NRGO Committee Meeting

STANDING COMMITTEE ON NATURAL RESOURCES AND GOVERNMENT OPERATIONS

COMITÉ PERMANENT DES RESSOURCES NATURELLES ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 14, 1999

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[English]

The Chair (Mr. Joseph Volpe (Eglinton—Lawrence, Lib.)): Pursuant to the committee's mandate under Standing Order 108(2), a study of the mining industry in Canada, I declare the meeting open.

First of all, I want to thank all colleagues for changing their schedule so that we could meet this afternoon. As well, I want to thank Mr. Comba for having waited so diligently this morning and then for making himself available again this afternoon.

I'm sure Mr. Comba will not necessarily appreciate but understand that some of us get tied up in the House for reasons that are beyond our control. This morning was one of those. Thank you very much for coming again.

We have before us Mr. Comba, who is the director of the Prospectors and Developers Association of Canada.

I met with that organization a little while ago, and subsequent and pursuant to some of the discussions we had around this table about listening to the interests of the mining community, I suggested that they write a request to meet with this committee before the Christmas break—I was hoping we could have done it a little earlier, but this is still before the Christmas break—and give us an opportunity to hear what they had to say on behalf of their association for the purposes of giving us an opportunity to make some input on the budget decisions, whichever are left to be made, and as well, down the road, keeping us abreast of and current on issues relative to mining.

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Without much further ado, Mr. Comba, I know you have a presentation you'd like to make. Normally we accord about 10 minutes to our speakers and then we go into questions and answers. Some of the members around the table may be familiar with you and your issues better than I would have been or am, so they might wish to go immediately to questions and answers.

I want to thank you again, and the microphone is yours. We'll have members coming and going, so don't let them distract you.

Mr. David Comba (Director of Issues Management, Prospectors and Developers Association of Canada): Thank you, Mr. Chairman.

I'm a geologist by profession, and I am currently on staff with the Prospectors and Developers Association of Canada as director of issues management.

On behalf of the PDAC and its over 5,500 individual members and 90 junior mining companies, I'd like to thank you for the opportunity to speak to you. The organization was formed in 1932, and we are most well known for our annual convention in Toronto. This now draws over 7,000 people worldwide, and it's the largest convention of its kind in the world.

I'd like to stress at the outset that our industry is very cyclical in nature, and this is primarily driven by commodity prices. However, the crisis that is upon us now started as just another downturn. In fact, the PDAC board of directors only agreed to call this a crisis and take action in mid-November of this year.

Why now? Well, there are some structural changes that have occurred in the exploration sector that clearly indicate this downturn is unlike any other. Junior mining companies are no longer on the radar scopes of high-risk investors. Right now, as most of you are probably aware, there's a feeding frenzy for Internet.com stocks, and this is taking away a lot of the investors who would normally play the higher-risk junior mining companies.

Equity financings are almost impossible to conclude, and they are very dilutive at today's depressed evaluations. Unable to raise moneys, juniors are unable to take advantage of grants and capital tax credits that are available in some provinces and territories. The recognition of this downturn has been met by a number of provinces with very innovative grant systems, but unfortunately, because the junior companies can't raise money in advance, they are unable to take advantage of these types of programs.

The number of financings has dropped from 120 per month at the beginning of this year to 80 by July, and right now you can count on your fingers and toes the number of junior mining issues that are being financed through December.

But even worse is the drop in the average size of the financing. It has gone from an average of $2.5 million down to less than $500,000. Less than $500,000 means the junior companies essentially are just staying alive. That's enough money to keep them listed on the stock exchange, enough money to keep one or two key people, pay overheads, and maintain their key claims. Assessment work still has to be done on those claims to keep them in good standing, but it doesn't allow them to do any new programs.

In order to look at ways of remedying the problem, we have had to look back 16 years to a federal program that helped exploration recover during another cyclical downturn caused by commodity prices...a structural change that occurred in the industry with the departure of the oil and gas industry from mine exploration. This federal program was called the mineral exploration depletion allowance, and it worked very well. In fact, it worked too well.

In hindsight, it's easy to see that it should have been in place only two to three years rather than the four years it was in place between 1983 and 1987. This program also had some structural problems with respect to timing of expenditures and allowed major underground programs to be eligible.

Looking back these 16 years, we can see there are obviously ways we can make the program better. What we are proposing is a redesign of the flow-through share premium. By increasing the time available for expenditures almost fourfold, that is, from February 28 to December 31, this is overcoming the greatest prior impediment to compliance with the old MEDA program. Also, the definitions and guidelines in what constitutes a qualifying exploration expenditure can be clarified and tightened by working with the Prospectors and Developers Association of Canada.

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To ensure that the proper scaled-down provisions are met, a number of independently monitored and mutually reinforcing activity measures can be set in place. We can work, for example, with the new western venture capital stock exchange based in Calgary. We can get from them the daily trading volumes and dollars traded on the junior mining issues. We can work with the Canadian Drilling Association and get monthly totals of the footage drilled. We can work with Gamah International, which is a company that keeps statistics on the frequency and size of financing of junior companies. Another major thing we are proposing is a mandatory termination at the end of three years and also that no underground programs be eligible.

We're calling this new program a focused flow-through share program, which is much more constrained than the earlier version, and, most importantly, no new legislation is required. We propose that we would start off with a premium of 40% to initially capture the attention of the investment community, and we would propose scaling that back to 30% in the second year and 20% in the final year. Our calculations, which are based on the methodology used by Finance and Natural Resources Canada in the previous program, indicate that every federal income tax dollar foregone will result in $3 to $4 of additional exploration spending. Keep in mind that those foregone exploration dollars are gross, not net, of the amount of money that would be recovered from salaries of people employed and provincial and federal sales taxes.

The focus of this program would be on northern and rural areas. It would be surface exploration only. The scaled-down formula is something that can be used as a management tool and can be monitored monthly. One of the problems we have now is that the statistics we and you work with are three years old. This doesn't allow you to have a good management tool.

