Mining companies hope recent changes to Canada’s tax regime will help them cross the “valley of death” that often kills efforts to extract promising mineral deposits from Canadian soil. 

The federal government introduced the new productivity “mega” deduction at the Canada Investment Summit last month to attract more global capital to Canada. The measure would help get major projects off the ground, Prime Minister Mark Carney said, including the mining projects that dominated the summit’s dealbook.

For an industry that requires “enormous” upfront investment and faces brutal failure risks—with only 1 out of every 1,000 exploration projects becoming a mine—the policy could improve the economics of getting a project into production. It is “the most significant change to capital cost recovery for Canadian mining investments in years,” according to PwC. 

“For more advanced stage projects that are actually purchasing equipment or have revenue streams, it’s going to have an impact on their bottom line probably right away,” said April Hayward, executive vice-president of strategic partnerships at Li-FT Power, one of the mining companies in the deal book. “Investors are always asking about the payback period.”

The measure lets companies claim upfront the income tax deductions they would normally spread over several years for capital investments in equipment. The announcement also added immediate expensing for Canadian development expenses, which are specific to the mining industry. Last week, the government confirmed that mining property will qualify, alongside everything from fibre-optic cables and greenhouses to software, patents and roads.

The policy has attracted its share of skeptics, who argue the government should have cut the corporate tax rate instead. Critics say a broader cut would also benefit service-based industries and let companies use the savings to hire workers, rather than just buy more machines.

But PwC found that the policy is especially favourable for buildings on mining sites, and will sweeten the deal for investments in flow-through shares, a major draw for investors in mining stocks listed on Canadian exchanges.

Canada Nickel, which is developing the world’s second-largest nickel reserve and counts the Taykwa Tagamou Nation as one of its equity investors, hopes the tax credit will help make its future more secure. The company is negotiating a deal to get equipment like autonomous trucks, electric vehicles and low-emission trolleys for hauling ore. CEO Mark Selby said the company will need about $2 billion just to build a mine, and that the new policy could increase project values by four or five per cent for companies like his. 

“A found resource has no direct benefit to the economy. It only creates benefit for the economy when that resource is developed into an actual mine,” he said, adding that eligible expenditures will help make that happen. 

Pierre Gratton, CEO of the Mining Association of Canada, said the policy is likely to move the needle on new investments, not just existing project plans. Multinational miners are constantly scanning their global portfolios to decide where to expand operations next. They often target projects with an expected 15 per cent return—and this policy could push Canadian projects from the margins to the “yes column” of those lists, he said. 

Hayward’s company, Li-FT, is developing lithium, a key ingredient in batteries, through mines in Québec and the Northwest Territories and an Alberta processing plant. As diamond mine closures destabilize the economy in the Northwest Territories, companies like Li-FT face pressure to step up. 

The tax credit will improve key investor metrics like net present value and internal rate of return, Hayward said. But companies still struggle to finance the stretch between discovering a resource and making a final investment decision—the so-called valley of death. 

That gap was visible at the Canada Investment Summit, where most mining companies got little face time inside the halls of the Four Seasons, and were left working the sidelines as major investors gathered in the Toronto hotel and shopped for larger deals. 

“There are other kinds of investors that probably need to fill in some of the cracks and gaps in funding, that have tens of millions on the table. They’re looking to invest for higher-risk, higher-reward projects,” Hayward said. 

The tax changes also leave gaps that the mining industry wants Ottawa to address. Many in the sector say the government needs to implement more drastic changes to compete with China, whose sprawling mineral supply chains give it significant commodity-pricing power. A fall in metal prices can quickly make Canadian mining projects less bankable.

Income tax deductions only help companies that have income, and key parts of the mining supply chain, like smelting and refining, can face long stretches without turning a profit, Gratton said. Other measures, like renewing exploration tax credits and expanding eligibility of the Canadian exploration expense program, could help, according to Gratton and Todd Stone, CEO of the Association for Mineral Exploration.

“We’re encouraging them to not lose sight of the fact that they need to have one eye also on the early exploration aspect of the mining sector,” Stone said. “There are thousands of companies doing really great work all over the country that are still really struggling to move their projects forward any faster.”