Investors' Supreme uncertainty

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Appeared in the Financial Post

The Supreme Court of Canada’s recent judgment on Aboriginal title for the Tsilhqot’in First Nation in British Columbia should be of great concern to all Canadians. This judgment will significantly increase the level of uncertainty in Canada’s natural resource sector and will likely deter investment and exploration in Canada.

More than 12% of Canada’s economic output is directly generated by resource development (i.e. energy, forestry, and mining). These industries are leading sources of stable, high-paying jobs and unless these uncertainties can be mitigated by purposeful government action, Canada’s economic future looks bleaker.

Unfortunately much of the analysis of the Tsilhqot’in judgment, such as that by McMillian lawyer and former Deputy Minister of Energy, Mines and Petroleum Resources in British Columbia, Robin Junger, misses the most important impact of these judgments - the increased riskiness of investing in Canada’s natural resource sector.

When investors examine potential opportunities, they spend considerable time evaluating exposure to various risks, including business, economic, political, and exchange rate risk. Many of these risks can be managed and mitigated through insurance and hedging. Others, such as political risk, can leave a business exposed to uncertainty that simply cannot be controlled or mitigated.

Uncertainty is one of the biggest barriers to business investment since it is difficult if not impossible to manage (this is distinct from risk, which can be managed when understood properly). One of the main implications of the recent Supreme Court of Canada judgment is that it increases uncertainty in Canada’s natural resource sectors in areas lacking treaties with First Nations.

Where treaties exist, some degree of certainty remains. For example, the July 11(th) Grassy Narrows Supreme Court of Canada judgment upheld the Ontario government’s right to “take up” and issue resource licenses on lands covered under historic Treaty 3. The stark contrast between this and the Tsilhqot’in judgment demonstrates the importance of negotiated settlements and treaties when trying to advance resource development in Canada.

The Tsilhoqt’in judgment represents the first time in Canadian history a declaration of Aboriginal title has been granted outside an Indian reserve. And unlike previous judgments, the Tsilhqot’in ruling states that Aboriginal title can extend to all traditional territories and is not limited to specific village sites. Even more important, once Aboriginal title has been recognized, project development requires the consent of the First Nation that holds title, except where the government can demonstrate a compelling and substantial public purpose for the project.

If there is a project on Aboriginal title land not supported by the First Nation, even if it has long existed, then according to the Tsilhqot’in judgment, the government “may be required to cancel the project ... if continuation of the project would be unjustifiably infringing.”

Ultimately the courts will decide the merits of each claim and the precise amount of land deemed to have “Aboriginal title” but the reality is this litigious path creates incredible uncertainty for investors and will likely be a tipping point whereby investment capital deems Canada too risky to justify investment. Put differently, there is little question the Supreme Court judgment will put a freeze on exploration and investment in mining, energy and other natural resources until clarity and some certainty emerge.

For example, since this judgment was released, the Gitxsan First Nations in British Columbia moved to enforce their claim to traditional territory by serving eviction notices to logging companies, sport fishermen and CN Rail to vacate their traditional territory along the Skeena River, citing the Tsilhqot’in judgment as justification. So in provinces such as British Columbia, where over 100% of the land is under claim by First Nations, resource projects currently under development or already in operation may be at risk due to Aboriginal title.

Canada is a small exporting country with world-class natural resource deposits but we live in an increasingly global world and must compete with other jurisdictions for investment. In mining for example, many other jurisdictions are equally if not more attractive to investors than Canada, including Western Australia, Nevada, Finland, Alaska, and Sweden.

The Tsilhqot’in judgment makes Canada even less attractive by markedly increasing the risk of investment because of the uncertainties linked to this legal decision. The federal and provincial governments along with Aboriginal leaders must recognize the enormously destructive implications of foregone investment for all Canadians and move to mitigate the uncertainties created by the Supreme Court decisions.

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