There is an opportunity here for the government to go back and look at a proven policy that's still on the books. It's just that right now the mineral exploration depletion allowance premium is set at 0%, which means the purchaser of a flow-through share just gets a 100% write-off when he purchases the shares of a junior company. What we're asking for is a bump up in the first year. Forty percent would mean that investor would get a 140% write-off if he bought the shares in the first year.

Another thing we find missing, particularly in some of the briefing documents we've come across in the last two to three weeks in Ottawa, is that there seems to be a very clear lack of recognition of how successful the last program was. There's some reference to a few gold mining companies. I'm here to tell you that the Louvicourt Mine in Val-d'Or, Quebec, was found directly with flow-through share money with the MEDA premium back in that period 1983 to 1987. This is a major base metal mine, and the company that found it, Band-Ore Resources, is going on to be an international company.

I personally was involved with the discovery of the Lindsley Mine in Sudbury, Ontario. I was the chief geologist in Sudbury for Falconbridge Limited. Falconbridge was one of the few companies at the time that actually used flow-through shares, and the then president, Bill James, took a lot of criticism for a program that most thought was available just for junior companies. But nickel was below $2 a pound, Falconbridge was not profitable and wasn't deemed to be profitable for several years, so Bill James did a flow-through program, and that money was used to find the Lindsley Mine.

In British Columbia the Eskay Creek Mine was found. I think, as importantly, the work done leading up to Canada's first two diamond mines, Ekati and Diavik, took place in this period. Gren Thomas, who was then the president of Aber Resources, is a personal friend of mine. I talked with him at length about this, and again and again he said how important it was from 1983 to 1987 to be able to tap into some of that MEDA money, because back then all the experts knew there were no diamonds in Canada. DeBeers had been running exploration programs in Canada since the late 1950s and hadn't found any diamond mines in Canada. Well, two juniors have found diamond mines in Canada, and DeBeers is still waiting to find its first mine.

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It was the financing in the 1983-1987 period that was really critical to the story. This is very high-tech exploration. We're talking about very sophisticated heavy mineral separation from soil samples, and the use of electron microscope probes to determine the chemistries of some very exotic chrome dioxides and garnets, minerals that are associated with diamonds in the geologic rocks that host diamond deposits. This was very sophisticated work, and it was funded in the 1983-1987 period by flow-through. If those companies had gone directly to brokerage houses to try to raise money for diamond exploration in Canada, they would have been turned away.

Gren also reminded me that Aber Resources during that period found the Thor Lake beryllium deposit and the Sunrise Lake copper lead zinc deposit. Neither one of them is currently in production, but keep in mind that those are now in Canada's national inventory. As technology changes and recovery methods change, there's no doubt in my mind that those deposits will be mined one day. Also, in order to qualify, all the work that was done had to be turned over to provincial and territorial surveys as assessment work, so the geoscience database of Canada was greatly enhanced during this period.

We have heard on a number of occasions in the last two to three weeks that people would prefer to use tax credits because by doing that they know the limit of their exposure. I'm here to tell you that tax credits don't work for a number of reasons. They don't incite investors to buy issues. That's really what we're talking about here: the upfront funding of junior companies by people interested in high-risk ventures.

These people don't like tax credits for two reasons. If it's just a straight tax credit, the money has to be spent before the tax credit flows through to the investor. That is one to two years later. Well, I know I'm taxable in 1999, but my contract with the PDAC ends in February. I have no idea whether I'm going to be all that significantly taxable next year or not. If I want to book a tax credit—and I've already bought flow-through shares for this year—I need to get that deduction in the year when I know I have a tax problem.

Another thing is that tax credits can be made so that they apply to a company and are immediately redeemable. A tax credit to a junior company that's not taxable doesn't make any sense, but I am told tax credits can be so structured that they put money back in the company treasury. Again, though, that does nothing for the investor, so the investor has no incentive to buy something with the tax credit.

We know something from the Mines Ministers' Conference in Charlottetown this year, in September. The deputy minister for British Columbia got up and emphatically said the tax credit system they had in B.C. was not working. We now know the numbers for that. They had set aside $9 million for this year, and they're going to be lucky if they can give out $1.7 million. It's the same story in the Yukon. Newfoundland also has an excellent grant program. They set aside $2 million this year. It was undersubscribed to $1.5 million. Now that we're in December, there's a very clear recognition that they're going to be really lucky to give out $1 million. So there is increased recognition across the country that the problem is the initial upfront financing of the junior companies, and tax credits don't help.

We've done some cost benefits for government. Essentially, if this program we're proposing fails, there isn't any cost to the government, nor can there be a repeat of the 1986-1987 expenditure levels that were up around $1.2 billion. The reason why that can't be repeated is that there are now alternative minimum tax measures in place. Between these two extremes, there is going to be a foregone tax revenue loss, but this is a gross loss. It's subsequently offset by the taxes on salaries from the people who will be employed in a rejuvenated exploration industry, and that includes the PST and the GST on the goods and services that are supplied to our industry.

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In the event that a mine is discovered or multiple mines are discovered, the wealth created is brand-new. It's not just transferred wealth.

I would also like to point out that our industry is different from any others in that it's fixed. Unlike most industries, we can't pick up and move to a more satisfactory tax jurisdiction. Ore bodies don't move.

While a long time coming, the royalty and tax revenues for Diavik and Ekati—Ekati is already in production and, as you know, Minister Anderson approved the go-ahead for Diavik here in Ottawa about three weeks ago—are paybacks for the meagre years from 1983-1987, because that period paid for the key field work leading to the discovery of diamonds in Canada. Capital expenditures for Diavik alone are $1.3 billion, so you've already more than made up for the expenditure and lost tax revenue for that one year.

The mine life is going to be measured in decades. Community benefit agreements have already been signed. For the first time ever, there's going to be diamond sorting, grading, and other value-added activities all taking place in Yellowknife.

