Québec is investing in mining infrastructure as part of its “Plan Nord” but the payoff is not immediate
Québec’s Plan Nord reads a lot like the recipe for stone soup. Like the hungry travellers of legend, who offer up a “magic” stone to cajole villagers into providing the ingredients for a community meal, Premier Philippe Couillard has tossed iron ore, assorted other minerals and $2.7 billion worth of infrastructure funding into the pot. Now he’s waiting to see whether the private sector will thicken the broth with mining and energy projects worth $50 billion.
If it works, Plan Nord will deliver electricity, roads, rail lines, ports, airports, schools, hospitals and thousands of mining jobs to the vast area north of Québec’s 49th parallel, while generating billions in royalties and taxes for government coffers. The 20-year plan covers a sparsely developed area of 1.2 million square kilometres, twice the size of France, that’s laden with iron, gold, diamonds, copper, nickel, zinc, uranium and rare earth minerals.
In Couillard’s favour, lower energy prices and a weaker Canadian dollar help to reduce project costs, and Northern Québec also contains enormous hydro-electric potential. Importantly, the monopoly provincial electric utility, Hydro Québec, is owned by the provincial government. Plan Nord calls on Hydro to build some $20-billion worth of new hydroelectric-generating capacity, assuming it’s supported by off-take agreements from new mining projects. Controlling the power company, arguably, could make it easier for the province to jump-start development. Moreover, the audacious Plan Nord is seen by some as the legitimate successor to Hydro in the role of standard-bearer for Québec pride.
Arrayed against the plan are stubbornly low commodity prices, the remote nature of the region, the dearth of rail lines, roads and ports – which imposes formidable transportation costs on both development and operations – and the lack of electric power infrastructure that further elevates cost profiles.
“The government cannot respond to the shortfalls of the public markets,” Jean Gagné of Fasken Martineau DuMoulin LLP says of commodity prices. But while they wait on prices, he says, industry and government can make modest infrastructure investments that will help reduce production costs.
Couillard and his ministers have been clear that, like stone soup, Plan Nord will require broad participation, especially from private-sector project proponents. But, like stone soup, someone has to toss in the crucial first ingredients in the bowl.
“We cannot wait until there is a mining boom and everything becomes uncontrollable,” Energy and Natural Resources Minister Pierre Arcand told the CBC. Arcand has said Québec will spend $1.3 billion on infrastructure and job training in the first five years (2015/20) of Plan Nord to assist the private sector in making commitments.
Accordingly, the province has invested $50 million in the expansion of a Montréal liquefied natural gas (LNG) plant, aimed at providing an alternative to the fuel cost and emissions of stand-alone diesel generators that are the primary source of electricity in the remote region. The government has funded a $20-million feasibility study for a 400-km rail line to the iron-rich Labrador Trough region, and they’ve fronted the $77-million cost of the Hwy 167 all-weather road extension to Stornoway Diamond Corp.’s new Renaud mine. The province is also negotiating to acquire industrial port facilities at Sept Iles from Cliff Resources, which unhelpfully shuttered its Bloom Lake iron mine in January. Sept Iles, on the St. Lawrence Seaway, would serve as the southern terminus of the rail line from the Labrador Trough and a gateway to world markets.
“If you can do infrastructure when it’s cheap and be ready when prices pick up, I think you’re in a good position,” says Brian Kujavsky, with the Montréal office of Davies Ward Phillips & Vineberg LLP. “People who are successful do tend to strike when the market is down.”
Eric Levy of Osler, Hoskin & Harcourt LLP agrees that “now is the time to develop infrastructure to ensure the long-term competitiveness of existing and new projects.” But he cautions that the province must “not get too far ahead” of a private sector that is clearly still held in check by commodity prices.
Erik Richer la Flèche of Stikeman Elliott LLP says the government has been careful not to overplay its hand on infrastructure development, and he doubts they will pressure Hydro into a major dam project in advance of big commitments from the mining sector.
“Everybody talks about power surpluses” in Eastern Canada and the United States Northeast, Richer la Flèche says. “There are a lot of questions to be answered before we build more dams. Hydro is not going to invest in a large project where it’s not needed. This is not a case of ‘build it and they will come.’” In his view, commitments to big mines must precede big dams.
The highly anticipated rail study, conducted with various iron-ore project proponents, is expected to be released late this year and will be an important indicator of industry and government sentiment. Champion Iron Limited says it’s planning a simultaneous announcement on the status of its Fire Lake project, which lies directly south of the Labrador Trough and boasts ore concentrations as high as 66 per cent.
Still, some mining experts have advised caution. They estimate debt servicing on a new $5- to 10-billion rail line could add as much as $14 dollars per tonne to the delivered cost of iron ore. Instead, they urge negotiating with Iron Ore Company of Canada for shared access and eventual expansion of its existing line into the region.
“If it can be shared it’s certainly cost effective,” Gagné observes. “For me, all forms of collaboration are preferred,” but he says he has no direct insight into the situation — and no comment on the suggestion of mining consultants that, if necessary, the government should regulate open access to rail lines in a manner similar to Australia’s National Access Regime.
Australia is much discussed in Plan Nord reviews because of its huge iron ore production, economies of scale and relative proximity to China, which is the world’s largest ore consumer.
“It’s true that Québec is essentially a high-cost jurisdiction,” and that Australia has a competitive advantage in the Chinese market, Richer la Flèche concedes. But he says Québec holds the transportation cost advantage to the American and European markets, and any increase in Chinese consumption will help boost prices in all markets.
Levy says, “It should also be noted that Australian iron ore has, generally, more impurities than iron ore from Québec and Labrador,” and therefore a significantly higher processing cost. Kujavsky adds that, in combination with iron mines on Baffin Island, Canada has the potential to become the world’s third-largest producer, with its own market power and economies of scale.
The critical mass of industrial development could also be supported to some degree by the emergence of an oil and gas industry in Québec. But Richer la Flèche notes that, so far, the best prospects are in the south, outside Plan Nord jurisdiction, including the Macasty shale formation on Anticosti Island. Production there might help to encourage port expansion at nearby Sept Iles, but appears unlikely to directly assist in the development of a northern rail line or power project.
Gagné and Richer la Flèche say that Québec oil development got off to a rocky start five years ago with proposals for hydraulic fracturing of shale formations. In a province where oil and gas development has hitherto been largely unknown, Richer la Flèche says it now seems unlikely that “fracking” will be broadly accepted anytime soon. He notes that conventional oil prospects have been identified in the Gaspé, and these may find greater public favour. But they’re too far south to provide support for Plan Nord.
For oil in particular, and to a lesser degree for industry in general, “social acceptability” is an important concept in Québec. The government has said that social acceptability will be a part of project approvals and that local benefits will be vital. Gagné says the government is currently studying a process to determine how social acceptability can be assessed.
“Everyone has the issue but this government has decided to tackle it,” and Gagné reckons the effort will smooth the way for project proponents. Richer la Flèche says the government is determined to attract projects with solid popular support but they’ve also been clear that their definition of social acceptability does not require unanimity. He says that perhaps only 60 per cent support will be required, provided that includes Aboriginal approval.
Kujavsky calls Plan Nord “the project of a generation (and) we think that the public is definitely prepared to accept a public/private approach. There is definitely hope that this will gain traction.
“We have to wait on commodity prices,” Kujavsky says, “but it’s not the facts that get in the way of private-sector investments, it’s the uncertainties and the risks. Plan Nord helps us to help our clients put boxes around these risks — not to make the risks go away but to help them understand these risks. Plan Nord helps put boxes around risks.”