< Previous20 Summer 2015 / www.canadianminingmagazine.com Feature B uilding a metals mine in today’s vola- Ɵle commodiƟes market seems like a strange move to some. AŌer all, met- al prices have fallen, retail investment has vanished and most investment bankers are looking to make their bonuses from non- mining sectors. But for experienced miners like Gor- don Bogden, president and CEO of Alloy- corp Mining Inc., it is an opportunity. The Toronto-based company is moving confi- dently ahead with development of its Avan- Ɵ Kitsault Mine in northwestern BriƟsh Columbia. “Now is the best Ɵme to be building a mine,” says Bogden. “When you look at the forecast for the long-term metals markets, the three-to-seven year horizon looks prom- ising. By the Ɵme we build the mine and get to full producƟon capacity, we will be po- siƟoned to take advantage of commodity price upswings.” It is not just Bogden who is opƟmisƟc about the future of mining, and molybde- num in parƟcular. In its Molybdenum Mar- ket Outlook 2014, CPM Group forecasts that higher wealth and living standards in emerg- ing markets will drive demand for stainless steel and, in turn, molybdenum used to pro- duce it. About 20 per cent of molybdenum mined worldwide is used to make stainless steel. ConstrucƟonal steel, tool and high- speed steel and cast iron, together, use an addiƟonal 57 per cent. The remaining 23 per cent goes into upgraded products like lubri- cants, chemical compounds and molybde- num metal. Alloycorp is advancing its AvanƟ Kitsault mine, having already prepared the project site, obtained all construcƟon permits and secured an agreement with the Nisga’a Li- sims Government, the local Treaty NaƟon. Alloycorp is now undertaking a front-end engineering design study to firm up design and cost esƟmates and move the project into full construcƟon. With producƟon Ɵmed to meet market demand, securing final funds for mine con- strucƟon is a priority. “Our major challenge is gaining the con- fidence of financers and helping them un- derstand there will be a significant demand for metal products in the next two to three years,” says Bogden. He points to the high priority govern- ments around the world are placing on de- veloping and replacing infrastructure. Ac- cording to the World Economic Forum, an esƟmated US$5 trillion per year needs to be invested in global infrastructure to help sup- port a projected populaƟon of nine billion by 2050 (up from about seven billion today). To help overcome risk-adverse lenders and jiƩery equity markets, Alloycorp has been scouring the world in search of non- tradiƟonal financing opportuniƟes. “We have had to be creaƟve in structur- ing our financing and, as a result, discover- ing new ways to do business,” says Bogden. To date, Alloycorp has credit approvals for US$225 million provided by two lend- ers, and a condiƟonal equity investment of US$210 million from Resource Capital Funds and its limited partners. Total fund- ing arranged to-date is US$435 million of an esƟmated $1 billion in construcƟon costs. For the remaining funds, Alloycorp is evaluaƟng several equity and non-diluƟve sources of financing, including an off-take investment by a strategic partner, direct in- vestment in the project, private equity in- vestments, silver stream moneƟzaƟon and a public offering. CreaƟve financing has become more the norm rather than the excepƟon in the current market. According to PWC’s Wait- ing Out Uncertainty: Junior Mining 2014 re- port, the top 100 junior mining companies raised a total of $685 million through equi- ty financing over the 12-month period end- ing June 30, 2014, down from $795 million one year earlier. Many have had to turn to other forms of financing, including debt financing, raising Northwest Community College Nisga’s environmental monitoring students checking out the AvanƟ Kitsault Mine site.Canadian Mining Magazine 21 Feature$379 million through such methods during the same period. With the financing requirements for con- strucƟon of the AvanƟ Kitsault project with- in sight, Bogden has become focused on the potenƟal cost-savings of building a mine during a bear commodity market. “In this market there are opportuniƟes to lock in costs resulƟng in significant sav- ings on construcƟon and labour costs,” says Bogden. “The downturn in the commodiƟes sector have impacted so many engineering and supply firms in Western Canada, who are now saying, ‘I have inventory and need to turn this.’” Alloycorp is also finding cost savings in the availability of good used equipment and a readily available