canada and internationally.

There is a need for infrastructure. Some of the projects being developed internationally require 600-kilometre railroads, etc., to bring them to market. To some extent, mining companies are in the infrastructure business as well, especially internationally. That introduces some challenges and some obstacles to bringing these projects on stream quickly.

I'll talk about the slide on the next page and walk you through what has happened on the mineral price scene. This table highlights six different minerals and metals, and it really tells three different stories.

It shows the strong growth in mineral prices that occurred between 2000 and 2007 right across the board. A lot of that is obviously driven by demand for infrastructure and manufacturing strength in China. That growth continued in general until halfway through 2008.

The second story this table tells is the significant price collapse that occurred from last fall to earlier in 2009. Copper prices fell by about two-thirds, zinc by two-thirds, nickel by over two-thirds, etc. Gold is in its own world to some extent and on its own trajectory. Gold prices remain very strong.

A third interesting story is that there has been a slight turn-up in the last couple of months in mineral prices, with some exceptions. In aluminum, the supply-demand balance is still not there to start turning prices up, but in other base metals prices have gone up. That leads us to have a fairly optimistic picture going forward.

In terms of the present situation, companies are adjusting to mineral prices. One of their fundamental roles is to adjust operations to reflect mineral prices. These prices are generally global prices; they're derived through international trading exchanges. Mining companies have been adjusting their supply. Some countries in particular have been managing their debt loads and trying to get them in line to ensure their future prosperity.

Natural Resources Canada has set up a desk to try somehow to tabulate the mining cutbacks that have taken place. They have found about 23 cutbacks announced in the past six months. These are companies we're familiar with. Vale Inco in Sudbury will be scaling back production this summer for a couple of months. ArcelorMittal on the north shore of Quebec will have the same kind of scale-back through the summer. A couple of the diamond mines as well will be scaling back production. It's really aimed at trying to get supply and demand back into balance.

The oil sands development has been moderating, and some could arguably view this as a positive thing. Certainly there was a very frenzied development over the past few years in that segment, and it is now coming back into more of a moderate development. I think there is a sense that costs are getting brought down, and there is a basis for future growth as well.

As I mentioned, exploration spending was about $3 billion last year. It's projected to be only about half of that this year, with pretty much a non-existent flow-through share market through the first quarter of 2009. The exploration sector has been hit quite significantly.

I'm going to leave the last slide for the question-and-answer session, so the final slide I'll talk about will be the global outlook.

As I mentioned, equipment backlogs and wait times are coming into balance. Ironically, these are some of the positives of a recession. We were in a situation a year ago in which companies were waiting up to a year or longer for items such as tires. Some of that is being brought back into balance.

Input costs are decreasing as well. There is a sense that the stimulus spending taking place in Canada, China, the United States, and elsewhere will help drive mineral and metal prices. As I mentioned, there has been a turn-up in some base metal prices in the last couple of months.

Long term we are very optimistic. The market potential in countries like China is just staggering. There are about 95 cars per 100 people in the U.S., but in China there are about two cars per 100 people. That gap will probably never be closed, but it will be narrowed. There are other, similar indicators; for example, there are 20 times more personal computers per capita in Canada than in China. These items contain many metals and minerals. Those kinds of indicators will narrow over the coming decades. It's our sense that we're in a bit of a pause now, not in a downturn. We're in a pause of a cycle that is going to continue and have very strong growth for decades to come.

The next bullet point is on China and India. It's not just going to be in base metals. These countries are moving towards more of a feed-intensive, protein-based diet, which means a need for potash. Canada is the number of one provider of that.

For nuclear power, there is a lot of investment in nuclear reactors in China and elsewhere, which means uranium. Canada is the top provider of uranium. Infrastructure and manufacturing growth will lead to more base metals demand, and as their middle class grows, it is going to lead to more demand for diamonds and gold and other items associated with middle-class growth.

As I mentioned, there is a stickiness on the supply side both in Canada and especially globally. That has the potential to contribute to significant mineral price increases in the coming years. Gold prices remain very strong. Gold companies have a lot of cash and are raising money and will probably be on a mergers and acquisitions kind of path over the coming years as well.

