A new diamond-mine royalty proposed by Ontario in Thursday's provincial budget appears to be arbitrary and discriminatory, and was not discussed ahead of time with the diamond industry, a spokeswoman for De Beers Canada Inc. said on Friday.

De Beers Canada is building the Canadian province's first diamond mine, called Victor, near Attawapiskat in northern Ontario. The open-pit mine is due to start production in the first half of 2008.

De Beers Canada employee Lesley Coldham holds the largest uncut diamond ever displayed in Canada, at the Prospectors and Developers Association of Canada Convention in Toronto in this March 8, 2005 file photo.
Photograph by : Reuters

In budget documents on Thursday, the Ontario government said it proposed to introduce a new diamond royalty based on the value of a mine's output, but will exclude diamonds from taxation under Ontario's existing Mining Tax Act. The current Mining Tax Act rate is 10%, while the proposed diamond royalty would range from 5 percent to 13 percent, depending on annual production value.

"We are concerned about what appears to be fairly arbitrary changes to the tax structure for us so close to the start of Victor," De Beers spokeswoman Linda Dorrington told Reuters.

There was no discussion between the industry and Ontario government officials about a new diamond royalty before this week's budget announcement, she said.

When the company decided to spend C$1-billion to build the Victor mine, "we made that decision on the basis of the tax regime that was in place, and there were no indications that they were going to change it," she said.

A predictable, stable and nondiscriminatory tax regime should apply to the entire mining sector, and the sudden tax change proposed "does cause companies like De Beers to lose a bit of confidence in the stability of the tax regime," Dorrington added.

Future diamond exploration and mine development in the province could suffer if a discriminatory tax regime is applied to diamonds, Dorrington said. "Our concern really is for future exploration and mine development."

Once De Beers has more information, it can assess the effect on the Victor project's economics, Dorrington said.

The Ontario government said many aspects of diamond mining differ from those of more traditional mining.

Unlike other commodities whose value is set by world markets, "rough diamonds are not traded on the open market and require a unique and separate system for determining their value," the budget stated. The province plans to introduce a "new valuation framework" for diamonds.

The Victor mine is expected to eventually produce about 600 000 carats a year and will create 400 jobs, De Beers has said.

It will add about C$7 billion to the provincial economy over the life of the mine, Dorrington said. "That's a significant investment," she added.

De Beers Canada is also developing the Snap Lake diamond mine in Canada's Northwest Territories and has some 30 exploration projects on the go across the country. The De Beers group is 45 percent owned by Anglo American Plc.