Infrastructure deficit and impacts on exploration and mining

1. The Mining and Resource Access Opportunity New Partnership Models for Infrastructure Devfelopment A Mineral Exploration Industry Perspective June 15, 2016

2. THE NORTHERN COST PREMIUM  Mineral exploration costs increase arithmetically with distance from infrastructure o Up to 50km away: 2.27 times more expensive than the average costs of the non-remote projects (up to 50km away) o More than 500km away: 2.8 times higher  Capital costs were higher for a range of commodities: o 2.5 times higher for base metal mines o Approximately double for gold mines o 15-20% higher for diamond mines in the territories 2

3. Impact of Remoteness on CAPEX Costs for Precious Metals Underground GOLD project (1.75 MTPA) 3Sources: MinEx Consulting and Kenex Ltd © Jan 2016

4. Impact of Remoteness on CAPEX Costs for Base Metals Open Pit COPPER project (1.75 MTPA) 4 Sources: MinEx Consulting and Kenex Ltd © Jan 2016

5. FACTORS AFFECTING THE MOVEMENT INTO PRODUCTION  Small size  Low grades  Commodity Prices / Access to Capital  Taxes and royalties  Community and social issues  High production costs o Depth of cover o Remoteness 5

6. 6 UNDEVELOPED DEPOSITS Note: Based on analysis of 1079 mineral deposits >=“Minor“ in size (including 355 “precious metal“ deposits) For purposes of this chart, precious metals includes gold, silver, PGEs and diamonds YK: 77% NWT: 69% NU: 85% Location of undeveloped Precious Metal, Base Metal and Other Projects Source: MinEx Consulting © May 2015

7. Impact of latitude on the percentage of projects discovered and developed 7 15% 50% 66% 46% 42% 46% 38% 27% 45% 44%40% 12% 7% 9% 14% Land area Deposits Closed Mines Operating Mines Undeveloped Projects Latitude >60 [Far North] >50-60 <50 [Far South] 8.76 Million km2 560 mines 1079 projects107 mines Source: MinEx Consulting © Jan 2016 1746 deposits

8. 8 Sources: MinEx Consulting and Kenex Ltd © Jan 2016 POTENTIAL AREAS OF OPPORTUNITY FOR PRECIOUS METALS FOR SHARING INFRASTRUCTURE ADDITIONAL AREAS EXIST FOR OTHER COMMODITIES (A) (B) (C) (D) (E) (F) (G) Potential areas of opportunity

9. RESPONDING TO THE NORTHERN COST PREMIUM To support exploration in remote and northern areas, governments could: • Create new, or enhance existing, tax credits for exploration projects in remote and northern areas • Incentivize drilling on early-stage exploration projects in remote and northern areas, such as the incentive offered by the Government of Western Australia 9

10. RESPONDING TO THE NORTHERN COST PREMIUM To facilitate the movement of remote discoveries into production, governments could: •Create an investment tax credit (10%) on all capital expenditures associated with remote and northern mines •Provide a supplementary 15% tax credit on specified infrastructure investments (e.g. roads, ports, docks) •Assuming the 10% investment tax credit as a base, create a mechanism for conditionally repayable contributions related to infrastructure investments (in lieu of the supplementary 15% investment tax credit) that could cover up to 25% of specified infrastructure investments, with the option of pardoning the loan in exchange for public ownership at mine closure. •Establish a northern infrastructure investment bank 10

11. Nadim Kara Senior Director, Policy and Programs nkara@pdac.ca www.pdac.ca @nadimkaraPDAC 11

Editor's Notes

Good afternoon folks. I’d like to thank Gowlings and AECOM for the opportunity to speak with you today about Canada’s infrastructure deficit, and how it affects our ability as a country to transform our resource potential into sustainable economic growth.
In our first report, Levelling the Playing Field, which was released in 2015, the PDAC and four other associations examined the cost premium faced by mineral industry companies operating in remote and northern areas. Our study found that this cost premium was directly linked to the lack of infrastructure in these areas Using actual data from a dozen projects, we found that exploration costs almost triple when more than 500km away from transportation infrastructure. The highest cost project, obtained from a project in the Arctic Circle, was six times that of the lowest cost project, in an established mining camp in southern Canada. The costs of developing and operating a mine were also significantly higher, as outlined on this slide. Not a surprise to anyone, but good to have concrete figures available.
In the next two slides, I’m going to very quickly show the results of a study PDAC commissioned that is about to be published, which involved creating a “remoteness heat map” for the country and demonstrating how remoteness impacts CAPEX costs for different types of mines. Here you can see the impact of remoteness on capex costs for a mid-sized gold project – not too bad, but roughly 40-80% higher than in southern canada.
For base metals, you can see that the cost premium can reach 170% over similar projects in southern Canada.
To be fair, remoteness (and the related increase in costs) is only one of the factors that determines whether or not a discovery is developed. That being said, the significant percentages of discoveries that remain undeveloped in the territories suggests that in some cases it may be the primary factor.
The data on the cost premium helps explain, in part, why so many discoveries in the territories have remained undeveloped. To put this map into perspective, on average about 50% of all discoveries made in Canada since the 1950s have not been developed into mines. This map illustrates the disproportionately high # of discoveries that have remained undeveloped in northern Canada, particularly Nunavut. Explanation of percentages, if asked: Nunavut: 7 closed, 1 operating, 44 undeveloped = 44/52 = 85% NWT: 17 closed, 5 operating, 48 undeveloped = 48/70 = 69% Yukon: 14 closed, 2 operating, 54 undeveloped = 54/70 = 77% (Note: around 50% of all discoveries since 1950 have not been developed, as not all discoveries are economic even when found close to existing infrastructure)
As a result, the Far North is missing out its fair share of the mining projects. If you compare the Far South of Canada with the Far North you will see that while 40% of Canada’s land area is above 60 degrees latitude, it has only 9% Canada’s operating mines. By contrast, the southern part of Canada has two-thirds of all past mines and nearly half of the country’s currently operating mines, despite only having 15% of Canada’s land area. All things being equal the mineral potential of the north should be as good as, if not better than the south. The two-part challenge is that first of all, it is very difficult and expensive to explore there - which holds back the number of discoveries made. Once you do make a discovery, only a quarter of the deposits get developed (i.e. 76% of projects remain undeveloped ) versus a 50:50 chance (or more correctly 48:52 chance) in the far south.
In our report, we’ve outlined a few potential areas where strategic infrastructure investments could be made to unlock mineral potential. Our analysis suggests that reducing the costs required to develop a discovery into a mine by just 10% could result in 3-5 new mines in the territories, all other things being equal.
So what can be done? Two recommendations to offset the costs of remote exploration are outlined here.
The report also makes some recommendations on how to incent private companies to fill the infrastructure gap in remote areas. The mining industry has had some good conversations with officials and Ministers’ offices in Ottawa, and we are hopeful that phase 2 of the government’s infrastructure spending will include some “nation-building” projects that open up the economic potential of the north’s minerals industry.
And that concludes my presentation. Thank you very much for your attention. I would be happy to take any questions you may have at this time.

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Editor's Notes