I'll leave the last slide. It talks about some of the remedies and asks--the ways through which government can help support the recovery. I'll leave that for the question and answer session.

Thank you very much.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Stothart.

Mr. Baird.

[Jon Baird, Managing Director, Canadian Association of Mining Equipment and Services for Export]

Good morning, Mr. Chairman and members.

I'm very happy to be invited here as part of the mining team.

Just by way of introduction, I am pleased to say that I was born in Chatham, Ontario.

I lived in Montreal long enough to learn French. I will be making my presentation in English but I would be happy to answer any questions in French.

Tomorrow I'll be in Sudbury, where there are 300 mining supply companies. It's a natural destination for me.

I'm sorry I can't lay claim to Edmonton, Mr. Lake, but I have been there. I note that it's pretty close to the large operations, which we call mining, in the oil sands.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I'm sure you're a huge Oilers fan, though.

[Jon Baird]

I used to be, but then they sold him.

I'm pleased to be here representing two organizations. I manage the Canadian Association of Mining Equipment and Services for Export, which is known as CAMESE. It's an organization of 300 companies that all sell to the mining industry and are particularly looking to increase their revenues from exports. I've been doing that for about 15 years now.

At the same time, I am the president of the Prospectors and Developers Association of Canada, which is a large association of some 6,000 individuals and 1,000 corporations. In that role, of course, I'm on the board. It's a voluntary job, not my full-time job, but I'm here to represent them as well.

I would like to start by talking about exploration and then move into the mining supply part of my presentation.

The two parts of the mining industry I'm here to represent are really integral to the mining industry, extremely important to the productivity, health and safety, and environmental performance of the mining industry. And yet they're different, and they're different from each other. Hopefully in my talk I'll be able to bring that out. You have already heard about the main part of the mining industry, which is the extraction and processing part and which Paul is here to represent.

Just to give you a bit of background on the exploration, there are between 8,000 and 10,000 Canadian exploration and mining projects in the world, only about half of them in Canada. The other half are in 100 countries. Secondly, aboriginal peoples are extremely important to this industry, in Canada and also in other parts of the world, because we tend to work in remote places in exploration.

Exploration is a big giver of jobs to aboriginal people. These are jobs that occur near to their communities, and they're jobs for which, often, high levels of training and so on are not required.

Mining exploration is unique in that it needs very large tracts in order to be successful, simply because what we're doing is looking for needles in haystacks. No one can tell you where those needles are going to occur, so we need to keep large tracts of land open for mineral exploration.

Turning to the business side of it, there are 1,474 companies classified as mining and metals issuers and listed on the Toronto Stock Exchange or on the TSX Venture Exchange. Indeed, when you look at the whole Canadian mining industry as an investor, as an explorer, and as a supplier, there is no other Canadian sector that is as dominant in the world. We are out there as the face of Canada in 100 countries around the world.

The current situation in the exploration industry, of course, as Paul has explained, is that we're facing the downturn in the commodity prices, which is a cyclical feature for us. On top of that, we're facing a very heavy credit crunch, a loss of risk capital for mineral exploration. The year 2008 was a peak year, when we had something like $12 billion U.S. invested in mineral exploration in the world, and 20% of it was in Canada. That gives us about $2.5 billion, often of other people's money, which we use to look for resources in this country. Last year was a big year.

The previous peak—as I told you, it's cyclical—was in 1997, when the world spent $5 billion to explore. There's a huge rate of inflation in the industry over that ten-year period, but the amount has more than doubled. We are not finding resources fast enough for the world. The next time, when we get into the upturn, which will come.... This is the fourth downturn in my career in this industry, and one thing is sure: it's going to come back, and everybody in the industry is sure of that. We're not running scared at all. We're hurt, we're wounded, but we'll get out of this. When it comes back, as it has every time, it's going to be better, and we want to be there to take part in it.

Looking at financings, the announced flow-through financings—I'm assuming that people here are aware of the flow-through share system here in Canada—in 2007 were over $1 billion. In 2008 they dropped to three quarters of that amount, but based on the first quarter of this year, they're probably going to come in at about a quarter of a billion dollars.