I'd like to thank the standing committee for allowing our association the opportunity to speak to you today. I'd like to also reiterate that there is great untapped mineral wealth waiting to be discovered in Canada's vast northern reaches. High-tech exploration by junior mining companies has discovered diamonds in the Northwest Territories and nickel, copper, and cobalt at Voisey's Bay in Labrador. With timely pump priming through a program such as what we're recommending, junior companies can do it again. They just need the investment seed capital to restart.

As an addendum to the material you have, I'd like to add an article that appeared in the Financial Post on November 26: “Junior mining hits rock bottom - VSE resource stocks fail to reflect commodity prices.” Also as an addendum, there's a translation of appendix A into French.

Thank you. That concludes my presentation.

The Chair: Thank you very much.

Mr. Chatters.

Mr. David Chatters (Athabasca, Ref.): Thank you, Mr. Chair.

I don't know quite how to react to this, because your suggestion and your encouragement are certainly something I've heard before, and I think at least Reg and Julien have heard it before. We spent a lot of time on this committee in the previous Parliament studying the Whitehorse Mining Initiative and making recommendations. As I recall, one of our recommendations in that report was to encourage the flow-through share provision for investment in new mines.

Having said that, the article you included in your presentation certainly suggests that as well. The big wall that's preventing speculative investment in new mines is environment and land claim issues, not necessarily the tax benefits or the revenue that one can make by speculative investment in mining shares. Particularly in British Columbia, the environment and land claims certainly are the big issues. I don't care if you have flow-through shares or some other mechanism that would potentially be more profitable. As long as you don't deal with the whole issue of the environmental movement and the land tenure and land claim issue, you're not going to be greatly successful in raising upfront capital.

Mr. David Comba: On environmental issues, there's certainly clear recognition that our sector really doesn't have a significant impact on the environment. Most of the exploration work that we carry out is done by remote sensing. It could be done by satellite, fixed-wing aircraft or helicopter. Work that's done on the ground consists of people walking through the bush. They may take samples of soil or a fist-sized sample of rock, but this has a negligible impact on the environment. In fact, we can go right through to the drilling stage without having to build roads. I think the construction of roads is what gives the environmental movement side the greatest concern.

With respect to unsettled land claims, they are a problem, but we have very clear outreach from the aboriginal community. They want to work with the exploration sector, because in many cases this is the only opportunity they have. There are vast reaches of Canada where there is absolutely no forest cover of commercial value, so the only real alternative they have to escape from a subsistence economy is the mining sector. We have an aboriginal director on our board of directors, and those ties, those links, are getting stronger rather than weaker.

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Mr. David Chatters: I don't want to argue with that point, but certainly the issue of who owns the resource and who benefits from the royalties from that resource, whether it be the aboriginal people of the area or the provincial government involved, is the issue. It's not that aboriginal people don't want mines and don't want development; it's about who we deal with and who owns these resources.

Certainly what you say is true enough. The preliminary work that's done in finding a mine and mapping out the potential of that mine isn't a big environmental issue, but that isn't where the return on your investment comes. The return on your investment doesn't happen until the mine is opened. You then have to build roads and you have to build the mine.

Mr. David Comba: I'm sorry, but for the junior sector that's not where the return comes. The return comes with the discovery. If it's a significant discovery, what the junior shareholders hope is that a major company will buy them out. We've seen that in the last few years. We've seen Arequipa on the Vancouver Stock Exchange purchased by Barrick. Argentina Gold, again a company on the junior Vancouver exchange, was bought out by a large American company. So this is actually where the investors in the high-risk junior companies get their reward. The juniors aren't present when the mine comes into production.

In the case of our industry, we start out with prospectors staking claims. Those are optioned to junior companies that provide the money for all the high-tech mineral assessments of the prospector's property. When a discovery is made and it's a significant discovery, very quickly that property changes hands and goes to a major. They are the only ones that really have the in-depth engineering and environmental people who can do the background engineering and environmental studies in order to bring that deposit forward, permit it, and get it into production. Junior companies, with very rare exception, just lack the ability to attract that kind of engineering.

Mr. David Chatters: I'm aware of that and I could debate that issue, but I'll pass, Mr. Chairman.

The Chair: That's very kind of you, Mr. Chatters.

Let me go to Monsieur St-Julien.

[Translation]

Mr. Guy St-Julien (Abitibi—Baie-James—Nunavik, Lib.): Thank you, Mr. Chairman. Mr. Comba, I will get right to the point. In the province of Quebec, we are at 175%. We are at 100%.

What killed flow through shares for junior companies? There were scandals such as that of Bre-X, etc. The problem right now with flow through shares programs, in Quebec and in Canada, is that there are grey areas regarding exploration expenses and equipment rental.

I will tell you why, Mr. Chairman. It is because after two and a half years, Revenue Canada and its investigators suddenly decided to inspect a flow through shares project and those who invested in the flow through shares were again assessed three years later. A person who invested $10,000 can be assessed again at $8,000 two and a half or three years later. This does not make any sense.

Currently, the consumer is responsible for his flow through shares, but the promoter who issued the prospectus and the flow through shares has no responsibility. This is what we must consider regarding flow through shares. A promoter can promote any project in Canada and in Quebec, but he is not responsible for anything, not even the geologist.

Mr. Chairman, if we want to make flow through shares a safe investment, we must make the promoter and geologists accountable. This is the message I am trying to convey.

What happened in the Abitibi region? Two and a half years ago, Revenue Canada sent a team of 25 investigators to take a look at flow through shares and promoters. I refer to these investigators as pit bulls. They arrived in our region, some even armed with a rifle, to seize documents. Then, after a six-month investigation, they finally apologized and said there was nothing wrong with that junior company. This does not make sense. I will stop here.

Mr. Comba, what did you find about grey areas and promoters' responsibility? Did you meet officials from the Quebec government to try to develop a new policy and a new federal-provincial attitude regarding mining exploration in Quebec?

