proving resilient - the mining industry in british columbia 2014

Proving resilientThe mining industry in British Columbia 2014

This is the 47th edition that outlines the financial results and major trends in BC’s mineral exploration, development and mining industry.

www.pwc.com/ca/mining

2 | The Mining Industry in British Columbia 2014

Photo Matt Fraser, courtesy of AME BC

Table of contents

3 Preface

4 Participants

6 Executive summary

10 Thefinancialpicture

12 Teck Resources: Part of BC’s mining history

16 Market shipments and market prices

18 Governmentincentivesandfiscalpolicy

20 Commodityperformanceandoutlook

22 Buildingforthefuture

24 Onedoorcloses,anotheroneopens

26 Conclusion

27 Financialsummary

28 Miningexcellence

Cover photo, left, courtesy Teck Resources

The Mining Industry in British Columbia 2014 | 3

Preface

PricewaterhouseCoopers LLP (PwC) is pleased to present our 47th annual British Columbia Mining Report.

The annual report outlines the financial results of BC’s mining industry in 2014. It highlights some of the major themes and trends in the industry today, and underscores the numerous economic and social benefits the industry provides not just for BC, but also for Canada as a whole.

BC is known worldwide as a global centre for mineral exploration and development, and home to some of the world’s largest mining producers, with operations across the province and around the world. The province is rich in high-quality mineral resources. BC is Canada’s largest copper producer, its largest exporter of metallurgical coal and its only producer of molybdenum. BC is also a safe, politically stable jurisdiction in which to do business with good infrastructure, a highly skilled workforce and easy access to Asian markets through a productive port system. These are all factors that make the province an attractive place in which to invest.

BC’s mining industry has its share of challenges too. Low commodity prices have been a drag on profits and investment in recent years for companies in BC, and around the globe. The province’s mining industry faces increasing competition for investment dollars from other mining regions. That’s why BC’s competitive position, as compared to other jurisdictions, is considered crucial. The industry receives some government incentives to help encourage investment in the province. Still, the industry believes more can and should be done.

To stay competitive, mining companies must also pay close attention to the environmental impacts of their operations and maintain strong community relations, including with First Nations. The Mount Polley tailings dam breach in the summer of 2014 was a serious incident and an unprecedented occurrence for the industry. That said, the incident has led to increased scrutiny of tailings facilities in the province, and around the globe.

When it comes to relations with First Nations, a June 2014 Supreme Court of Canada ruling on Aboriginal title in BC was a landmark event for the industry and the country. While in some quarters this could be perceived as having a negative impact on future investment in the industry, the industry believes the ruling confirms its responsibility to consult with First Nations when it comes to resource development on land where Aboriginal title is asserted, a practice that it already widespread.

Some positive developments in the province over the past year have been the official commissioning of the Northwest Transmission Line and the approval of the Site C Clean Energy Project, both of which are expected to help mining companies more cost effectively meet their energy needs. These infrastructure projects, along with others planned or underway across the province, should help to encourage investment in the sector. That, in turn, will help to grow and to drive the economy, creating jobs and economic prosperity.

This report collates data on important economic indicators such as mining revenues, capital investment, employment and total payments to government, all of which demonstrate the positive impact BC’s mining sector has on the provincial economy. While some totals may be lower than in 2013 as a result of a drop in metal prices, the bigger picture underscores the mining industry’s long-term commitment and importance to BC.

The results of this report are based on an in-depth survey independently prepared by PwC with the cooperation and assistance of mining companies with operations and activities across the province. This year’s survey included 31 participants. They include 17 operating mines, two in the exploration stage, 11 in the permitting or environmental assessment stage and one smelter operation.

A special thanks to the mining companies who took part in this year’s survey, and to the Mining Association of British Columbia (MABC) and the Association for Mineral Exploration BC (AME BC) for their continued and invaluable support of this annual report.

We hope you find this report useful and that it provides insights into BC’s mining sector, and its economic promise for years to come.

Mark Platt BC Mining Leader and Partner at PwC


Operating

Coal Mountain Teck Resources Limited

Copper Mountain Copper Mountain Mining Corp.

Elkview Teck Resources Limited

Endako Thompson Creek Metals Company

Fording River Teck Resources Limited

Gibraltar Taseko Mines Limited

Greenhills Teck Resources Limited

Highland Valley Copper Teck Resources Limited – Highland Valley Copper

Huckleberry Huckleberry Mines Ltd.

Line Creek Teck Resources Limited

Mount Milligan Thompson Creek Metals Company

Mount Polley Imperial Metals Corporation

Myra Falls Nyrstar NV

New Afton New Gold Inc.

Quinsam Coal Quinsam Coal Corporation

Red Chris Imperial Metals Corporation

Trail Metal Smelter Operations Teck Resources Limited

Treasure Mountain Huldra Silver 1

Development stage — permitted or active permitting

Ajax KGHM Ajax International Ltd.

Brucejack Pretium Resources Inc.

Dome Mountain Metal Mountain Resources Inc. 1

Galore Creek NovaGold Resources Inc.

Harper Creek Yellowhead Mining Inc.

Kitsault Alloycorp Mining Inc.

Kutcho Capstone Mining Corp.

New Prosperity Taseko Mines Limited

Ruddock Creek Imperial Metals Corporation 1

Schaft Creek Copper Fox Metals Inc.

Tulsequah Chief Chieftan Metals Inc.

Exploration

Berg Thompson Creek Metals Company

Head Office – BC Exploration Teck Resources Limited

Participants

Notes

1. New participant for 2014



Tulsequah Chief

Schaft Creek

Galore Creek

Brucejack

Kitsault

Dove Mountain

Berg

HuckleberryEndako

Mount Milligan

Gibraltar Mount Polley

New Prosperity Harper Creek

Ruddock Creek

New AftonFording River

Greenhills

Line Creek

ElkviewCoal Mountain

Highland Valley Copper Ajax

Copper Mountain

Quinsam Coal

Myra Falls

Trail Metal Smelter Operations

TreasureMountain

Teck (Head Office)

Red Chris

Kutcho

Operating

Permitted or active permitting

Exploration

Trail operations

Highway 37

Participant locations in 2014



$8,537m

$8,238m

2014

2013

Executive summary

BC’s mining industry continues to prove its resilience and demonstrate its commitment to sustainability and stakeholder engagement amid a number of challenges presented in the past year.