These are the moneys the junior companies depend on. Junior companies, by definition, do not have revenues from production; they rely on capital markets to raise money, which they use for mineral exploration. This decline is extremely serious for juniors, who rely on the flow-through financing, when most other financial options are closed.

Here are a few challenges, as I see it, for the exploration part of the industry. There's financing, of course. They're having to pull back on projects and lay off employees, and companies are merging. There's a big problem around financing.

Secondly is, I guess I could call it, “survival”. Putting it a little more politely, you might call it “maintaining capacity”. In previous cycles like this, 50% of these companies have disappeared. That's not to say that they all went bankrupt, but many of them folded—politely bowed out, if you will—or many of them merged with other companies, and so on.

If this present situation lasts for two or three years, we'll probably have 50% fewer companies with which to do exploration in Canada, but also to maintain Canadian dominance in exploration around the world.

A third challenge is attracting new people. As Paul pointed out, this whole mining industry has a demographics problem. The demographics are probably caused by the cycles of the industry. The young people don't go into mining-oriented courses when things are down; they go in when things are up. When they come out, there are no jobs, which is precisely what's happening this summer, and I'm going to mention a couple of solutions to this.

Another challenge, of course, for Canada is that the world is globalizing. Just like any other sector, if we want to retain our dominance, we have to take certain steps.

An additional challenge is around the whole area of corporate social responsibility. Some of you may be well aware of the round tables and so on that occurred two or three years ago. I can give you more information on these, if you like. The industry is doing something about this. The Mining Association of Canada has a program called Towards Sustainable Mining, and the Prospectors and Developers Association of Canada has a newly expanded program called e3Plus. I can tell you more about what the guidelines and framework for excellence entail, if you would like.

Lastly, a challenge for the exploration industry, as I mentioned a little earlier, is to maximize the exploration land base and ensure mineral tenure and land access. What's happening in Ontario this year is really critical. The government has announced three very important changes. One is the opening up of the Mining Act for renovation, if you like, and two others have to do with aboriginals and a very big question on land use in the far north of Ontario. If these changes are not handled properly, any of the three will probably cause a continuing problem across Canada.

What can government do in the exploration sector? Geological mapping is in the government bailiwick for sure. It's geoscience, if you like, that is fundamental to the success of explorers in Canada. A couple of budgets ago, there was $100 million allowed over five years in what's called the GEM program, and this is something I would suggest to you could even be increased, or the expenditures brought forward over the five-year period.

Another thing government does is provide something called the Mineral Exploration Tax Credit, the METC. It was extended in the most recent budget for one year, but METC could be increased. METC should certainly be made permanent. It's an extremely important part of getting this kind of risk investment into Canada.

Another thing that I know the government is working on is the question of the single securities regulator for Canada. We are the only major developed country—the only developed country, I believe—that has this disparate system of securities regulators across the country, and it causes a great deal of extra expense, duplication, overlap, and lack of enforcement.

“Infrastructure”, I know, is the buzzword these days. Why not build roads to resources? Why not improve the airports and seaports and so on in the north? This will lead us to great wealth for not only northerners but all Canadians.

Governments should quash Bill C-300. Bill C-300, a private member's bill that was introduced prior to the government's response on the CSR question and prior to industry taking action on it, is an anachronism now and should be wiped off the face of legislation in Parliament today. It would risk politicizing the CSR issues without offering any kind of clear process for resolution. It would just tie the hands of Canadians around the world, and I think it should be quashed.

Further, government can support innovation. It was interesting to hear these other two sectors talking about innovation; I can go into it in much greater detail, if you would like. In mining, we have been forming over the last couple of years something called the Canadian Mining Innovation Council--

[The Chair, Conservative, Dave Van Kesteren]

Mr. Baird, I'm going to interrupt this quickly. The only reason I'm doing this is that Mr. Garneau has the first round of questioning, and he's getting short of time.

Can we possibly just...?

[Jon Baird]

I'm done on exploration. Is it all right if I give you two minutes on mining supply?

[The Chair, Conservative, Dave Van Kesteren]

Yes, if you could perhaps do it in about 30 seconds.

[Jon Baird]

I'll try.