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[English]

Mr. David Comba: Yes, I'm pleased to say we have met with the finance department in Quebec. Essentially, the write-off in the province for surface exploration, particularly in the parts of the province where they want to incent junior companies, is 175%. I'm a director of a junior company that was on the Montreal Exchange and just moved recently to the west. We have done flow-throughs at 175%. That is a lot of money on the table, and the Quebec system has now been in place for seven or eight years. When you leave that combination of money on the table for that length of time, you start to get elements that want to take advantage of that.

When I was in Ottawa about ten days ago, I heard that the federal auditors had found it was something like 68% fraud. That's what was reported to me, and I asked if these were random audits or targeted ones. Well, they were targeted. To me that means whoever did the targeting obviously knew what they were doing. My next question was whether it was non-compliance or fraud. They said they didn't know. It seemed a lot of it was actually just non-compliance. Was it material? Again, they didn't know. I'm sure that on any number of occasions I personally have sent in tax forms when I've mixed up my working copies with my final copies and I've sent in something that wasn't signed. Technically, that's not compliance. But was there fraud? No. I think the number, 68%, is greatly exaggerated.

However, I am aware that there were certain people primarily based in Val-d'Or who had figured out a way in which they were going to create essentially hard dollars from the soft dollars created from flow-through shares. I think they have been correctly targeted and found out. Whether there's actually any criminal charges that come from that is something we'll have to wait for in the future.

In one of my capacities with the Prospectors and Developers Association of Canada, I sit on a committee called the mining standards task force. This is as a result of Bre-X, and we are definitely raising the bar. The recommendations now are that you have to have at least one qualified person on your board of directors and there has to be continuous disclosure. So for this next round, yes, we're in much better shape than we were just a few years ago.

You can't legislate against fraud any more than you can legislate against murder, but I think we can make it much more difficult for people to create problems for investors.

[Translation]

The Chairman: Mr. Fournier.

Mr. Ghislain Fournier (Manicouagan, BQ): I thank you for your presentation. I took notes and I have three questions regarding what you said.

I am told that natural resources are a provincial jurisdiction. As we know, mining exploration expenditures in Canada are at their lowest level since 1993, if I am not mistaken. How do you qualify and explain the situation that has prevailed since 1993, for almost seven years? Is it because the responsibility was transferred to the provinces? If so, what can the federal government do? Is it because of a disagreement, or because of bad arrangements? Who will invest? This must seriously hurt mining exploration.

I would like to get your opinion on this. I will have two short questions after, if this is okay with you.

[English]

Mr. David Comba: There were many parts to your question.

First of all, the mining rights belong to the provinces and to the territories. However, the taxation for most parts of Canada, with the exception of Quebec, which collects its own tax, is a federal matter.

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With respect to the decline in exploration, major mining companies don't explore in Canada any more, and your member from Abitibi can testify as to the number of major companies that have closed their offices in the Abitibi and moved out.

This started in 1992. We've been plotting the expenditures of major mining companies for many years in our organization, and for decades prior to 1992 about 60% of their exploration money was spent in Canada and about 40% was spent in the rest of the world.

At that time, in 1992, there would have been about ten places where companies would consider spending their money: Ireland, the United States, Mexico, Australia, South Africa, Zimbabwe. In 1999, less than 20% of the exploration dollars for major mining companies are being spent in Canada, over 80% offshore. Major mining companies now can explore and acquire mines in over 100 countries.

The Central and South American governments in the early 1990s upgraded the quality of their mining title, and that's made them very attractive. Also, for the first time, what was the former Soviet Union has allowed Canadian mining companies to get in and look at, explore, and acquire properties in those jurisdictions.

So it's a much more competitive world now than it was.

With respect to the taxation itself, we think with the program that has been followed by Quebec, where flow-through share premiums have continued where they were discontinued in the rest of Canada, Quebec has not undergone nearly the severity of the downturn that the rest of the country has in terms of declining exploration.

The average in Canada is a 54% downturn. In Quebec it's only 45%, and in Ontario, which has suffered the steepest decline, it's 69%, almost 70%. So I think that's a very clear indication that the premium attached to flow-through shares does work to a degree. And it has worked in Quebec. It's mitigated the damage there to some extent. But I think Quebec realizes that you can only go to the well so many times. It's a very rich program—175% has been on the table for a long time. Investors are getting a little bit weary of it.

At Charlottetown, Quebec was a major booster for the reintroduction of a MEDA-type program nationally because they realized that they can reach out to far more investors across Canada than they can solely within the province of Quebec. For example, in the company I'm a director of, we raised flow-through last year in Quebec, and we're doing another one this year. As a resident of Ontario, I was only able to write off 100% of the investment I made in the company's shares, whereas a resident of Quebec could have written off 175%.

But still it's been an attractive program and to us a very clear indication that this type of thing can be successful with investors.

What I'm really pleased to talk to you about is that following our meetings with the chairman on November 23, the incoming president of the Québec Prospectors Association left Ottawa and spent the following three days in Quebec City. When he left on the Friday afternoon, he had the assurance of the Quebec finance department that they would harmonize their program with anything the federal government came up with. We clearly realize you can't have 175% and 140%. There's no risk to the investor then, and that's one thing Finance and ourselves very clearly want to maintain. The investor has to assume some of the risk.

I'm pleased to say that, yes, there is recognition in the province of Quebec that this is a good program, and they are prepared to harmonize with anything that is introduced by the federal government.

The Chair: Ghislain Fournier.

[Translation]

Mr. Ghislain Fournier: In your opinion, what is going on?

The Chairman: Excuse me, Mr. Fournier. I will give you the floor the next time around. It is now Julian Reed's turn.

[English]

Mr. Julian Reed (Halton, Lib.): Thank you very much, Mr. Chairman.

Mr. Comba, just for the enlightenment of a layman, can you explain the difference between hard dollars and soft dollars.