Lower commodity prices remain the primary threat to profitability in the industry. The steady and continuous drop in the price of many metals and minerals has led to reduced revenues and margins, which in turn has meant lower overall spending and investment across the sector.

A handful of mines were put on care and maintenance in 2014, as companies cope with the current price slump. Some capital projects were also delayed, as companies decided to hold off on advancement until prices start to recover.

This drop in activity is evident in the financial results of companies in our 2014 survey of BC mining companies. Gross revenues fell to $8.2 billion in 2014, compared to $8.5 billion in 2013. Net income before taxes came in at $288 million, down considerably from $1.4 billion in 2013, amid a drop in prices for key metals produced in the province, particularly coal. Spending also fell as companies continued to hunker down and weather the ongoing market volatility. Capital expenditures, for example, fell to $1.5 billion, compared to $1.8 billion in 2013.

Mining is a cyclical business. Miners know this better than most and many are taking appropriate measures to try to maintain profitability, while at the same time ensuring their operations are sustainable for the long-term, for when commodity prices do eventually recover.

$1,503m

$1,785mCapital

expenditures decreased in 2014

2014

2013

Gross mining revenuescontinue

to decline


2014 a challenging but “important year”

2014 was a “difficult but important year,” for the mining industry in BC, according to MABC President and CEO Karina Briño, citing lower commodity prices, mine closures, the Mount Polley tailings dam breach and the Supreme Court of Canada’s decision regarding Aboriginal rights and title.

On August 4th 2014, the dam for the Mount Polley tailings storage facility breached, releasing water and tailings into the environment. Since that time, the mine has been put on care and maintenance. In January 2015, an independent panel found the breach was the result of a failure in the foundation of the embankment, which is a primary support element for the dam.

In June 2014, the Supreme Court ruled that six Tsilhqot’in bands have title over 1,700 square kilometres of land in central B.C. The ruling is seen as significant because it recognizes Aboriginal peoples own their ancestral lands where they can prove title, and have the right to use and control the land and enjoy its benefits. The position of both AME BC and MABC is that the decision actually clarifies the rules around title, which can help to encourage investment.

“It reinforces industry’s commitment to meaningful consultation and engagement with First Nations, which will continue to position BC as an attractive jurisdiction in which to mine,” says Briño. “I think it’s important to know that, from the industry perspective, this is an evolution of aboriginal law in our country. We look forward to understanding how this decision will be implemented on the ground.”

A number of advancements were also made in the BC industry in 2014, including environmental approvals of projects, such as Pretium’s Brucejack project and Seabridge Gold’s KSM project, and more government policy incentives to try to encourage investment in the sector, details of which are included later in this report.

These votes of confidence in the industry by government are key, particularly given the perception by some that BC is a challenging jurisdiction in which to explore, discover and develop mineral and coal resources. The 2014 Fraser Institute Annual Survey of Mining Companies placed BC in the top third for investment attractiveness, ranking 28th out of 122 jurisdictions, down from 16th out of 112 jurisdiction in 2013. BC also ranked 10th out of 12 Canadian provinces and territories included in the survey, down

from 7th in 2013. BC’s ranking in the Policy Perception Index dropped 10 spots in the 2014 survey, to 42nd, which was the poorest showing of any Canadian jurisdiction in the policy category.

AME BC President and CEO Gavin Dirom says the province and industry have work to do to build and maintain public and investor confidence in the sector. However, he also points to Natural Resources Canada data showing BC’s share of Canadian mineral exploration investment has more than tripled to 21% in 2014, from 6% in 2001.

While exploration spending is down across the industry, Dirom says BC is proportionally attracting more investment as compared to other jurisdictions, and in fact ranks 2nd behind Ontario. “BC is also improving its competitive edge through more efficient permitting and environmental assessment processes complimented by the government taking decisions that enable mine projects to proceed,” Dirom says.

2014 2013 2012

Gross mining revenues $ 8,238 $ 8,537 $ 9,157

Net mining revenues 1 6,760 7,008 7,844

Net income (pre-tax) 288 1,387 1,784

Cash flow from operations 1,685 2,568 2,230

Payments to governments 2 467 511 504

Exploration and development expenditures 234 185 305

Capital expenditures 1,503 1,785 2,746

Pre-tax return on shareholders’ investment (%) 2 13 23

Direct employment (number of employees) 9,954 10,720 10,419

New capital raised 3 1,207 221 94

Statisticalsummary ($CAD millions, except where otherwise noted)


Infrastructure appeal

Teck Resources President and CEO Don Lindsay says BC has a lot to offer investors in the sector, and people who benefit from it. Not only is the province rich in mineral resources, but it’s also well positioned geographically to serve resource-hungry global markets, particularly those in Asia.

“We should never forget that the logistics we have here are pretty good,” said Lindsay, citing a range of rail and port facilities across BC. “The infrastructure we have here is a big advantage.”

He also cited progress in permitting, including the BC government’s recent commitment to establish a Major Mines Permitting Office to improve co-ordination across government. The government has also set aside funds to increase staff to conduct more inspections and permit

reviews, and to boost turnaround times for notice-of-work permits. The province says the investment will help advance the up to 10 new mines it expects to move forward in the coming years.

“BC’s mineral exploration and mining industry is a great comeback story and today we have a significant opportunity to create thousands of jobs by opening new mines and expanding existing ones,” BC Premier Christy Clark said in announcing the measures in the latest provincial budget.

The challenge for BC going forward is to manage its costs and to remain competitive, while waiting for the cycle to turn once again in its favour.