trained workforce. “We already have approximately 3,000 resumes in our database and whenever we post a job lisƟng we are receiving upwards of 200 resumes,” says Bogden. With demand fundamentals looking pos- iƟve for metals, compeƟƟve supply costs and available trained local labour, the ques- Ɵon remains why more companies are not following Alloycorp’s lead and building mines in today’s market. “Short-termism has crept into the min- ing industry,” says Bogden. “CEOs of mining companies are challenged by sharehold- ers demanding quarter-by-quarter returns. You can’t strategically plan this short-term, but this thinking has percolated through the enƟre market and driven investment away.” Bogden says the difference is that they are in it for the long-term. M An aerial view of the AvanƟ Kitsault Mine site in northwestern BriƟsh Columbia.24 Summer 2015 / www.canadianminingmagazine.com Transaction Report S ince 2010, more and more Canadian public mining companies have begun asking shareholders to symbolically support their execuƟve compensaƟon plans by passing say-on-pay resoluƟons at annual general meeƟngs. A say-on-pay resoluƟon is non-binding, meaning a company is not legally required to act on it. An unfavourable result, howev- er, signals strong shareholder dissaƟsfacƟon which companies are wise to act on to avoid a proxy fight down the road. Unlike in the United States, Australia and England, Canadian public companies are not required to hold say-on-pay votes. Regardless, large shareholders may expect them, and a fa- vourable result can bolster a company’s corpo- rate governance standard. Historically in Cana- da, a say-on-pay vote has come with liƩle risk. On average, say-on-pay resoluƟons gar- ner approximately 90 per cent approval. Last year, not a single Canadian company lost a say-on-pay vote. This year, however, the Ɵde has turned. Both Barrick Gold Corp. and Yamana Gold Inc. overwhelmingly lost their say-on-pay votes. It appears that the gold companies’ sharehold- ers are frustrated with high execuƟve pay in the face of poor market performance. In 2014, Barrick lost over one-third of its market value but paid its chairman $13 mil- lion ($3.5 million more than he earned in 2013). Yamana’s shareholders were unhap- py with a US$2.7 million cash bonus and a significant number of performance share units paid to its CEO for concluding the Osis- ko Mining Corp. takeover (these share units were subsequently cancelled as a reacƟon to the vote). Added to his regular pay, his overall compensaƟon for 2014 was US$11.3 million despite a 49 per cent plunge in Ya- mana’s share price. Prominent proxy advisory firms also recommended that shareholders of Gold- corp Inc. vote against its say-on-pay resolu- Ɵon. However, most shareholders ignored this recommendaƟon with 89 per cent of votes coming out in support of the compa- ny’s compensaƟon plan. The results of Gold- corp’s posiƟve vote have been aƩributed in part to a push in shareholder communica- Ɵon before the vote. Goldcorp reached out to shareholders in several ways to explain and answer quesƟons on its compensaƟon policy. In addiƟon, its CEO earned signifi- cantly less than in the previous year. It will be interesƟng to see how Bar- rick and Yamana tailor their compensaƟon plans to temper shareholder opposiƟon and whether any proxy fights will ensue. Failure to address the disconnect between share performance and execuƟve pay in a mean- ingful way could lead to significant changes to the board and management of both com- panies despite the non-binding nature of the say-on-pay vote. M Catherine Graham is a corporate lawyer at Gowlings, with a focus on providing secu- riƟes, corporate finance, and mergers and ac- quisiƟons advice to clients, many of which are mining exploraƟon companies. She can be reached at catherine.graham@gowlings.com. Cyndi Laval is a partner at Gowlings and co-leader of its firm-wide Mining Group, as well as its firm-wide Corporate Finance, M&A and Private Equity Group. She pracƟs- es corporate and securiƟes law with empha- sis on corporate finance, mergers and acqui- siƟons, and mining law, and is recognized as a leading mining lawyer in The Best Lawyers in Canada, The InternaƟonal Who’s Who of Mining Lawyers, The InternaƟonal Who’s Who of Business Lawyers and the Canadian Legal Lexpert Directory. She can be reached at cyndi.laval@gowlings.com. Shareholders Object High Executive Compensation By Catherine Graham & Cyndi Laval, Gowlings This arƟcle summarizes say-on-pay require- ments in Canada and certain recent exec- uƟve compensaƟon