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Mr. David Comba: Hard dollars are the ones you would raise without flow-through shares. Anything that's raised with flow-through shares is considered to be an easier dollar to raise, although in this market there doesn't seem to be much distinction. I'm sorry to use that—

Mr. Julian Reed: No, it's all right. I'm glad to get the explanation.

I want to get back to the environmental concern thing, because in spite of the fact that a junior company explores and so on, that company is generally out of it before the actual mining occurs. At least that's what I understand.

But I can tell you that there is a lot of misguided—I believe—concern environmentally about mining in general. Some of it hearkens back to methods used in the past for dealing with tailings and things like that, and acids that would appear in creeks, etc. I don't think that atmosphere has brightened very much, if I read what I feel around Parliament Hill. There's still an element, aided and abetted by certain non-governmental organizations, that really is opposed to mining. I say that with sure and certain knowledge. I have a brother who's in mining exploration, and has been for many years. He's been a great source of information to me as to what you go through now in terms of the environmental process.

I'm wondering if you have any thoughts about how we can get over that hurdle, how we can get beyond that “nature good, mining bad” philosophy.

Mr. David Comba: I wish I knew the answer to that. I have had the good fortune to participate in a program in Manitoba to sit in on some of the meetings where they are completing the park and protected area network in Manitoba. Representatives of major and junior mining companies sit down with members of the World Wildlife Fund and other environmental groups and actually work out boundary changes, sizes of parks, locations of parks. It really is amazing to see it work, because it is working. There's an element of common sense in Manitoba that doesn't seem to exist in other parts of the country.

I participated in a program in Ontario and it was just dreadful. Our industry felt really betrayed by the process. Having an opportunity to travel nationally, I can see it happening elsewhere, but essentially it's an urban-rural split. People who live in Toronto just don't know anybody any more who cuts down trees for a living, who milks cows for a living, who really does much of anything other than get on the Go train. That's the problem we're faced with: people just don't understand the rural ridings any more.

Mr. Julian Reed: I couldn't agree with you more, and the irony of course is that the centre of mining technology is in Toronto.

Mr. David Comba: Yes, it's in Toronto.

Mr. Julian Reed: So there are people like ourselves who must assume some responsibility for jumping that hurdle, and any kind of direction you can give to us to meet that criticism, which has now developed into a fundraising type of criticism.

Mr. David Comba: Oh yes.

Mr. Julian Reed: Every time one can instill fear, the $100 cheques keep coming in. But we have to get over that and get beyond it if we're going to do something substantial in rural Canada.

Mr. David Comba: Many times I feel very frustrated because as an officer and director of a junior company, if I made the kind of statements that are made by environmentalists, I'd be in jail; I wouldn't be able to be an officer or director of a publicly traded company. They have no compunction about lying because their cause is just.

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At the same time, I think our industry deserves some criticism because we have not told the good news stories as well as we could. I visited a mine in Saskatchewan two years ago. It was in a provincial park. It was amazing how, with a little bit of forethought, very small things had been done at that site to essentially keep it hidden from view of a major canoe route. Instead of building a mill that was ten stories high, they put most of it underground. You couldn't hear it and you couldn't see it.

Engineers love to build roads in a straight line, but they're really obvious. What they had done there was they had kept the road as narrow as possible and had followed the contours. Even when you were up in an airplane, it was very difficult to spot the mine access road. All the buildings were clad in green metal siding.

It was very simple little things, but very effective. I think that's the type of thing we have to show people: you can have mining in a park and maintain the park values. Right now it's very difficult to convince environmentalists that you can even explore in a park, much less mine in a park.

The Chair: Mr. Schmidt, it's up to you to defend the honour of the chair and the city of Toronto. Get on my good side; ask him some decent questions.

Mr. Werner Schmidt (Kelowna, Ref.): I'll ask some decent questions all right, Mr. Chairman. I'm not sure you're going to like them, but that's another issue.

The Chair: As long as you uphold the honour of the big smoke down in southern Ontario.

Mr. Werner Schmidt: I found the candour that was associated with your last comments rather refreshing. I think you ought to be commended for that. The issue is a very real one.

I think in the last sentence you probably put your finger on the real problem. The real problem isn't getting money for the initial public offering, although there is a bit of a problem there. Until you have the resources of a major company buying that exploration company, the money isn't going to be there.

Venture capitalists who buy these flow-through shares, which I used to underwrite, are very sophisticated people. They look at the situation and say we're going to send this exploration company out. We'll sell it down the road, five or six years from now, we'll get our capital gain, and everything will be great. But they have to see that something is going to happen at the end of six years.

The way things are happening in Canada now, there is nothing at the end of six years. That's why the big majors aren't exploring in Canada. We know that's the case. That's the real issue.

So I'm not sure that issuing flow-through shares or making that possible is going to solve anything. I don't think it is. It may, but I doubt it very much, because unless you can see the light at the end of the tunnel, it's not going to go anywhere.

I really want to ask you a very similar question to what Mr. Reed asked. How do you get an attitudinal change to take place here? I'm not quite sure if you said this, but I think you implied that we have to deceive the environmentalists so they don't know what we're doing.

Mr. David Comba: I hope I didn't say that or imply that. Julian sits on the environment committee, so you have to be quiet.

I think Mr. Reed identified the problem as being that the non-environmental groups rely on scaring the hell out of people in order to commit fundraising.

Mr. Werner Schmidt: They do.

Mr. David Comba: That's a very difficult problem for us to overcome.

I disagree with your statement about majors not being interested in buying junior companies.

Mr. Werner Schmidt: How many have they bought in the last year?

Mr. David Comba: Junior companies haven't been exploring for almost two years now. There's been no news, no activity, to get anybody excited.

Mr. Werner Schmidt: No, but there has been some—

Mr. David Comba: Let me finish. There was a bidding contest for diamond fields when Voisey's Bay was found. If you find the right target, the majors are going to be there. The majors have told us they buy deposits now. If you find something in Canada, they'll buy it. To think there aren't problems with permitting in other jurisdictions, that it's all the mining industry's way, is quite frankly wrong.

