Finding a Way Forward

Posted September 27, 2012

The resurrection of the deal with Stern on September 22 came as a considerable surprise. It will be even more surprising if it lasts for more than ten years without Stern asking for another handout.

There are two principal differences from the deal that collapsed the previous day. First, the $40 million that was to be a repayable loan will now be “earned” as long as the mill makes the expected electricity purchases from NSPI.

Secondly, a different arrangement is proposed to take advantage of the mill’s most valuable asset—its past tax losses. These can be used to reduce tax on future income by pooling Stern’s other properties in Canada with the mill. Nova Scotia will share in this bounty. If all goes well it is estimated to be worth $52 million to the province over the next ten years and $110 million to Stern, with lesser amounts possible in subsequent years. This is in addition to the subsidies of  $124.5 million that the company will receive from the province. For this, Stern will pay $33 million.

So Stern, which appears to have little of its own money at risk, will benefit to the tune of about $200 million over the first ten years, an average of $20 million per year. Unless the market conditions for the mill improve a great deal over that decade, more subsidies will be demanded.

A breathing space has been purchased at very considerable expense. Government should use it to facilitate development of new industries with good future prospects, first and foremost in Cape Breton.

The best economic opportunities going forward will be those that take advantage of natural assets, with capable proponents who are willing to risk substantial amounts of their own capital:

  1. The proposed Melford terminal is being advanced, albeit slowly, by a credible group that has spent a lot of their own money without so far requesting any financial support. Their recent decision to finalize land purchases in Guysbrough County is further evidence of their serious interest. Government should be willing to help with infrastructure, for example with the rail connection, and by accelerating regulatory processes. In sharp contrast, the Sydney harbour dredging project has consumed $38 million of taxpayer money without any evidence of serious private sector participation.
  2. Likewise the Cabot Links resort is being led by one of North America’s most successful golf course developers. Again, a lot of private money is being invested. Cape Breton has the possibility of becoming a major golf destination. Government should be willing to help with infrastructure but should not subsidize operations.
  3. Extractive industries are fuelling all of the best performing provincial economies. Government should actively promote itself as open for business for mining as well as oil and gas exploration, including appropriately regulated fracking. One of the best investments by government in recent memory was the Play Fairway data gathering on offshore oil and gas prospects, which led to Shell’s recent spending commitment of almost $1 billion, with further possibilities to come. Perhaps a similar onshore survey could be done for both minerals and hydrocarbons, starting in Cape Breton.
  4. Corporations making major capital commitments have choices about where to do business. Government should seek to minimize taxation, keep electricity rates low, and avoid labour legislation that distresses major private sector employers. If the environment was more attractive the Michelin announcement might not have been cancelled.

None of this will produce quick results, which is why it should have started a year or more ago. The lessons from the Newpage mill should extend to every aspect of government activity and every part of the province. Government must focus its efforts on industries with good future prospects.

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  • I keep asking myself “why didn’t the government of NS buy the mill for $33 million” and run it as a crown corporation or some such operation. Then at least when it was no longer a viable proposition, the province could have sold the assets to the highest bidder, even if at firesale prices. As it stands now, Stern got the mill for a song and can shut down whenever it wants and sell the assets as the owner.

    Ron Gilkie. P.Eng. | October 13, 2012

  • The way forward is for government to seek to minimize taxation (by spending less) and avoid labour legislation that distresses private sector employers (investors). If the ‘work-climate’ were more attractive, these ‘real’ work providers would reinvigorate our economy, perhaps even replacing our sad government-economy.

    gordon stanfield | September 28, 2012

  • Well Bill you hit some key problems with this Stern group deal but also I would like to add in regards to Melford. Melford Terminals is buying the Linwood Junction to Mulgrave siding which was abandoned when the causeway opened in 1955. This is a huge step forward and progress in relaying tracks will not take long as satellite photos from Google Earth show that the roadbed is very clear of forest growth. The ironic thing about Melford vs the port of Halifax is there is more sidings and marshaling track from Truro to Port Hawkesbury then there is Halifax to Truro. I would also look to Georgia Pacific with their two gypsum quarries in Inverness County to eventually come back for employment. The housing market in the US will eventually come back which was the backbone of the gypsum mining industry in Nova Scotia. The new Biomass Generator at Point Tupper is also going to employ people as well. What should have been done in regards to the New Page mill was to allow the possibility of a changing in manufacturing there. An east Indian company Aditya Birla Group recently bought a Pulp mill in Terrace Bay Ontario for 300 million dollars. Aditya Birla Group owns two pulp mill in New Brunswick , one of which was producing photographic paper, now producing dissolving pulp for the production of rayon. The demand and need for rayon will never go away and the market place in Asian . Better to have a ownership group that would probably like to have a ice free deep water port with their own dock to export all their Canada production to Indonesia, China, India and Sri Lanka. The Province of Nova Scotia subsidizing Sterns operation will result in Tariffs for the worlds largest marketplace the United States. New Page Ironically challenged and won tariffs on Chinese and Indonesian papermakers in 2010 and a New Page in Chapter 11 will probably make the same case against the Point Tupper Mill.

    paul | September 28, 2012

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