voƟng results in the public company mining sector. It does not consƟtute legal advice or an exhausƟve analysis of execuƟve compensaƟon laws or issues currently faced in the mining sector.Canadian Mining Magazine 25 HR ReportT he recent downturn in the mining in- dustry has taken pressure off immedi- ate hiring requirements, but several in- dicators point to what can only be termed as a malfuncƟoning labour market. This will only become more acute as the market recovers and enters a new phase of growth, says a new report from the Mining Industry Human Resources Council (MiHR). The report outlines that the mining la- bour market is much Ɵghter than for oth- er sectors; for every job vacancy in mining, there are less than three potenƟal job seek- ers across Canada, compared to the aver- age of six job seekers per vacancy for oth- er industries. This is one of several labour market indi- cators that point to the mining labour mar- ket inefficiencies. “A tight labour market puts upward pressure on wages and salaries, as em- ployers compete for a limited supply of skilled workers. Earnings in the mining sector have increased nearly 40 per cent in the last decade—significantly more than the average for all sectors in Cana- da,” says MiHR executive director Ryan Montpellier. “Layered on to this is mining’s volaƟle business cycle and the challenges of recruit- ing people to rural or remote mining opera- Ɵons,” says Montpellier. “If unresolved, this labour market Ɵght- ness has the potenƟal to undermine the compeƟƟveness of Canada’s mining sector when the cycle does rebound.” Less compeƟƟon among job seekers is an issue for the mining industry, but good news for people considering a career in min- ing. About 95 per cent of mining jobs are full Ɵme and the average weekly earnings of salaried mining industry employees are anywhere between 25 and 60 per cent high- er than those in other sectors. Further evidence of labour market Ɵght- ness is dependence on a commuter work- force—those who live in one province but work in another. This is a mining specif- ic challenge: mining employers are three Ɵmes more likely to use commuƟng workers than any other industry in Canada. Employers have made significant efforts to address this by building a local workforce through the aƩracƟon of Aboriginal Peo- ples, but MiHR research shows that this ef- fort is constrained for a variety of reasons, including that up to one in four Aboriginal Peoples of working age do not actually par- Ɵcipate in the labour force. “The current market condiƟons have soŌened the gap between hiring require- ments and available talent, but we are not out of the woods yet. MiHR’s research shows that the Canadian industry will need to hire between 86,000 and 127,000 new workers over the next 10 years, depending on the economic outlook and industry per- formance,” says Montpellier. Some of the biggest gaps expected over the next decade are anƟcipated to be in trades and producƟon posiƟons, parƟcular- ly underground miners, as well as machine operators and mine labourers. There is also expected to be a shortage of scienƟsts, engi- neers and technicians in the industry across Canada. “MiHR’s research demonstrates the im- mediate need for governments, educators and employers to work together to address the major human resource challenges facing Canada’s mining industry,” says Pierre Grat- ton, president and CEO of the Mining Associ- aƟon of Canada. “The mining industry is doing a lot of work to aƩract, recruit, develop and retain workers across Canada,” says Montpellier. “However, more can and should be done to improve on these efforts if the industry is to be prepared for the next economic cycle.” M Alana Kennedy is director of markeƟng and communicaƟons at the Mining Industry Human Resources Council (MiHR), responsi- ble for promoƟng MiHR soluƟons and prod- ucts through stakeholder communicaƟons. Kennedy was formerly head of markeƟng for a group of accountants in the UK. She is a chartered marketer (UK) with more than 14 years of experience. By Alana Kennedy, MiHR The Closing Mining Labour Gap For a copy of the full report please visit www.mihr.ca/en/publicaƟons/NaƟonal_ Outlook.asp. This is a mining specific challenge: mining employers are three times more likely to use commuting workers than any other industry in Canada.26 Summer 2015 / www.canadianminingmagazine.comCanadian Mining Magazine 27 International ReportI f you have ever been involved in an in- ternaƟonal mining deal, chances are you have had one of these thoughts cross your mind. Understanding