Notes

1. Net mining revenues are reported after deduction of smelting and refining charges, freight costs, and marketing.

2. Includes direct taxes, other levies and payments related to employment.

3. Excludes capital raised by parent companies not directly related to projects in BC.

The Mining Industry in British Columbia 2014 | 9The Mining Industry in British Columbia 2014 | 9


The financial picture

A drop in prices for key BC commodities such as metallurgical coal, copper and gold led to a decrease in mining revenues across the province in 2014. Costs were also cut to cope with the prolonged industry downturn. Lower confidence in the sector, and the industry overall, has also deterred some investment.

Below is a summary of the financial picture, based on the results of BC mining companies surveyed for 2014:

Gross mining revenue from survey participants was reported as $8.2 billion, compared to $8.5 billion in 2013 and $9.2 billion in 2012. This is due to a drop in metal and mineral prices and a subsequent drop in production after a handful of mines were put into care and maintenance in the province in 2014. BC’s two largest revenue-generating commodities, metallurgical coal and copper, both saw price decreases in 2014.

Net income before taxes sank to $288 million. That compares to $1.4 billion in 2013 and $1.8 billion in 2012. The significant drop is largely due to the depressed metal prices, in particular the price of coal, a major BC commodity, which makes up about a third of mining revenues among survey respondents. This combined with six mines being put on care and maintenance in the year caused a significant decline in results.

Cashflowfromoperations came in at $1.7 billion, compared to $2.6 billion in 2013 and $2.2 billion in 2012. Mining companies continue to struggle with cash flow primarily due to decreased cash generated from sales and reduced shipments of metallurgical coal.

Totalexpenses were $6.5 billion in 2014, up from $5.6 billion in 2013. Depreciation, the depletion, and amortization increased in 2014 compared to the year before reflective of a significant increase in copper production in the year. In addition, the ramp up of production at Mt. Milligan resulted in notable additional operating expenses. Expenses related to interest on long-term debt also saw a big increase in 2014, compared to 2013.

2011

2012

2013

2014

Net income feeling the commodity

price drop$3,690

$1,784

$1,387

$288

Earnings summary($CAD millions) 2014 2013 2012

Gross mining revenues $ 8,238 $ 8,537 $ 9,157

Less: Deductions 1,478 1,529 1,313

Net mining revenues 6,760 7,008 7,844

Less: Operating costs and other expenses 6,513 5,643 6,081

Other income 41 22 21

Net income (pre-tax) 288 1,387 1,784


Capitalexpenditures fell to $1.5 billion, compared to $1.8 billion in 2013. Some miners are choosing to conserve costs, waiting for commodity prices to recover, before investing in expanding operations or new mines.

Explorationanddevelopmentexpenditures increased to $234 million in 2014. That’s an increase from $185 million in 2013, but below $305 million in 2012. In 2014, a handful of companies made meaningful increases in their exploration budgets.

Totalpaymentstogovernment were down slightly to $467 million in 2014, compared to $511 million in 2013 and $504 million in 2012. Lower commodity prices lead to lower revenues for miners, which in turn impact the amount of money paid to governments through taxes and royalties.

The amount of newcapital raised by BC mining companies increased significantly in 2014 to $1.2 billion. That’s up from $211 million in 2013 and $94 million in 2012. The increase is due largely to financing arrangements Imperial Metals made for its Red Chris project, which totaled more than $700 million.

Returnonshareholderinvestmentfell significantly to 2.4%, compared with 12.7% in 2013 and 22.8% in 2012. The investment climate continues to be tough for mining companies coping with lower commodity prices and this has resulted in significantly lower returns.

Labouroverview:The number of people working in direct jobs in BC’s mining industry fell to 9,954 in 2014, compared to 10,720 in 2013, based on the survey results. Miners continued to reduce their staffing levels to cope with the loss in revenues from lower commodity prices, and drop in overall investment. The general reductions being made across industry, combined with several mines going into care and maintenance during the year, resulted in the decline.

Direct employment Number of mining employees in BC

9,954

10,720

2014

2013


Teck Resources: Part of BC’s mining history

Teck is bracing for more difficult conditions ahead, amid ongoing market volatility, but is also seeing some cost-saving benefits from lower oil prices and improved revenues from the depreciating Canadian dollar.

Every one-cent change in the Canadian-US dollar exchange rate helps Teck generate about $52 million of additional EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) annually; while every US$1 per-barrel drop in the price of oil reduces its operating costs by about $5 million per year.

“While challenging market conditions persist, Teck remains in strong shape,” President and CEO Don Lindsay said in an interview with PwC. He said the company is on track for a targeted year-end cash balance of $1 billion.

To help conserve costs and maintain its financial strength, Teck recently cut its dividend.

2014 was another challenging year for miners in BC amid falling prices for most metals and minerals.

Vancouver-based Teck Resources, Canada’s largest diversified mining company, was impacted largely by falling prices for two of its key commodities, copper and steelmaking coal.



“While we believe that the longer term fundamentals for steelmaking coal, copper and zinc are favourable, the weakness in some of these markets may persist for some time,” said Lindsay.

Teck is the largest producer of steelmaking coal in North America, the second-largest seaborne exporter of steelmaking coal globally, the third-largest zinc producer, and one of the top 10 copper miners in the Americas.

The company owns or has an interest in 13 mines, one large metallurgical complex, a wind power facility and several major development projects in Canada, as well as the U.S., Chile and Peru. In BC alone, Teck has five operating steelmaking coal mines and one producing copper mine. In 2014, Teck’s steelmaking coal business unit accounted for 39% of its overall revenues; zinc was 31% and copper 30%.

The price of copper was relatively resilient in 2014, but dropped below US$3 per pound towards the end of the year, where it has remained well into the spring of 2015. Zinc prices slid in the second half of 2014, falling below US$1 per pound, but have strengthened in recent weeks as a result of tighter supply as mines shut and older producing sites are now tapped out.

The price of steelmaking coal continued to drop in 2014 and so far into 2015, amid a slowdown in steel production in China. Steelmaking coal is trading around US$100 per tonne, which is a considerable drop from its record price around US$330 in 2011.

