Canada's Natural Resources in High Demand, but Underexploited

Canada's Natural Resources in high demand, but Underexploited

Peter Munk has his eye on a patch of dirt in northwestern British Columbia. It's a rugged corner of the province. Ice-capped mountain peaks tower over a carpet of spruce and fir, while a receding glacier has scraped the valley floor down to raw rock. But the famously wily mining executive isn't after this plot of land, known as Galore Creek, for the view. Munk wants what lies deep beneath - a vast, untapped treasure chest of copper, silver and gold. And he's willing to pay close to $2 billion to get it. That's serious coin. Especially since there's no guarantee the mine will ever get off the ground.

Novagold Corp., the junior miner that bought the property three years ago, has plunked down tens of millions of dollars to bring it to life. The company rerouted an access road around sensitive rivers and snared the support of the local Tahltan First Nation with a $50-million trust fund. It even plans to build a "green" hydroelectric power plant nearby. In fact, the mine-to-be is so promising that Munk's Barrick Gold Corp., the world's largest gold producer, has been locked in a four-month battle to buy control of Galore Creek and Novagold's other projects.

Not so fast. Despite a 2004 agreement between the federal and provincial governments to streamline the environmental approval process for mines like Galore Creek, the green light has yet to come. Galore Creek isn't alone. There's a growing backlog of 25 mines, worth $8 billion in capital investment, grinding their way through government channels in B.C. alone. No new mine has opened in the province since the late 1990s.

Dan Jepsen, head of B.C.'s mineral exploration association, says red tape is killing the industry. "We have such huge bureaucracies and federal and provincial turf wars that it creates huge frustrations," he says. "B.C. wants to send a message that the province is open to MINING, but this story is going to die very quickly if we can't show we can get these mines approved." Critics, though, argue governments are cutting corners in their duty to assess the environmental and social dangers posed by some new mines. "This government would go ahead and approve just about any bad mine plan in the name of economic development," says Glenda Ferris, an environmental activist in northern B.C. "The industry thinks it can self-regulate, which is basically my worst nightmare."

Canada has long been ambivalent about its natural RESOURCES - we're blessed with massive stores of petroleum, minerals and forests, but always worried that our reliance on them hinders development of knowledge-based industries. As then-international trade minister Pierre Pettigrew proclaimed in 2002: "If we want the world to associate Canada with innovation and competitiveness, we have to change the perception of Canada as just a source of raw lumber, or metals or wheat." A commodity boom later, and Canada is cashing in on its natural inheritance once again. According to a recent TD Economics report, global investors have injected more than $100 billion into commodity industries worldwide in recent years. Canada has captured an impressive slice of that capital. Even today, after decades of economic diversification, more than one million jobs depend on the resource sector, making it our second-largest employer.

But Canada faces tough decisions about how it manages and invests in its natural assets, from forestry and energy to agri-foods and mining. There's a growing awareness, even in business, that a line must be drawn between exploiting resources and abusing them; that for Canada to truly capitalize on its resources, the benefits must flow to a wide cross-section of society to assure prosperity. The Conference Board of Canada set out to find solutions through its Canada Project. Its final report offers a road map to achieving sustainable growth over the next two decades.

Forestry
The old saying that Canada is a nation of hewers of wood has taken a beating in recent years; barely a week goes by that a lumber or pulp mill isn't shut down. Since 2001, more than 110 mills have closed, throwing close to 20,000 people out of work. From Kenora, Ont., to Carrot River, Sask., at least 85 communities have seen a major employer vanish. Most aren't coming back. Canada is still the world's largest exporter of newsprint and the second-largest exporter of pulp and softwood lumber, but our market share is steadily slipping even as global demand for forest products is marching higher. China alone has doubled the amount of wood pulp it imports.

The challenge for Canada is that other nations are ramping up production. During the 1990s, the number of countries exporting newsprint jumped to 57 from 33, while 180 countries exported solid wood products, up from 111 in 1990. South America is building some of the world's largest pulp mills, while China's Nine Dragons Paper Co. now operates the world's largest paper mill. While "super mills" are becoming commonplace in other countries, Canada's pulp and paper industry remains fragmented, with dozens of small mills scattered across the country. A "super mill" can produce at least a million tonnes a year of product. In Canada, the average size of mills is around 200,000 tonnes. The Conference Board points out that 10 pulp and seven newsprint "super mills" could theoretically handle the output of Canada's 72 existing mills. But any such drive for greater efficiency would entail heavy losses. It would also require heavy capital investment. And governments will have to overhaul many of their forest tenure policies to make it easier for new larger mills to obtain wood chips and logs. In most provinces, trees on Crown land are reserved for local mills, and rules block logs from being transported across provincial borders. All that would have to change.