Mr. Werner Schmidt: That's true, I agree.

Mr. David Comba: One of the biggest things about Bre-X that's always amazed me is that people have focused on the fraud, on the salting, which quite frankly I don't think they'll ever be able to prove in court.

What really is evident is that they had lost title to the property. Indonesia is a civil code country. If you break the law in a civil code country where title is tied to a contract, you don't have title any more, and that happened. They had a contract of work that allowed them to build only so many roads in the jungle and to have only so many drills working in the jungle. They very clearly exceeded that, and the Indonesian government told them they broke the contract of work. In a civil code country, that's it. They didn't have title, and some of the early insider trading was when they were told they didn't have title any more.

• 1625

You may remember that in part of the Bre-X, at one point Arequipa was going to be given the lion's share of the deposit and Bre-X was going to be allowed to keep 25%. People were outraged. How can you take 100% and only give them 25%? The Indonesian government said I'm sorry, but they own zero right now; in recognition of the work they've done, we're going to give them 25%.

People just don't seem to understand that anywhere in the world now you are faced with the environmental movement. With video cameras and the Internet, if you have an environmental problem, it doesn't matter whether it's in Ghana or whether it's in Spain; it's on the front page of the paper the next day and you have trouble financing.

Mr. Werner Schmidt: I want to be clear. I think the words were stronger than you had intended them. I appreciate that, but I wanted to make a point, and you've made the point very well in your answer. We are concerned with environmentalists right across the globe, and I don't think it's all bad.

Mr. David Comba: I agree.

Mr. Werner Schmidt: I think we need to be aware of the environment, because the mining interests have done some terrible things, as has the lumber industry. At the moment we are facing a boycott of Canadian lumber in other parts of the world. They're not buying Canadian lumber for environmental reasons.

In defence of the urban resident and the urban person who is concerned about the environment, they know only too well what pollution of the environment can do. They need to be convinced not that we're not caring about the environment, but how we can control the environment in such a way that the development can in fact be environmentally friendly. I think that's the issue. With the selective logging that's taking place now, to use an example from the lumber industry, that is taking place.

We can look into the open pit mining that's taking place, especially in areas like Wabamun, Alberta, for example, where there's been a complete recovery. In fact, the topography has actually become better than it was before it was disturbed. These are the kinds of messages that I think have to be there.

Urban people aren't stupid. They know exactly what it is they're after, but they have to be convinced. They're all from Missouri. They look around with those cameras and they say you did this wrong, you did this wrong, you did this wrong, and it's true. What are you doing today to prevent that from happening?

I think that message has to be out there. That, coupled with the flow-through share offering through a tax system of some kind, may be exactly what they're after. The big investors want security as well. Those of us who live in urban centres need that development to take place because we know right now that if we don't continue to develop, the standard of living that we have will go down. We know that.

How can we do that in a cooperative way so that we can run parallel on each front? That's what has to happen. So you're pushing one side, but what about the other side? Unless they go together, we're going to defeat the purpose we're trying to reach, because one can't do it alone.

The Chair: Okay, Mr. Schmidt. I'm sure you have lots of expertise, but I'm still looking for a period somewhere.

Mr. Werner Schmidt: I didn't want to stop.

The Chair: I don't think he wanted you to answer. He just wanted you to say okay.

Mr. David Comba: Okay.

Mr. Werner Schmidt: Well, normally the question is how to do that. That's implied.

The Chair: Monsieur Bélair.

Mr. Réginald Bélair (Timmins—James Bay, Lib.): I'll get straight to the point. What is the incidence or the impact of aerial mapping on junior mining companies?

Mr. David Comba: Do junior mining companies employ airborne surveys? Yes, they do. They tend not to be as grandiose as a company like Inco or Falconbridge, but it's still a very useful tool for junior companies. Actually, one way for governments who own the mining rights to encourage junior companies to come is to fly a survey and then make it public all at once so that everybody can use it at the same time.

Mr. Réginald Bélair: It's just that some people in the industry are somewhat implying that they know exactly what is there and there is not really any point in drilling if they know exactly what's there already.

• 1630

Mr. David Comba: I've been in the business for going on 37 years—

Mr. Réginald Bélair: I'm being the devil's advocate.

Mr. David Comba: —and I would never say I knew what was going on. I can't see any farther into the floor than you. Quite often the big discoveries in our business occur where you sort of least expect them. It might be your priority ten target that turns out to be the winner. Very rarely in my career has my number one target proved to be the mine. There was a mine on the property, but it wasn't found in the first hole.

Mr. Réginald Bélair: But doesn't mapping indicate very closely almost exactly what kind of ore, minerals, or metals....

Mr. David Comba: No. You can get an indication of certain types of rocks. Certain rock types tend to hold certain types of deposits, so you can get an idea that in this area you should find gold deposits. But that's not to say you couldn't stumble across a very good copper zinc deposit and vice-versa.

Mr. Réginald Bélair: Okay.

Second, besides finances, what other barriers exist that prevent junior exploration companies from doing their work?

Mr. David Comba: I think it's really the regulatory regime in Canada.

Mr. Réginald Bélair: Could you be specific?

Mr. David Comba: I would prefer to get examples from the Mining Association of Canada, because they keep right on top of these. For years, the Mining Association of Canada has been pointing out that it takes longer and longer, from discovery to mine permitting to actual production, and there's tremendous duplication, almost to the point of interference.

Mr. Réginald Bélair: By duplication do you mean federal-provincial guidelines?

Mr. David Comba: Yes. For example, Placer Dome got their start in Canada and they closed all their offices in Canada. They don't explore here any more. They brought a new mine into production in northern Ontario called Musselwhite. The Department of Fisheries and Oceans got involved, and they had to move 10 northern pike—it's not as if pike were an endangered species. It cost them, if I believe the numbers, something like $107,000 per pike to move them, and within a few weeks they had been netted out by a local aboriginal to feed to his dogs.