culturally-driv- en tendencies of both your own culture and that of the counterparty can be essen- Ɵal to successful negoƟaƟons. Mining is a global business involving the flow of capital, equipment, human resources and commod- iƟes across internaƟonal borders. This re- quires cross-cultural interacƟon and negoƟ- aƟon with many different players, including buyers, suppliers, governments, employees, unions and local communiƟes. Several factors can influence the out- come of any negoƟaƟon, including financial circumstances, objecƟves, personality, ne- goƟaƟon style and experience, and the gen- eral economic cycles. One essenƟal factor is culture. This can be parƟcularly important in mining as min- ing companies oŌen operate in areas and with people who have had limited exposure to foreign business cultures. Many cultural tensions can arise in inter- naƟonal mining deals. The three core rea- sons these tensions may arise are Ɵme, trust and style. In 1959, American anthropologist Ed- ward T. Hall coined the word “polychronic” to describe a culturally disƟnct concept of Ɵme. Unlike those from monochronic cul- tures, such as that in North America, who view Ɵme as linear and who are task-orient- ed and scheduled, people from polychron- ic cultures, such as LaƟn America, are more distracƟble, spontaneous and focus on long- term relaƟonship-building. This cultural dichotomy can be problem- aƟc and oŌen lead to divided and frustrat- ed parƟes in negoƟaƟons, as one side is try- ing to remain focused on the plan of closing the deal as efficiently as possible, while the other’s primary objecƟve is fostering a long- term relaƟonship. Another cultural difference we oŌen see is the value placed on trust. In people-ori- ented cultures, trust is integral in achieving long-term relaƟonship-building, whereas in more task-oriented cultures, greater em- phasis is placed on precisely documented legal rights and obligaƟons. However, interesƟngly, negoƟators from task-oriented cultures can get frustrated by the propensity for negoƟators from relaƟon- ship-focused cultures to conƟnually renego- Ɵate the terms of a deal, which can oŌen be mistakenly viewed as being untrustworthy. There are also culturally idenƟfiable ne- goƟaƟon styles. In task-oriented cultures, the style is more direct or low-context where posiƟons and responses are clearly arƟculated. In cultures with indirect or high-con- text styles, where a direct approach can be seen as disrespecƞul, discussions oŌen nev- er seem to precisely address the negoƟaƟon points and inference is required. This high-context approach extends be- yond the realm of negoƟaƟons. Most min- ing companies have had the experience of seeking advice on an issue in a foreign ju- risdicƟon, only to be frustrated when it re- ceives a memo providing extensive back- ground informaƟon without actually provid- ing any concrete advice. While not strictly a cultural trait, of- ten certain cultures have conƟnuity of and stronger connecƟon to land. Mining compa- nies may experience deals that involve min- eral or surface rights that have been in the same family for generaƟons. It can be a challenge negoƟaƟng with a party that has a strong emoƟonal aƩach- ment to the subject maƩer. This not only in- fluences how negoƟaƟons proceed but also the expectaƟon of outcomes, including per- ceived value and future use of the asset. In general, it is essenƟal to have an un- derstanding of your own cultural tendencies and those of your counterparty. Successfully handling cultural differences in internaƟonal business negoƟaƟons can, at the very least, prevent a cultural faux pas that can throw negoƟaƟons off the rails even before they begin. As for those frustraƟng thoughts, they are culturally inherent and virtually un- avoidable, but being fueled with cultural in- telligence will help you navigate most situa- Ɵons respecƞully and appropriately. M As a partner in Dentons’ Toronto office, James McVicar is a member of the Business Law Group. His pracƟce involves all aspects of corporate finance and mining with parƟc- ular focus on assisƟng exploraƟon and min- ing companies with corporate and commer- cial transacƟons, including property and equipment acquisiƟons, joint ventures, op- Ɵon agreements and royalty agreements. He also advises issuers, underwriters and in- vestors in domesƟc and internaƟonal public and private financing. Culture of the Deal By James McVicar, Dentons Canada LLP “When a man says that he approves something in principle, it means he hasn’t the slightest intention of putting it in practice.” -Otto von Bismarck “I thought we had a deal.” “I could be dead by the time this closes.” “What are they saying? It makes no sense.”28 Summer 2015 / www.canadianminingmagazine.com Junior Mining News I n the spring edition of Canadian Min- ing Magazine, an industry colleague offered insights into how junior miners are evaluated by potential investors. To advance that discussion, let’s look at four ways to create ongoing shareholder value for junior resource companies. 