Is the New Mining Tax in Quebec a Headwind for Gold Stocks?
Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Monday, May 6, after the close of market, the government of the Province of Quebec released its much anticipated proposal to change the mining tax and royalty regime in the Province which is expected to be effective at the beginning of 2014.
In this situation, the question arises: What impact this new tax regulation will have on mining companies with a great exposure to Canada?
Background on the new proposed mining taxes
Currently, mining companies in Quebec pay a 16% profit tax. Under the new proposal, mining companies will pay the greater of:
1. A minimum mining tax on the output value at the mine shaft head (OVMSH)
2. A progressive profit tax
In the first option, the weird acronym (OVMSH) is calculated as the gross value of annual output for the mine less expenses incurred including crushing grinding, handling, marketing, etc; G&A expenses; depreciation and processing allowance. The first $80 million in OVMSH will be taxed at 1% and anything above $80 million will be taxed at 4%.
The second option of progressive tax is pretty much similar to the current regime where companies pay a 16% tax on mining profits. However, the key difference is that now the profit tax will add a progressive feature whereby mining companies will pay higher profit tax rates as profit margins increase. The table below, taken from a government source provides details of the progressive rate scheme.
Source: Government of Quebec
Impact on the companies
In the mining world, three US-based mining companies that have ongoing operations or near-term development projects in Quebec are Agnico-Eagle (NYSE: AEM), IAMGOLD (NYSE: IAG) and Goldcorp (NYSE: GG).
It is interesting to note that the new minimum mining tax is expected to be only relevant for new operations as, once in production, the progressive profit tax will be higher for all of the mines in Quebec owned by these companies. For these companies, only Goldcorp’s Eleonore mine and Agnico’s Goldex mine will be new operations in 2014. In both cases, the mines are expected to be paying the progressive profit tax by year 2 of operations. As a result, the new minimum tax has little to no impact on these companies.
In case of the profit tax, the new feature is the progressive portion for circumstances when profit margin is greater than 35% and then greater than 50%. For profit margins below 35%, the profit tax is the same as the current regime. In case of Agnico and IAMGOLD, they already have material operations in the province where the companies are already paying the 16% profit tax. It is expected that for the most part, the mines operated by Agnico, Goldcorp and IAMGOLD will seldom have profit margins greater than 35% (exceptions could be Agnico’s LaRonde mine beyond 2017 and Goldcorp’s Eleonore mine beyond 2016). As a result, there is only minimal impact to Agnico and Goldcorp’s valuation from the new progressive feature of the profit tax.
Hence, this new proposed mining legislation will have minimal impact on the valuation of these companies.
The Net Asset Value (NAV) impact to these companies is as below:
In addition, the Street has highlighted that the proposed taxes are actually better than originally expected, with previous expectations calling for a 5% revenue-based royalty in conjunction with a profit tax of up to 30% based on profit margin thresholds.
Some more discussion on the companies
Agnico’s earnings release brought a mixed outlook in the market.On the positive side, the company posted a decent operating quarter and showed good progress on its development projects with La India and Goldex both approximately one quarter ahead of schedule.
However, these positives were offset by additional down time expected at Kittila mine in Q2/13, lower commercial production expectations and an increase in cash cost guidance in 2013, associated with the downtime and a revision in commodity and forex assumptions.
Overall, the lower commercial production and higher costs in 2013 negatively impact earnings and cash flow in 2013 and as such some pressure on the stock price is expected in the short term; However, assuming the additional downtime at Kittila is contained to what was guided, any prolonged pressure on the stock price would be seen as an opportunity to enter the stock.
A gold company worth investing
For IAMGOLD, the Street has recently turned bullish on the company. A strong operating quarter highlighted by cash costs that were well below annual guidance, the potential for a cost guidance reduction in Q2, start-up of commercial production in Quebec and a Quebec tax proposal that ended up being much better than feared, all give us reason to believe positive signs are starting to emerge at this company.
In the near term, the implementation of the company’s $100 million cost savings program along with mine re-sequencing at Rosebel to access higher grade ore could lead to a reduction in annual cost guidance when the company reports its Q2 results.
Despite an earnings miss, Goldcorp’s investors have recently been excited about the company given its developments in Q1 and the outlook for 2013.
In terms of development, the announcement of a new water source at Penasquito that has the potential to support ramp-up to name plate capacity is seen as a significant positive given that previous guidance at Penasquito inferred that name plate capacity would be more of a blue sky situation.
From an operational outlook perspective, the production and cost metrics are expected to improve throughout the year as gold and byproduct grades improve sequentially at Penasquito and Pueblo Viejo continues to ramp to full capacity. Overall, with improving operations and further clarity on the water solution at Penasquito upcoming, Goldcorp is recommended as a buy when moving forward in 2013.
Through some calculations, we can safely conclude that new mining regulation in Quebec is not as big a threat to Agnico, Goldcorp and IAMGOLD’s profitability as perceived by the market. Talking company-specifically, both Goldcorp and IAMGOLD are recommended as buys given their solid cost-cutting plans. However, uncertainty at its Kittila operations, keeps me on the sidelines for Agnico for the time being.
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