Tobin told this story at a dinner at the mines ministers' conference in St. John's about three years ago. He mentioned a situation in Newfoundland where trout had to be moved, and it worked out to about $7,000 or $8,000 a fish. This was in a province that had just had their inshore and offshore fisheries essentially decimated. He really wondered what the people at Fisheries and Oceans were doing in the interior of Newfoundland moving trout around.

So there are examples. There are horror stories you hear about.

The Chair: Mr. Godin.

[Translation]

Mr. Yvon Godin (Acadie—Bathurst, NDP): Mr. Comba, I have a specific question for you.

Let us take a look at the mining situation. I cannot claim to have 15 years of experience in the House of Commons, but I do in the mines. I worked underground at the Brunswick mine, in New Brunswick, for Noranda, and I understand the mining sector.

I do not know if you agree with me, but I think that today, in the global economy, companies can make better deals than in the past with other countries. In today's world, it is easy to open a mine and to invest elsewhere. Let me give you an example. Noranda opened mines in Africa. It opened mines everywhere.

Do you agree with me that, because of mining development and because of the government assistance received by some today, mining exploration is impeded in Canada, even though deposits could be found, compared to the situation that exists in other countries?

[English]

Mr. David Comba: The world is a very competitive place, and Canada's tax regime is not the lowest, our regulatory regime is not the fastest, and we are losing market share. That is a real concern. If the Norandas of the world are going to survive, profit, and create profits for their shareholders, they have to play the international game. They have to go where they can get the best deal. But it's a mistake to assume that all countries around the world are superior to Canada.

• 1635

Title is still a concern in most of the former Soviet Union countries. The concept of ownership there is not well laid out, nor is the legal system well laid out to establish ownership. So I don't think Canada is quite as uncompetitive as some people will tell you, but certainly the major companies are pretty gun-shy.

The event that really set the decision-makers in mining on their ear was in 1992, when B.C. expropriated Windy Craggy. Windy Craggy is a world-class copper cobalt deposit located in the northwest corner of British Columbia. The expropriation of that deposit really shook the industry. It got them looking globally.

The MEDA years, from 1983 to 1987, to some extent built up tremendous bench strength in the Canadian financial community. When MEDA ended in 1987, you had this tremendous bench strength that went up and took on the world. Our big competitors are Australia and to a lesser extent the United States, but we essentially beat the pants off them. Junior Canadian companies went out there and found the mines in Argentina, Peru, and many of the former countries of the Soviet Union.

It is a global market, but you can't compete globally unless you have a strong domestic market. We're hearing that very clearly from our support industry. For example, on this awareness campaign, the Canadian Drilling Association is very much involved. The president this year is Tim Bremner from North Bay, Ontario. He is a vice-president of Boart Longyear, which is the largest diamond drilling company in the world. They just laid off 400 people in Canada, 257 in Premier Harris' home riding.

This is a very sophisticated industry. They make a lot of very high-tech electric hydraulic drills. They manufacture diamond bits. They do a lot of things, and they're laying off people right now. They're really concerned that without a domestic industry, they won't be able to survive.

When I found Lindsley Mine in Sudbury in 1987, I signed what is still the largest single contract ever signed by Longyear in the world. I not only agreed to so many drills, but I agreed to them building so many drills of a certain size, which normally they would not have had a need for in Canada, because Lindsley was found well below a mile in depth—very deep.

One of the things they had been conceptualizing in North Bay at the Longyear plant was they wanted to build a really big machine that they called the Longyear 60, but there had never been justification for it. Falconbridge gave them the justification for going ahead and building it and it went through a trial period in Sudbury.

When I went there a couple of months ago to start talking about a campaign like this, I asked them where the Longyear 60s were. Only three of them have ever been made, and they're all in South Africa right now. The advantage was that Longyear's plant was building them in North Bay and Falconbridge was using the prototype in Sudbury, so if a change had to be made, they could find out very quickly.

That's the advantage of having a strong domestic mining industry. Canadians are very highly regarded around the world, as explorationists, drillers, and operators. But a lot of the technological advances have been made here in Canada, and if we don't have a strong domestic mining industry, we're going to lose that ability.

The Chair: Okay. Thank you very much.

[Translation]

Mr. St-Julien.

Mr. Guy St-Julien: Thank you, Mr. Chairman. I was waiting for my next turn.

Mr. Comba, I feel you are too polite with us members of the federal government. I am under the impression that you are being very cautious.

I am a former miner. I was involved in diamond drilling and I worked in a mine for several years. Mr. Comba, today we must not hesitate to tell it like it is, and I will explain why.

Earlier, I talked about a consumer who got a taste of Revenue Canada's medicine regarding those grey areas concerning exploration expenses. Protests were held in my riding over the issue of mining exploration. During the past 11 years, I attended many meetings with the chambers of commerce in Val-D'Or and Rouyn-Noranda.

• 1640

But that is not where the problem is. The problem is the lack of coordination between a number of departments. Mr. Comba, I know that you and your mining association, and also the Quebec Prospectors Association with Guy Parent, are going from one department to the next, from Natural Resources to Finance, to Revenue, to Economic Development, to Indian Affairs and to Environment. The problem, Mr. Chairman, is that there are no tools adapted to the mining regions.

We are just days away from the year 2000 and there is no tool to ensure a follow-up. Promoters of mining exploration projects are not responsible for anything, and nor are geologists. A geologist should be held responsible, just like a chartered accountant. This would be an innovative way of helping Canada's mining industry.

The problem is that there is no coordination between the following departments: Natural Resources, Finance, Revenue Canada, Economic Development Canada, Indian Affairs and Environment Canada. The federal government should make an integrated offer to set up a mineral exploration program, in cooperation with the provinces, but also with the national and provincial associations of prospectors.

Our problem is that there is no leader within the federal government to run the flow through shares program. Neither Natural Resources nor Revenue Canada is responsible for that program. Economic Development Canada should be given the mandate to coordinate activities.