1. Be focused Old guard thinking was to collect as many properties as possible. If lucky, one may eventually enter production. But, with so many opportunities to invest in near-stage production companies, today’s junior resource investors are less interest- ed in early-stage property plays. It is expensive to acquire and raise cap- ital to fund multiple drill programs or fea- sibility studies, and impossible to create value on projects not being worked on. To increase investor appeal, the follow- ing are a must: • Be selective in acquiring projects; • Pick quality over quantity; • Take time to build the production roadmap; • Set manageable milestones and deliver on time and on budget; and • Clearly communicate how and when you will add value to the project. 2. Active advancement Virtually every junior resource com- pany boasts about its flagship project’s potential. But, it is what you do or do not do with that asset that counts with stockholders. Are you trying to conserve cash, put- ting on hold valuable work to advance the project? Or are you progressing with a business plan and creating value for the asset, your company and its investors? Those playing “wait-and-see” have not adjusted to today’s realiƟes. Specifically, the model of waiƟng for the market to change, then raising capital down the road, no lon- ger works. Junior mining execuƟves must acƟvely advance projects to reap rewards. Consider this: • Siƫng idle does not progress projects; • There are an abundance of drill rigs avail- able, so exploraƟon and drilling is on sale; and • Talking with the market about your work and results places you ahead of staƟon- ary peers. 3. Lead your district Even with the best project and plan in place, it can take years to arrive at a produc- Ɵon decision. Grabbing the bull by the horns and acƟvely advancing projects cuts Ɵme to potenƟal producƟon. Companies choosing to rest on their laurels while waiƟng for oth- ers to advance area plays and prove the po- tenƟal of these mining districts must even- tually do the same exploraƟon and develop- ment on their own project, essenƟally dou- bling the Ɵme to reach a decision. ProspecƟve shareholders are unlikely to invest into a company that intends to have private placement funds sit for years, when it could instead invest in acƟve neighbours. AddiƟonally, if projects in your area do advance to producƟon, they do so solely on their property’s merits. Mere proximity to a property in no way creates shareholder val- ue or guarantees success. 4. Keep telling the story Even with a great asset, a tailor-made technical team and an acƟonable produc- Ɵon plan, the invesƟng public will not nec- essarily take noƟce of your company. You need to get your message out and in- vest in shareholder communicaƟons, telling current and potenƟal investors the good job you are doing. The following Ɵps will help you share your story with the market, while building trust: • Plan your news flow by providing up- dates regularly; • Promptly answer investor calls and emails; • Keep your markeƟng materials and web- site up-to-date; and • Seek opportuniƟes to meet new investors. In closing Current market condiƟons have created an advantage for junior miners whose busi- ness plan is focused on acƟvely adding value to advanced-stage properƟes. ExploraƟon is relaƟvely inexpensive and the best profes- sionals and technical equipment are readily available at a discount. These factors, combined with the straight forward parameters discussed above, will enable junior resource compa- nies to enhance the worth of their projects and create shareholder value, which, aŌer all, is our objecƟve. M Brad Kitchen is chairman and CEO of Secova Metals (TSX-V: SEK) (secovametals. com). Secova has agreed to acquire up to 90 per cent of the Duvay Gold Project near Amos, Que. Kitchen has 25 years of experi- ence in investment banking and leading op- eraƟons and financing of resource-based corporaƟons. A former vice-president of CIBC Wood Gundy SecuriƟes and TD Securi- Ɵes, he was most recently president and CEO of Eagle Hill ExploraƟon. Creating