To cope with lower metal prices Teck, like most miners today, is implementing a wide-range of cost-reduction measures. That includes holding back on the restart of its Quintette metallurgical coal project in northern BC, until the market for steelmaking coal is on more solid footing.

Teck’s focus is on controlling costs and making strategic investments for the long term, when markets do eventually recover. Teck has cut hundreds of jobs since early 2014 and both reduced and deferred spending across its operations. The company says its cost-reduction program has surpassed its initial goal, reaching $640 million in annualized savings to date.

Meantime, Teck is investing in its energy business unit to further diversify its portfolio. That includes the Fort Hills oil sands project, near Fort McMurray, in which Teck has a 20% stake. Fort Hills is a 50-year project which is expected to operate long after project capital is repaid and remain cash flow positive through multiple oil price cycles.

Lindsay has said Teck continues to assess opportunities across a number of commodities including copper, where a significant production deficit for the commodity is anticipated to start in 2017.

“Longer term, we remain optimistic about the outlook for copper,” said Lindsay. “The lack of current investment will leave a gap in the market in future years.”


Don LindsayTeck Resources, President and CEO

Don Lindsay joined Teck as President in January 2005, was appointed to the Board in February 2005 and was appointed Chief Executive Officer in April 2005. He is a graduate of Queens University (B.Sc., Hons.) and Harvard Business School (M.B.A.).

Photo courtesy Teck Resources


The mining engineer and former investment banker, who reaches a 10-year milestone in the top job at Teck this year, said the company won’t overpay for assets, but is planning for the future by capitalizing on its market strengths.

Lindsay said the steelmaking coal market remains oversupplied and prices can’t recover until further cuts are announced and implemented around the world.

“We need those cuts,” said Lindsay. He said Quintette will reopen once coal prices recover but, for now, “the market doesn’t need any more coal.”

Despite weaker steelmaking coal prices in U.S. dollar terms, the stronger U.S. dollar means that prices have actually increased in Canadian dollar terms. As of February 2015, in Canadian dollar terms, coal prices were more than 10% higher than the levels in the summer of 2014.

The slowdown in China has been a drag on commodity prices, but Lindsay believes the country’s economic shift towards consumer services, from its massive infrastructure build out in recent years, will help to underpin the price of many commodities.

“I’m not worried about a hard landing,” Lindsay said. “Their life is going to continue to get better and better.”

India is a potential growth market for Teck, especially since the country needs to import all of its steelmaking coal. However, Lindsay noted that growth in the country hasn’t been as robust as many economists had forecast in recent years. Teck sold more coal in India in 2014 than in its history combined, although it was only about 7% of sales last year.

“They have big plans and a strong leader in [Prime Minister Narendra] Modi … I’m optimistic about India, but it could take a while,” said Lindsay.


• Largest Canadian producer ofsteelmakingcoal

Teck snapshot

•TeckHighlandValleyCopperisthelargestcoppermine in Canada

•Secondlargestseaborneexporterofsteelmaking coalglobally

Copper30%

Zinc31%

Coal39%

Teck consolidated revenue numbers




Net mining revenue was $6.8 billion in 2014 compared to $7.0 billion in 2013, and $7.8 billion in 2012. Lower metallurgical coal and copper prices adversely impacted on revenue in 2014.

Below is a breakdown by commodity:

Metallurgicalcoalrevenue fell sharply to $2.2 billion from $3.1 billion in 2013 and $3.5 billion in 2012. The price of coal dropped to an average of US$126/tonne compared to US$160/tonne in 2013. Shipments for metallurgical coal dropped to 26.3 million tonnes, compared to 28.1 million tonnes in 2013 and 24.2 million tonnes in 2012. The temporary closure of some coal mines in BC in 2014 contributed to the production decrease.

Copper concentrates revenue increased to $2.2 billion, versus $1.7 billion in 2013 and $1.5 billion in 2012. Copper prices started high in 2014 but then dropped throughout the rest of the year. Shipments rose to 997,000 tonnes, compared to 844,000 in 2013 and 787,000 tonnes in 2012, alongside a growth in copper production in BC. The price of copper averaged US$3.12 in 2014 which was down from the average price of US$3.32/lb in 2013 and US$3.61 in 2012.

Zinc revenue totaled $711 million, up from $628 million in 2013 and $685 million in 2012. The price of zinc increased slightly in 2014, which helped to boost revenues for miners of the metal. Shipments were up slightly to 331,000 in 2014, from 322,000 in 2013. Both were increases from 287,000 in 2012. Zinc prices were higher on average in 2014, at US$0.98/lb. That’s up from an average of $0.87/lb in 2013 and US$.088/lb in 2012. Zinc supply was tighter in 2014 as demand outstripped supply.

Lead revenue came in a little lower, at $162 million in 2014, versus $189 million in 2013 and $194 million in 2012. The price of lead dipped in 2014. Lead shipments were relatively steady at 82,000 tonnes, versus 88,000 tonnes in both 2013 and 2012. The average price of lead in 2014 was US$0.95, which is down only slightly from an average of US$0.97/lb in 2013. Both are above the 2012 average of US$0.94/lb.

Market shipments and market prices


Molybdenum revenue increased to $256 million, compared to $150 million in 2013 and $248 million in 2012. That’s due in part to increased sales at the Gibraltar mine. Also, the price of molybdenum rose slightly in 2014, to an average of $11.35/lb, compared to an average of $10.42/lb in 2013. Both remain below the 2012 average of US$12.78/lb.

Gold revenues increased to $461 million in 2014, compared to $304 million in 2013 and $275 million in 2012. The increase is due largely to the ramping up of commercial production of the Mt. Milligan mine in 2014, as well as foreign exchange movements between the US and Canadian dollar given gold is priced in US dollars. For BC mines, gold is a byproduct that is primarily derived from copper mining activities. The price of gold continued to slide in 2014, averaging $1,266 for the year. Gold also fell significantly in 2013 to an average of US$1,411/oz, compared to US$1,668/oz in 2012.