Mr. Comba, am I right to say there is a lack of co-ordination between the departments?

The Chairman: Mr. St-Julien, did you attend the same school as Mr. Schmidt?

Mr. Guy St-Julien: No, but I will tell you—

The Chairman: You belong to the same profession.

Mr. Guy St-Julien: The problem, sir, is that I received the training that people in the Abitibi region get.

The Chairman: Yes, yes.

[English]

Mr. David Comba: It would be really nice if there was one-stop shopping, but there isn't. I must say, however, that I've had a lot of useful input from the various departments and ministries that I have been to, and that's not only here in Ottawa, because I've had an opportunity to be in Newfoundland, Nova Scotia, and Manitoba. The president of our organization is in British Columbia, and before this campaign is too much further along we intend to be in all the provinces and territories.

We've met very broad support. I can't say all the ideas are mutually supporting. Sometimes they're conflicting. Nicholas Taylor, a senator, suggested that I wasn't thinking big enough, that I should be asking for a 200% write-off. He told me about the Dome Petroleum drilling in the Mackenzie Delta.

The Chair: Mr. St-Julien just told you the same thing.

Mr. David Comba: I must say I think there was an awareness that there was a problem, but I think there's shock when people actually see how quickly the industry has declined, and the extent to which it has declined. Essentially, Natural Resources Canada still hasn't published the 1997 drilling statistics yet. They've given us some stuff over the phone for the Mines Ministers' Conference. On a graph it looks like we're entering a bunny run on a downhill slope, but we're trying to tell them that we just skied off a cliff and they don't even realize it yet.

So I think there is a problem in that people don't understand how severe this downturn has been, and if we don't get this in the next budget, you won't really have much of an exploration industry left here.

[Translation]

The Chairman: One last question from Mr. Fournier.

Mr. Ghislain Fournier: Mr. Comba, I am a person who loves to look at what goes on in various areas. In the mining sector, I have a hard time making a comparison. As we say in Quebec, when one looks at himself one feels sorry, but when one looks at others one feels good. When it comes to natural resources in Canada, I have never been able to make any comparison.

Because you are a competent person in that area, I am taking this opportunity to ask you what is going on with prospecting and mining exploration in Canada. Does it compare to what is being done elsewhere in the world? As we know, competition now takes place at the world level. What is being done in terms of prospecting and exploration? Does our situation compare to what is done elsewhere in the world? If so, we are on the right track. Are we competitive to some degree? If not, our attitude must change. We must do certain things to be competitive at the international level. Today, it is necessary to compare ourselves. We must perform. We must be like the others.

• 1645

Another question comes to mind. If I heard you correctly, large deposits of nickel, diamond and other metals were found. Could you tell me where in Canada, Quebec or in the Great North these interesting deposits were found?

[English]

Mr. David Comba: Once again your question covers a lot of territory.

Geologically speaking, there are many countries that have mineral wealth comparable to Canadas. However, Canada is the only country that has a junior mining sector of the size and the capability of Canada's. The only other country that comes close is Australia. But in Australia there's no equivalent to, for example, the Prospectors and Developers Association of Canada. They've actually tried to enter into an agreement with us whereby we'll go to Australia to set up conventions and start bringing the various states together. Australia is very similar to Canada in that the different states own the mining rights. There are state organizations for prospectors and developers, but there's no national body.

Canada really has a leg up on the competition. Our problem is that our competitors are looking at what happened at Windy Craggy. They've looked at Newfoundland essentially passing retroactive legislation in the government's negotiations with Inco. They look to Canada for leadership, but they're really confused about what they're seeing in Canada right now. They realize that mining has been very important to Canada's development, they realize that mining is very important to their development, and they can't believe the signals they're seeing in Canada right now.

I hope that has covered most of your questions. To list the deposits again, they're Louvicourt in Val-d'Or; Lindsley, in Sudbury, Ontario; Eskay Creek, in British Columbia; and the two diamond mines in the Northwest Territories. There are many other deposits that were found during that 1983-1987 period—for example, in Quebec—but they're not in production yet.

The discovery of a mine isn't just one program, it's a learning process. As we learn more and more about how these deposits formed, or as we develop new techniques, we can go back to take a look at earlier work and say it was good work but essentially they were drilling it from the wrong direction; they were going parallel to it. That happens a lot in our industry, so it's a gradual building process. With Hemlo, discovered in Ontario, the first three tiers of holes completely missed it. It was only halfway through the third tier that Hemlo was discovered. People who do not find something with the first program and then say there's nothing there don't really know much about our industry.

One of our greatest concerns right now as an industry is that the major mining companies have closed their offices in Canada. They were the real mentors. I spent most of my professional career with the Falconbridge group of companies. In fact, I started working underground at Giant in Yellowknife, and that's where I got my interest in geology. The Falconbridge group of companies actually supported me for two university degrees, and I worked for many fine people. I was mentored through the system. I moved every five to eight years to see different things. We see that is going to be an increasing problem in Canada. That mentoring process has stopped because the major mining companies have closed their exploration offices in Canada. They've kept a few very senior people to help them do due diligence on deposits globally that they're buying, but there are no young people coming up in the ranks, and that is a real concern.

The Chair: Mr. Comba, thank you very much for some very exhaustive answers. I'm sure the members around the table have appreciated the give and take. You've filled up all of the time, and I'm pleased about that. It sounds like you got most of your issues out for our consideration.

I also want to thank all members for their participation in the discussion.

• 1650

Mr. Comba, I'm sure we'll have an opportunity to dialogue with you at a later time. I think the committee may continue its interest in this sector and amplify that interest, so we may be in touch with you at another date. In the meantime, thank you very much. On behalf of all committee members, I wish you and yours the merriest Christmas and the best in the new year.

Mr. David Comba: Thank you very much. I'd be very pleased to return.

The Chair: Colleagues, don't leave. We're going to recess for two minutes and then we're going to go in camera.

[Proceedings continue in camera—Editor]