Shareholder Value By Brad Kitchen, Secova Metals Corp.Canadian Mining Magazine 29 Tax TimeT he Canada Revenue Agency’s (CRA) success in obtaining sensiƟve and con- fidenƟal tax informaƟon in Minister of NaƟonal Revenue v. BP Canada Energy Com- pany 1 will be of interest to taxpayers gener- ally and public companies in parƟcular. This case deals with tax accrual working papers (TAWP), which are an analysis pre- pared by the taxpayer or its audit firm as to the strengths and weaknesses of posiƟons it has taken on its tax return. TAWP is cre- ated to determine whether reserves should be provided for in the company’s financial statements for potenƟal tax exposures. Apparently, the CRA now considers these materials fair game for use as a CRA audit roadmap, notwithstanding its stated policy of asking for these materials only in excep- Ɵonal situaƟons. 2 In this case, during a normal audit of BP Canada’s 2005 taxaƟon year, the CRA became aware of TAWP that had been prepared inter- nally at BP Canada. It demanded to see these materials and, in parƟcular, a list BP Canada prepared idenƟfying specific issues the CRA might win on were it to reassess them. When the taxpayer refused to turn over the list, the CRA went to court seeking a compliance order, which the Federal Court of Canada granted. It is expected that BP Canada will appeal. The Federal Court’s judgment is trou- bling on a number of levels. The fact that the CRA was seeking these TAWP at all, not because of a specific concern on a parƟcular issue but simply to ensure something had not been missed, represents a major change in how tax statutes are enforced in Canada. EffecƟvely, the taxpayer’s own analy- sis (legally required to be prepared for fi- nancial statement purposes) is being used against it. The court did not seem troubled by this. Its reason- ing on the scope of what the CRA is enƟtled to demand is unsaƟs- fying and arguably unsupported by the words of the statute or prior authority. There is a real danger that financial state- ment disclosure will be impaired if the CRA rouƟnely uses the resulƟng work product to look for issues on tax audits. Unless over- turned, this decision will leave a taxpayer’s subjecƟve assessment of its uncertain tax posiƟons (and other confidenƟal tax analy- sis) completely exposed to demands for dis- closure from Canadian tax authoriƟes, except where protected by lawyer-client privilege. In summary: • This case indicates that as a pracƟcal maƩer, the CRA has decided to signifi- cantly change the rules of engagement with taxpayers in terms of what consƟ- tutes fair game; • If the result of this case stands, since there is no obvious basis to restrict the princi- ple to TAWP, taxpayers being audited may be demanded in one form or another to idenƟfy any uncertain tax posiƟons. Any- one required to undertake that sort of analysis will need to seriously rethink how that work is done and what form it takes; • Going forward, irrespecƟve of wheth- er the CRA ulƟmately wins or loses this case, a more detailed and analyƟcal ap- proach is needed to adequately resolve the legal issues and policy choices raised in this case; and • UlƟmately, this case demonstrates the paramount importance of lawyer-client privilege as the only reliable defence to the disclosure of confidenƟal tax data that is consistently respected by the CRA and the courts. Lawyer-client privilege allows communi- caƟons between a lawyer and client made in order to obtain or give legal advice to be kept confidenƟal. Taxpayers preparing con- fidenƟal and sensiƟve tax analysis, such as TAWP, would be well-advised to do so within the scope of lawyer-client privilege. This privilege is not lost under Canadi- an law when disclosure is made to the tax- payer’s external auditors for the limited pur- pose of compleƟng its financial statements. 3 The business community will watch this case with interest. M Steve Suarez is a partner in the Toronto office of Borden Ladner Gervais LLP. He can be reached at 416-367-6702, ssuarez@blg.com or through the website, www.miningtaxcanada.com. Tax Accrual Working Papers are Fair Game References 1. 2015 FC 714, June 6, 2015 (Federal Court of Canada). 2. www.cra-arc.gc.ca/tx/tchncl/cqrngn- frmn/menu-eng.html. 3. The scope and importance of lawyer- client privilege in Canada is reviewed in Suarez, “Canada Revenue Agen- cy Forces Taxpayer to Disclose Dis- cussions with Accountant”, Tax Notes Int’l, May 11, 2015, p. 553, avail- able at www.miningtaxcanada.com/ current-developments. By Steve Suarez, Borden Ladner Gervais, LLPNext >