Mill closures don't make for happy voters, of course, so instead of encouraging efficiency, governments are in the habit of pumping millions into outdated mills to keep them open. "While this action has the effect of keeping the operation going," the board writes, "it does nothing to postpone the obsolescence of the mill or improve its competitiveness." In the late 1990s, for example, B.C. subsidized the Skeena cellulose mill in Prince Rupert to avoid a shutdown. When the mill finally closed in 2001, the cost to the province was $323 million. The board suggests industry and provincial governments work together to anticipate which mills are at risk, and develop a plan to help the affected towns diversify their economies. Quebec appears ready to accept permanent shutdowns. After a spate of recent mill closures, Premier Jean Charest announced more than $700 million over four years to help the industry restructure, while providing funding to communities. "This is the moment to be lucid and frank," he said recently, "and recognize that a restructuring has consequences."

At the same time, the board argues governments should encourage innovation. Pulp mills can be adapted to become "bio-refineries" capable of producing energy, fuels or chemicals from underused mill residue. By gasifying black liquor, a recycled by-product of the pulp process, a mill can produce syngas, which can be converted into power. It's already happening: earlier this year, Tolko Industries launched a new energy plant at its Heffley Creek plywood mill near Kamloops. The plant, built by Vancouver-based Nexterra Energy, converts mill waste to syngas that Tolko uses to replace natural gas.

Ottawa has taken some steps to promote biomass production through tax breaks. The board urges the government to go further, and give the same financial incentives to biomass energy as it does to wind power. Ottawa should also follow the lead of the U.S., which offers grants to make it cheaper to buy forest biomass that's used to produce electricity. With these sorts of changes, the board argues, even Canada's outdated pulp and paper mills could rise to meet global competition.

Agri-food
Canadians have never been more passionate about their food. They flock to gourmet organic grocery stores, dine at exotic Asian fusion restaurants, and feast on TV cooking shows. But in an era of genetically modified fruits, ever more powerful pesticides and new, enriched foods, consumers are also demanding to know exactly where that egg or loaf of bread came from. And they're willing to pay a premium for that knowledge. Yet Canada's rickety agri-foods sector is ill-equipped to meet their needs. "Agriculture in Canada is 20 or 30 years behind other industries," says Martin Gooch, a research associate at the George Morris Centre, an agriculture think tank at the University of Guelph. "It's like looking at how Toyota fares compared to GM to see how much competitive advantage you can get by working with your suppliers."

The Conference Board argues that our agri-food sector needs a major overhaul. It may have boosted its exports by 83 per cent to more than $20 billion since 1990, but our share of global exports, after growing from 3.2 per cent in 1995 to 4.3 per cent in 2001, has since fallen back to 3.7 per cent. The drop can be traced to the hysteria over mad cow disease, as well as a severe drought in 2003, but reams of red tape and regulatory backlogs are hurting Canada's competitiveness.

For one thing, producers can't get their hands on certain additives and environmentally friendly pesticides that are available to farmers in Europe and the U.S. According to the George Morris Centre, which worked with the Conference Board on its report, animal drug companies do extensive R&D in Canada, but the final product is often only available in other countries. "The approval system is slower in Canada than anywhere else," says Cher Brethour, a senior researcher at the centre. "A farmer in the U.S. has access to better drugs than here."

Meanwhile, consumers are browsing the grocery store aisles for food with specific characteristics, but regulators here are slow to adapt approval and labelling rules. There is no system in place to approve so-called "functional foods" like Omega-3 eggs and calcium-enriched orange juice quickly, says Brethour, despite their popularity. And stringent labelling rules limit producers from marketing low-carbohydrate food. "The government urges the sector to differentiate and diversify," the board says, "but does nothing to change a regulatory system that rewards sameness and makes innovation costly."

Farmers are now also faced with the very modern problem of managing the environment, given the growing awareness that heavy pesticide use near certain wildlife habitats is wreaking havoc. One option is to pay farmers to stop farming, at least in environmentally sensitive areas. The board advocates compensating producers for the "natural capital" they preserve. The concept faces hurdles, not the least of which is how to value the benefits of clean air and water. There are pilot projects in Ontario and Manitoba, and the World Bank has looked at ways to value environmental benefits. "In the near future," the board believes, "it is likely that these types of policy mechanisms and valuation techniques will gain more presence in Canada."

Mining
Steven Dean knows a thing or two about mining in Canada. When he was president of Vancouver-based Teck Corp., he helped merge the company with Cominco Ltd. in 2001, creating one of the country's largest miners. And like many executives who leave jobs at major mining companies, he went on to finance a junior exploration outfit. But a few months ago, while choosing between two copper projects in which to invest, one here, the other in South America, the decision came down to taxes - and the Canadian project lost out. "The post-tax economics were decidedly in favour of the South American project," says Dean. "It reminded us, quite concisely, of the impact of tax on projects here."

