February 2001
Who Makes the Grade?
by Liv Fredricksen & Laura Jones
The Fraser Institute conducted its first survey of mining companies in 1997 to assess how various public policy factors such as taxation and regulation affect exploration investment in Canada. Since then, we have expanded the survey to include selected US states and foreign jurisdictions including Argentina, Brazil, Chile, Mexico, Peru, Australia, Papua New Guinea, Indonesia, and South Africa.
The idea to survey mining companies about how government policies and mineral potential affect new exploration investment came from a Fraser Institute conference on mining held in Vancouver in the fall of 1996. At that conference, many industry representatives who had privately been critical of how government policy was deterring investment in mineral-rich British Columbia were reluctant to express those same views publicly, as any public criticism of government policy may have negative effects on projects already under way in a region. As a result, governments were largely unaccountable for the impact of their actions, which can encourage, discourage, or in some cases virtually eliminate new exploration.
To add to this problem, new exploration is an indicator of the future, not present health of the mining industry in a region. The effects of increasingly onerous, seemingly capricious regulations, uncertainty about land use, higher levels of taxation, and other policies will rarely be felt immediately, as they are far more likely to deter companies looking for new projects than they are to shut down existing operations. The lack of accountability that stems from 1) the lag time between when policy changes are implemented and when economic activity is impeded and job losses occur and 2) industry's reluctance to be publicly critical of governments, is a cause of concern for those who would like to see a healthy future for the mining industry in their jurisdictions.
To address this problem and to assess how various public policy factors influence companies' decisions to invest in different regions, The Fraser Institute began conducting an anonymous survey of senior and junior mining companies. A summary of the results of the 2000/2001 survey, which represents the opinions of 25 senior mining companies and 132 junior mining companies, is presented below.
Policy Potential Index: A "report card" to governments
While geological and economic evaluations are always requirements for exploration, increasingly it is a region's policy climate that drives investment decisions.
The Policy Potential Index is a composite index that measures the climate for exploration created by government policies, including taxation, environmental regulations, duplication and administration of regulations, native land claims, protected areas, infrastructure, labour, and socio-economic agreements (see figure 1). The highest possible score on this index is 100. The five regions with top ratings for their policy climates are Nevada (93), Chile (87), Mexico and Alberta (tied at 79), and Peru (75). The worst performing jurisdictions, based on policy, are British Columbia (6), Wisconsin and Nunavut (tied at 21), California (24), and Montana (27). These five are the same jurisdictions that were given the worst ratings last year. British Columbia has been the lowest-rated jurisdiction in terms of mining policy for each of the four years that the survey has been conducted.
The Mineral Potential Index
The Mineral Potential Index rates a region's attractiveness based on companies' perceptions of geology (see figure 2). Survey respondents were asked to rate each region's mineral potential assuming there were no land use restrictions in place, and further assuming that any mine would operate to industry best practice standards. The goal was to determine the region's true mineral potential unaffected by policy restrictions. Ontario received a perfect score of 100 this year, followed by Nevada (97), Chile (94), Alaska (91), and Australia and Peru (tied at 89). The worst-rated regions on this index include Nova Scotia (3), South Dakota (6), Minnesota (9), Wisconsin (11), and Alberta (14).
The Investment Attractiveness Index
The Investment Attractiveness Index shows the best- and worst-rated places for mining companies to spend their exploration dollars. The overall Investment Attractiveness Index is constructed by combining the Mineral Potential Index, which rates regions based on geological attractiveness, and the Policy Potential Index, a composite index that measures the effects of government policies on exploration investment. Interestingly, jurisdictions with good mineral potential but poor policy potential can receive low ratings for overall investment attractiveness.
For the third year in a row, the State of Nevada is the top-rated jurisdiction for overall investment attractiveness with a score of 95 points out of a possible 100 (see figure 3). The impressive rating is the result of the state's top rating in policy potential (93) and high rating in mineral potential (97). Chile (91), Ontario (86), Peru (82), and Mexico (77), also performed well overall. Ontario outperformed fourth and fifth place contenders Peru and Mexico in terms of investment attractiveness because of its top ranking on the mineral potential index (100), even though the latter two countries continue to attract high levels of exploration investment.
Also placing in the top ten jurisdictions for overall investment attractiveness are Australia (75), Brazil and Alaska (tied at 74), Quebec (73), and Arizona (60).
At the other end of the scale, Wisconsin (16), Minnesota (24), Nova Scotia (26), and Washington and South Dakota (27) were rated the least attractive areas for new mining investment. Wisconsin's low Investment Attractiveness score may stem from its moratorium on mining and well-publicized anti-mining attitude (reflected in its low Policy Potential Index score) as well as its low score on the Mineral Potential Index. Nova Scotia's low rating on the Investment Attractiveness Index is mainly due to a perceived lack of mineral potential as shown by its last-place finish on the Mineral Potential Index. Other low-scoring jurisdictions include California (32), Colorado, Wyoming, and Montana (tied at 35), and Newfoundland (40).
[Editor's note: The entire survey document is available on our website at www.fraserinstitute.ca/publications/surveys/2000mining/index.html.]
Laura Jones (lauraj@fraserinstitute.ca) is Director of Environment and Regulatory Studies at The Fraser Institute. She received her M.A. in Economics from Simon Fraser University. Liv Fredricksen is currently a research assistant with The Fraser Institute. She has a B.A. in English Literature from the University of BC.
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