Silver revenue slid to $487 million compared to $626 million in 2013 and $760 million in 2012. The average price of silver continued to fall in 2014, to an average of US$19.07/oz, which is down from US$23.79/oz in 2013 and fell even further from US$31.16/oz in 2012. In BC, silver is generally produced as a byproduct of metals such as copper, gold, lead and zinc.

Market prices

Gold

Copper

2011

2011

2011

2012

2012

2012

2013

2013

2013

2014

2014

2014

CoalUS$257/tonne

US$4.00/lb

US$1,572/oz

US$193/tonne

US$3.61/lb

US$1,668/oz

US$160/tonne

US$3.32/lb

US$1,411/oz

US$126/tonne

US$3.12/lb

US$1,266/oz


The BC government introduced new mine permit fees in February 2015. They will not be imposed on individuals or companies undertaking exploration activities, but producing companies will be subject to mine permit fees.

Karina Briño, President and CEO of the MABC, which represents producers in the province, said her organization is working with the BC Ministry of Energy and Mines to ensure the new mine permit fees deliver efficient, effective and measurable services.

“Predictability in the approval process creates confidence in BC as a leading mining jurisdiction,” Briño says.

The repeal of the harmonized sales tax in BC, as of April 1, 2013, following a referendum held in 2011, continues to be an issue for mining companies in BC. The return to a separate provincial sales tax (PST) and goods and services tax (GST) system has increased administrative costs as companies work to comply with the complexity of rules related to various exemptions.

When the HST regime was in place, mining companies were eligible to recover HST paid on most purchases of property and services relating to their mining operations. With the current GST and PST regime, mining companies remain eligible to recover the 5% GST portion while any PST payable remains a cost of doing business in BC (subject to various exemptions available for the mining industry).

The main impact to mining companies operating in BC is an increase in operating costs due to the application of non-recoverable PST on purchases of taxable tangible property (including electricity and natural gas consumed in mining operations), taxable services and software.

“Similar to the prior PST, there are some exemptions available for mining companies relating to the acquisition of specific production machinery or equipment used at the qualifying part of a mine site,” notes Garry Eng, a PwC Mining Tax partner.

“Miners are encouraged to take advantage of these exemptions as a way to help increase the competitiveness of their operations now, and into the future.”

A stable and competitive tax regime is key for BC’s mining industry, to help encourage long-term investment. There are both federal and taxation programs in place to attract and retain investors to the sector across BC and Canada.

Government incentives and fiscal policy


Governments have recently extended and broadened some of these incentive programs. For example, in March 2015, the federal government extended the Mineral Exploration Tax Credit (METC) through March 2016. The METC is a measure designed to encourage junior mining companies to raise new equity through flow-through shares to finance early stage grassroots exploration.

A taxpayer claiming the METC can also claim the 100% Canadian Exploration Expenses (CEE) deduction, which applies for both federal and provincial/territorial income tax purposes. After February 2015, the federal government has also extended the eligibility of CEE to include environmental studies and community consultation expenses incurred as a pre-condition to obtaining an exploration licence or permit. This is another positive note.

The BC government also said in early 2015 that it would extend its BC mining flow-through share tax credit through December 31, 2015. In BC, when the federal 15 per cent METC for investors is harmonized with the 20 per cent mining flow-through share tax credit, investors can receive a combined effective 32 per cent credit.

In addition, taxpayers who conduct grassroots exploration in BC continue to be eligible for a refundable tax credit of 20% (30% in pine beetle-affected areas) for qualifying expenditures.

Miners developing new projects or expanding existing ones in BC are also getting some encouragement through tax breaks extended until the end of the decade. In its latest budget, the BC government extended the new mine allowance for BC mining tax purposes for four years, until December 31, 2019. It allows companies to claim an additional allowance equal to one-third of the capital cost incurred during development of the new mine or eligible expansion project.

Gavin Dirom, President and CEO of AME BC, says these tax incentive measures will help encourage more investment in mineral exploration and development and increase the potential for the discovery of new mineral deposits throughout BC and Canada.

“Our modern society needs metals and minerals and relies on explorers to find new discoveries that will lead to the development of the next generation of mines,” says Dirom. “We have to keep investing in exploration in order to find the discoveries that will become mines of the future.”

“ Miners are encouraged to take advantage of these exemptions to help increase the competitiveness of their operations”

Garry EngPwC Tax Partner



The price of most commodities produced in BC continued to slide in 2014.

Metallurgical coal was particularly hard hit, while gold and silver continued to fall after a steep drop in 2013. Copper was relatively resilient for most of 2014, but fell towards the end of the year. The price of lead remained relatively stable in 2014, while zinc was the lone commodity to see a price increase.

Supply and demand were the key factors driving prices in 2014. However, prices were also influenced by the strengthening U.S. dollar and concerns about an economic slowdown in China, one of the world’s largest consumers of commodities such as copper, coal and zinc.

While most commodity prices are still well above their levels during 2008-09 global recession, they remain down considerably from record or near-record highs set in 2011.

The drop in coal prices had the most impact on mining activity across the province in 2014. A handful of coal mines were put on care and maintenance during the year due to lower prices. Metallurgical coal prices have fallen below US$100 per tonne as of the spring of 2015, down from record around US$330 per tonne in 2011, due to oversupply of this steelmaking ingredient in the global market and a slowdown in China’s economic growth.

Copper was performing well for most of 2014, but then fell below US$3 per pound towards the end of the year, amid concerns of oversupply. That compares to early 2011, when copper traded at a record of just over US$4.60 per pound. Concerns about sluggish growth in China’s economy are also weighing on the price of copper, a key industrial metal used in everything from cars and housing construction to computers.

“The copper boom in recent years has been inextricably linked to the growth of China, which consumes about 45% of total supply,” states PwC’s latest Mine publication, which reviews the performance of the Top 40 global miners. “However, apart from traditional consumption from construction and other industries, copper has also been stored in bulk and used as collateral for lenders.”

The PwC Mine report also cites a “lack of transparency” in Chinese copper trading as an explanation for some of its price volatility.

