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Agnico Eagle Mines Ltd (USA) (AEM), IAMGOLD Corp (USA) (IAG): Is the New Mining Tax in Quebec a Headwind for Gold Stocks?

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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.

Agnico Eagle Mines Ltd (USA) (NYSE:AEM)

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)

OR

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 Mines Ltd (USA) (NYSE:AEM), IAMGOLD Corp (USA) (NYSE:IAG) and Goldcorp Inc. (USA) (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 Inc. (USA) (NYSE:GG)’s Eleonore mine and Agnico Eagle Mines Ltd (USA) (NYSE:AEM)’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 Eagle Mines Ltd (USA) (NYSE:AEM) and IAMGOLD Corp (USA) (NYSE:IAG), 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 Eagle Mines Ltd (USA) (NYSE:AEM), Goldcorp and IAMGOLD Corp (USA) (NYSE:IAG) will seldom have profit margins greater than 35% (exceptions could be Agnico’s LaRonde mine beyond 2017 and Goldcorp Inc. (USA) (NYSE:GG)’s Eleonore mine beyond 2016). As a result, there is only minimal impact to Agnico Eagle Mines Ltd (USA) (NYSE:AEM) 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 Eagle Mines Ltd (USA) (NYSE:AEM)’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.

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