De Beers: Ontario Royalty Fee Hurts Diamond Business and Locals

The recent announcement by Ontario’s Minister of Finance Greg Sorbara that the Canadian province intends to replace the 5 percent tax rate with a 13 royalty fee on diamonds has blindsided De Beers. After focusing for many years on mining in Africa, and a decade after diamond mining started in Canada, the giant was finally in an advanced stage, preparing to open Victor, Ontario’s first diamond mine.

Exploring for diamonds is cash-intensive. It requires a well established company with deep pockets or a junior with investors – the general public – that have a major sparkle in their eye and have faith in the company undertaking the exploration.

But even after finding strong evidence of the presence of diamonds in the ground, a feasibility study needs to prove that mining the site is economical. One thing that De Beers Canada took into account at Victor was that the tax rate would be five percent. To be told that it would be nearly tripled two years into development, and with another year until production begins, seemed unfair, to put it mildly.

Unfair, for a number of reasons. Victor is a remote project by government standards. This is defined as a mine located more than 30 kilometers from an all-weather road or railway. The Ontario mining tax for new remote mines is five percent, compared to 10 percent for non-remote mines, says the Ontario Premier’s Office. That means that De Beers not only has to build temporary ice roads each year on their on dime, but to create the entire infrastructure, like sewage treatment and electricity transmission lines to the site.

According to Minister Sorbara, the change makes sense because it brings the royalty fee in line with the Northwest Territories, where two other diamond mines are located. De Beers Canada is also developing a new one, Snap Lake, in the region.

But in the NWT, tax is applied equally to all mined minerals and metals. In Ontario, only diamonds are subject to the higher rate, according to Linda Dorrington, De Beers Director of Public and Corporate Affairs. In addition, the 13 percent fee in the NWT is long established – so when De Beers did a feasibility study for Snap Lake, it took that into account.

Dorrington says the Ontario government is creating a disincentive for further diamond exploration and investment in the province. “The C$1 billion dollar investment in Victor by De Beers will create a C$6.7 billion dollar growth in the Ontario economy over the 12 year life of the Victor mine.  This is orders of magnitude greater than any income from the proposed royalty,” she told IDEX Online. 

“Ironically the value of salt production in Ontario is $260 million. The value of the Ontario mining industry, for all commodities is $9.4 billion per year. With Victor's production valued at about $280-$290 million, they really are not going to see big additions to the Government income statement from this royalty. But what they will do is curtail the growth of a nascent diamond industry in this province,” she warns.

Dorrington points to another issue, local residents. According to an agreement, once the diamond mine breaks even, a revenue sharing accord with the aboriginals, such as the Attawapiskat First Nation, will go into effect. With more of the income going into provincial coffers, the break even point will be pushed back, and the local communities will get a lot less.

“If the Government was genuinely committed to economic growth and the development of remote Aboriginal communities in the north, they would encourage investment rather than apply punitive taxes on an emerging new industry,” Dorrington added.

De Beers is investing C$1 billion (US$880 million) in Victor’s development. This is money that is brought in from the outside and spent in the Ontario economy.

At such an advanced development stage, De Beers can’t afford to abandon the project. No wonder they feel ‘tricked’.