While the price of copper has fallen, some are forecasting the metal to rebound this year, and over the next couple of years, due in part to predicted global supply shortages some expect starting in 2017.

Zinc is one metal that has increased in price in 2014, compared to 2013. Zinc prices are forecasted to remain strong as some mines around the world reach the end of their life cycle, creating an anticipated supply shortage. Analysts believe European Central Bank’s recent stimulus program and further easing in Chinese monetary policy will help boost demand for industrial metals such as copper and zinc.

Commodity performance and outlook

2013 2014Net Revenue by Product

Metallurgical coal43%


Thermal coal4%

Thermal coal3%

Copper23%

Copper32%

Zinc9% Zinc

10%

Molybdenum2% Molybdenum

4%

Silver9%

Gold4%

Lead3%

Silver7%

Gold7%

Lead2%

Misc.3%

Misc.3%

2013 2014Net Revenue by Product



Thermal coal4%

Thermal coal3%

Copper23%

Copper32%

Zinc9% Zinc

10%

Molybdenum2% Molybdenum

4%

Silver9%

Gold4%

Lead3%

Silver7%

Gold7%

Lead2%

Misc.3%

Misc.3%

Net revenue by product 2013Net revenue by product 2014

Gold ($/oz) 1184 1,231

Silver ($/oz) 16.66 17.15

Zinc ($/lb) 0.94 1.04

Lead ($/lb) 0.83 0.93

Copper ($/lb) 2.75 2.80

MetalSpot price at

March 31, 2015

2015 Analyst consensus estimate

at April 7, 2015


Meantime, gold and silver continue to be weighed down by the prospect of higher US interest rates. That signals the American economy is on more solid footing, putting less reliance on these precious metals – gold in particular – as a hedge against a lower US currency.

Gold was trading around US$1,200 per ounce in the spring of 2015, which is down from US$1,700 at the start of 2013, and well below the record of just over US$1,900 in 2011. The metal price, considered a safe haven for investors in times of uncertainty, continues to be weak in the face of a strengthening US dollar. A stronger dollar discourages gold buyers, which also affects the value of the commodity.

Gold miners have been hit hard by the metal’s drop since 2011. PwC’s Mine 2014 publication shows global gold producers took the biggest portion of write-downs in 2013, or about $27 billion of assets. That’s out of a total $57 billion of assets wiped off the balance sheets of the top 40 global miners in 2013. The report also show the Top 40’s aggregate net profit sank by $52 billion (or 72%) to a decade low $20 billion, and that gold companies were responsible for $20 billion of net losses.

Silver prices fell sharply in 2013 and continued to drop in 2014. Silver is now trading around US$16 per ounce. The drop is being blamed in part on oversupply of the metal on global markets. Silver has more industrial applications than gold, which could stabilize demand, and in turn prices, in the months and years to come.

Overall, 2015 looks to be another volatile year for commodity prices. While some metals will do better than others, miners will continue to manage their costs to reflect the ongoing downturn in the cycle, and are expected to treat any price recovery with great caution.



BC has a solid infrastructure base today, which includes resource access roads, bridges, highways, hydroelectric power facilities and power lines, railways and ports. New projects now ready for use, and some in long-term planning stages, will go a long way towards improving BC’s infrastructure and, in turn, drawing investment to the mineral exploration and development sector.

A notable example is the official opening of the Northwest Transmission Line (NWTL) in the summer of 2014. The 344-kilometre, 287-kilovolt-transmission line, which originates from near Terrace and ends at a new substation near Bob Quinn Lake, provides power to new projects such as Imperial Metal’s Red Chris copper-gold mine, which began production in early 2015.

Building for the futureA strong infrastructure base is critical to the long-term sustainability of BC’s mining industry.

Good infrastructure is key to helping mining companies invest, plan, construct and carry out their operations. It also encourages new investment in the province.


AME BC says there are about 10 potential new mines in the region, which could create more than 4,000 long-term jobs and generate hundreds of millions of dollars in revenue each year. They include Brucejack, owned by Pretium Resources and Seabridge Gold’s KSM project, both of which have received key environmental certificates.

The NWTL represents “an essential building block for future mineral exploration and development in BC,” says AME BC President and CEO Gavin Dirom.

Another power project the industry has been pushing for is the Site C dam and hydroelectric project, which proposes to provide clean, low-cost, reliable electricity power for communities across BC for the next century. Site C, which was approved by the provincial government in late 2014, is expected to be operational by 2024.

“Site C will power the next generation of mines,” Dirom says, “and act as a major catalyst to grow global investor confidence in BC mineral exploration and development.”

Other infrastructure developments that will benefit the BC mining industry include upgrades to the coal export facility at Roberts Bank, owned by Westshore Terminals, and whose largest customers include Teck Resources. Mining companies across the province are also expected to make improvements to their tailings dam facilities in light of the breach at the Mount Polley mine in 2014.

Access to rail remains an issue for mining companies, many of which are competing for capacity with other industries such as agriculture and oil, as the number of players using the infrastructure grows.

“Stability in infrastructure and our ability to access those ports, rails and power is what the industry is interested in,” says MABC President and CEO Karina Briño.

“Infrastructure investment is something the industry has to keep a close eye on.”

MABC President and CEO Karina Briño

“ Stability in infrastructure and our ability to access those ports, rails and power is what the industry is interested in.”


One door closes, another one opens

These are volatile times in BC’s mining industry, and nothing demonstrates the ups and downs like the various openings and closings of mines across the province over the past five years.

Miners were hit hard by the 2008-09 global financial crisis, but bounced back quickly starting in 2010, as commodities prices staged a strong recovery, driven largely by demand from resource-hungry China.

Mining companies took advantage of the comeback from the recession, and record or near-record commodity prices in 2011, by ramping up operations and starting up a number of mines across the province, particularly those with producing copper. In fact, the first half of the decade has been fairly positive for copper mines in BC.

Examples of copper mines opening in recent years include; Copper Mountain in 2011, New Gold’s New Afton copper and gold mine in 2012, and the Mt. Milligan copper and gold mine, owned by Thompson Creek Metals, in 2013.