It's an all-too-familiar story. Canada is the market of choice for raising mining finance. More than half of the world's public mining companies are listed here, and mining firms raised $8 billion on our exchanges last year. But only $1 billion stayed in Canada, according to the Association for Mineral Exploration British Columbia. "I'm not pleased with that context that we're recognized as a global centre for financing," says Dan Jepsen, CEO of AMEBC, "but most of the investment goes elsewhere."

That's a concern to the Conference Board too, which points out the steady decline of mineral reserves in the country over the past quarter-century. The national inventory of deposits is being depleted faster than new mines are opened. At the same time, a series of major deals has taken some of Canada's largest mining companies out of play, such as Falconbridge and Inco. As a result, the board argues that the federal and provincial governments must stimulate mineral exploration by juniors in order to capitalize on soaring metal prices.

They should, for example, streamline the environmental assessment process to avoid delays when multiple jurisdictions and agencies are involved. Aboriginal involvement should be ramped up too, especially in B.C., to smooth the way for new projects and address a growing threat to the mining sector - a looming lack of workers. Half of Canada's mining workforce is between 40 and 54 years old. Don Lindsay, CEO of Teck Cominco, has said worker shortage is the biggest challenge facing the Canadian mining sector. The fastest-growing population group in Canada is Aboriginals, and there are moves to bring them into the workforce. At the Voisey's Bay nickel mine in Newfoundland and Labrador, an $85-million program is underway to train Aboriginals.

In B.C., the British Columbia Institute of Technology launched a training program for Aboriginals more than a year ago. The instructor, Jim Morin, is a Metis who spent 10 years with Inco. He's travelled to reserves and attracted dozens to the program, which is backed by AMEBC and the provincial government. "It would be a win-win situation for both sides," he says. "Sites of high unemployment would be changed, people would get more financial capability and transferable skills, and the companies would have access to a workforce that's local, wouldn't have to be brought in from outside, and would presumably have a low turnover."

Energy
When Stephen Harper met with other G8 leaders this past summer, he touted Canada as an "energy superpower." After all, with soaring oil prices and the development of the Alberta oil sands, Canada's petroleum sector is a $90-billion-a-year business. Our natural gas wells are brimming. We've got vast reserves of coal, and turbines capture the power of our rivers. But the Conference Board argues Harper didn't go far enough when describing Canada's role as electrical outlet to the world. "We think he should put the word clean in front of it," says Gilles Rheaume, vice-president of public policy. "The markets will drive us as an energy superpower, but the key thing is to make sure the environment is not left by itself. Clean energy has to be broader than just talking about windmills."

The board is just one of many groups that see the need for a plan to deal with climate change. It argues for investment in technologies such as carbon dioxide sequestration, which involves capturing and storing greenhouse gases. Canada should also have a plan to deal with the effects of climate change, such as unstable weather patterns and possible widespread flooding. The biotech sector should play a role in developing drought- and flood-resistant crops. "The climate is changing," says Rheaume, "but there is no strategy on adaptation."

The board calls as well for the regulatory approval process to be made more efficient. Canada has played a relatively small role, for instance, in liquefied natural gas. That could grow with investment in new storage sites. There are currently eight proposed LNG projects, from Point Tupper, N.S. to Ridley Island, B.C. For energy infrastructure projects, the board recommends governments set timelines for environmental approvals that meet annual performance targets for regulatory bodies. If delays continue, Canada risks missing out as developing nations like India and China hunt for affordable energy.

Meanwhile, Canada's own energy needs are threatened by shortfalls in the power grid and outdated transmission systems. The board points out "hot spots" where community opposition has led to delays. By mid-2007, the main transmission line on Vancouver Island will have outlived its projected lifespan. There have been attempts to build a new system, but they've gone nowhere. Unless a new line is built soon, "the people of Vancouver Island risk serious economic and social disruptions." In Toronto, meanwhile, the city's transmission lines are running at full capacity. Efforts to build a new generation station are moving slowly, and new transmission lines would have to be erected across the city. If the project does win public support, the board points out the regulatory approval process will take at least another five years.

Canada's energy sector is clearly in overdrive. Yet there is dire need of investment in certain areas, such as regulatory oversight and environmental technologies. In fact, the board says Canada should adopt a national energy framework to guide the energy sector into the future. Wary of rekindling sour memories of the Trudeau-era National Energy Policy, the board envisions more of a statement of energy policy, rather than new rules that might infringe on the provinces. But the idea is that Canada needs a road map to the future, and Ottawa is in the best position to provide "a strong sense of direction for Canada's energy industry."

Maclean's November 27, 2006