While those operations continue to be in production, despite more difficult economic conditions today, it’s a different story for other operations across the province, particularly for metallurgical coal mines, due to depressed prices for the key steelmaking ingredient.

A number of coal operations in BC have been put on care and maintenance, and projects have been put on hold, at least until prices recover.

“ With a certain approach and attention to details, projects do proceed in BC in a timely way”


Examples include: Walter Energy Inc., which put its Wolverine and Brazion mines on care and maintenance in April and July 2014 respectively, citing slumping coal prices; Anglo American, which stopped production at its Trend mine in September; and Teck Resources, which is deferring the restart of its Quintette coal mine.

Coal mines weren’t the only ones to face closures in 2014. Thompson Creek Metals said in late 2014 that it was temporarily suspending production at its Endako molybdenum mine. The Mount Polley copper and gold mine has also been on care and maintenance since the tailings dam breach in August 2014.

While these temporary closures are not good news for economic growth in BC’s mining sector, other mines continue to reach or move towards production. Red Chris, owned by Imperial Metals, began commercial production in early 2015. The Kitsault molybdenum mine, owned by Alloycorp Mining (formerly Avanti Mining), is under construction and production is expected to begin in 2017. Meantime, Brucejack, owned by Pretium Resources and Seabridge Gold’s KSM project, have both received key environmental assessment approvals in recent months. A handful of other projects are also advancing towards development, such as Kemess North.

AME BC President and CEO Gavin Dirom says these positive developments are proof that BC has the capacity to review projects efficiently, and with First Nations support.

“With a certain approach, determination and attention to details, projects do proceed in BC in a timely way,” Dirom says.

He describes BC’s mining industry as being in a restructuring phase for the next few years. A number of projects will advance, he says, but production may be delayed for some depending on commodity prices and production costs. Many miners also need to secure additional financing, which is not an easy task in today’s uncertain markets, to help fund construction of mine projects and to eventually bring them into production.

“ Projects will advance but production may be delayed until commodity prices recover”

AME BC president and CEO Gavin Dirom


BC’s mining industry continues to face significant headwinds. Low commodity prices have put a major strain on the industry over the past three years. Until prices begin to recover, confidence and investment in the sector will be difficult to muster. Meantime, environmental safety and stakeholder engagement, including relations with First Nations, will need to remain a focus for miners looking to ensure they have the critical social licence required to explore, advance and operate their projects.

It’s not all bad news for BC’s mining industry though. A lower Canadian dollar is helping companies realize meaningful savings across their operations. For example, Vancouver-based New Gold said in a recent investor presentation that a 5-cent change in the Canadian dollar exchange rate equals about a $90 per ounce change in all-in-sustaining costs for its New Afton mine in B.C. Teck Resources told its investors recently that every one-cent change in the exchange rate, relative to the U.S. dollar, helps it to generate about $52 million of additional EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) annually. Lower oil prices are also helping miners save millions of dollars annually. According to Teck, every US$1 per-barrel drop in the price of oil reduces its operating costs by about $5 million annually. Companies across the sector are finding some relief from lower oil prices and the depreciating Canadian dollar.

What’s more, many miners are holding up relatively well, despite lower prices for their commodities. When the cycle began to turn lower again in 2012, there were predictions that hundreds of junior mining companies would fall away, unable to survive the cash crunch. In spite of this, a number of juniors continue to raise money and advance their exploration and development programs.

PwC’s latest Junior Mine Report, which looks at the top 100 mining companies by market capitalization on the TSX Venture Exchange, showed the environment is tough for juniors today, but their resilience and determination could soon pay off. According to the 2014 Junior Mine report, the Top 100 raised a total of $685 million through equity financings in the 12-month period ended June 30, 2014, which was down from $795 million a year earlier. Many have had to turn to more risky debt financing.

“As in previous mining cycles, the recovery usually starts with the major mining companies. Once they begin to make meaningful investments in the industry, the mid-tier and juniors will benefit,” John Gravelle, PwC’s Global Mining Leader said in the report. “Junior companies are a foundation of the industry and its future.”

Many senior miners are also staying the course, continuing production by strictly managing their costs. Still, as we reported in our latest Mine publication, “At current prices, many producers are on the wrong side of the marginal cost curve, which cannot be sustained for extended periods.”

Those with cash to spare are even using the latest downturn as an opportunity to invest in future growth, by purchasing assets at lower valuations. These opportunities are starting to pick up, but M&A activity remains relatively quiet as miners continue to worry about overpaying for assets.

From our perspective, investment in the mining industry must continue, despite today’s challenging conditions. Miners need to keep exploring if they are to find the discoveries today that will be developed into the mines of tomorrow. This is the only way to ensure the industry remains competitive in the long term. A strong, sustainable and responsible mining industry benefits us all.

Conclusion

“ From our perspective, investment in the mining industry must continue, despite today’s challenging conditions.”


Five-year financial summary($CAD millions, except where otherwise noted)

2014 2013 2012 2011 2010

Gross mining revenues $ 8,238 $ 8,537 $ 9,157 $ 9,886 $ 7,905

Net mining revenues 1 6,760 7,008 7,844 8,747 6,574

Net income (pre-tax) 288 1,387 1,784 3,690 3,718

Cash flow from operations 1,685 2,568 2,230 4,013 2,855

Total assets 18,200 17,568 13,933 13,059 8,546

Pre-tax return on shareholders’ investment (%) 2.4 13.0 22.8 46.0 62.9

Direct employment (number of employees) 9,954 10,720 10,419 9,310 8,195

Payments to governments 2 467 511 504 674 515

Exploration and development expenditures 234 185 305 463 322

Capital expenditures 1,503 1,785 2,746 2,943 1,252

Notes

1. Net mining revenues are reported after deduction of smelting and refining charges, freight costs, and marketing.

2. Includes direct taxes, other levies and payments related to employment.


Mining excellence at PwC

Delivering local solutions to global challengesThe mining sector is facing a range of competing trends and a rapidly changing global business environment. Against the backdrop of commodity price fluctuations, miners need to balance shareholder dividend expectations while maintaining an investment pipeline in the midst of increasing operating costs. Safety, environmental and community principles also continue to shape the industry as miners look to achieve their licence to operate and deliver on corporate responsibilities.

Mining Excellence at PwC has been designed to mobilize and leverage PwC’s collective global knowledge and connections to deliver an exceptional and tailored client experience, helping our clients navigate the complex industry landscape and meet their growth aspirations. Our team of specialists is exclusively focused on the sector and brings an industry-based approach to deliver value for you and your organization.

Mining Excellence at PwC provides our clients:

Leading edge knowledge and global thought leadership

With significant investment in the research behind our mining publications and a comprehensive industry learning and development program, our professionals can share both industry and technical insight with our clients, such as:

• a library of industry publications designed to help challenge “conventional” thinking and delve into topical industry issues.

• extensive industry development program for our people and clients, featuring our annual learning and development programs: - Americas School of Mines (North

America) - London School of Mines (United

Kingdom) - Asia School of Mines –– Hard Hat:

The Mining Experience (Australia)

Connections to our vast network of mining experts and global client portfolio

We have the widest network of industry experts who work out of strategic mining hubs across the globe to help better connect you to vital mining markets.

Our connections provide:• seamless client service delivered

with collaborative cross-border account management

• maximized deal potential through a well-connected global community of mining leaders

• a mobile workforce to ensure effective service delivery in even the most remote mining locations.

The delivery of an experience that meets our clients’ definition of ‘value’

With mining experts working around the globe, our award winning teams are helping clients deliver on specific projects and organizational growth aspirations. We offer advisory, tax and audit services to global corporations and locally listed companies.

Mining Excellence at PwC complements this with:• a suite of niche mining consulting

capabilities focused on optimizing value across mining operations and effectively managing risk to help our clients grow their business and deliver shareholder value

• a comprehensive client feedback program to ensure we are always improving and delivering on individual client needs.


Assurance and Tax Partners

Mark Platt [email protected] 604 806 7093

John DeLucchi [email protected] 604 806 7575

Lana Kirk [email protected] 604 806 7102

Dean Larocque [email protected] 604 806 7173

Craig McMillan [email protected] 604 806 7724

Mark Patterson [email protected] 604 806 7160

Ken Scott [email protected] 604 806 7175

Garry Eng (Tax) [email protected] 604 806 7037

Tim Johnston (Tax) [email protected] 604 806 7831

Sean Wilson (Tax) [email protected] 604 806 7187

Senior Managers

Tiffany Spurling [email protected] 604 806 7190

Mazin Khan [email protected] 604 806 7566

Frans Minnaar [email protected] 604 806 7042

Elena Orlova [email protected] 604 806 7358

Alexander Shulga [email protected] 604 806 7762

Eric Talbot [email protected] 604 806 7077

Len Wadsworth [email protected] 604 806 7085

Brooke Ko (Tax) [email protected] 604 806 7798

Charmaine Neilsson (Tax) [email protected] 604 806 7573

Managers

Amy Bonner [email protected] 604 806 7159

Kevin Cheung [email protected] 604 806 7131

Joshua Contant [email protected] 604 806 7108

Kamil Dziegielewski [email protected] 604 806 7720

Ron Gill [email protected] 604 806 7039

Patrick McNary [email protected] 604 806 7081

Jamie Rule [email protected] 604 806 7553

Jeannette Vergara Canoles [email protected] 604 806 7327

Pamela Gao (Tax) [email protected] 604 806 7064

Shanawaz Islam (Tax) [email protected] 604 806 7786

Junior Mine 2014

The junior mine sector continues in survival mode, but we’re starting to see signs that the worst may be over. In our eighth annual Junior Mine Report – which looks at the top 100 mining companies by market capitalization on the TSX Venture Exchanges.

www.pwc.com/ca/en/junior-mining-headquarters

2014 Mine

PwC’s 11th annual review of global trends in the mining industry. This analysis is based on the financial performance and position of the global mining industry as represented by the Top 40 mining companies by market capitalization.

www.pwc.com/mine


Since 1904 Britannia has been known as a Mining TownNow, it is an award-winning Museum and National Historic Site

In recognition of the contribution of the Britannia Mine Museum

In 1904 the Britannia Mine was initiated after the area was discovered to be rich in copper. Even with no road or train access, the mine grew to be one of the largest copper mines in the British Empire and an economic backbone of BC.

In 2005 the EPCOR Water Treatment Plant came into operation to manage Britannia mine’s acid rock drainage and ensure clean water. This was the starting point for the Museum to expand and transform the site to an international tourist destination.

Revitalized in 2010 with a $14.7 million redevelopment, the Museum commemorates the accomplishments and ingenuity of Canada’s mining pioneers and showcases the evolution of the mining industry, its advances and achievements. It highlights Canadian innovation and leadership in sustainable mining and resource development and environmental stewardship.

The Museum’s engaging exhibits, special events and tours of the impressive 1921 Mill Building plus a mine tunnel gives 70,000 visitors a glimpse into what it takes to mine copper ore. Visitors leave with an increased appreciation in how modern mining contributes to our daily lives.


Please direct any questions about this survey to:

MarkPlatt PwC | [email protected] 604 806 7093

or

TiffanySpurling PwC | [email protected] 604 806 7190

For additional copies of this publication, please contact:

SabineMargolis PwC | [email protected] 604 806 7258

Key contributors to the survey:

Mark PlattTiffany SpurlingBrenda BouwJordana WhetterRyan TalbotJenny NguyenAnthony ChanAdam BrownPatrick GunnDiane ErdsteinSabine Margolis

The annual PwC BC Mining Industry Survey for 2014 is available at www.pwc.com/ca/bcminingsurveyand on the MABC website at www.mining.bc.ca

© 2015 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 4620-02 0515 VN

www.pwc.com/ca/mining

proving resilient - the mining industry in british columbia 2014

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