|
Marc Humphries Analyst
Environment and Natural resources Policy Division
May 12, 1994
94-438 ENR |
|
| The General Mining Law of 1872 grants free access to individuals and corporations to prospect for minerals on open public lands, and allows them, on discovery, to stake a claim thereby obtaining the rights to the mineral. A claimant may file for a patent application for title (ownership) for surface and mineral rights. If approved, the claimant may purchase the surface and mineral rights at a rate of $2.50 per acre for placer claims and $5.00 per acre for lode claims. The government receives no royalty from production on mining claims. The Mining Law applies to hardrock minerals. |
| The Mining Law was intended to promote settlement and mineral development in the West. Critics argue that the minerals industry is now mature. The location-patent system, they say, is unnecessary and difficult to defend in light of budget deficits and environmental concerns. On the other hand, proponents of the current location-patent system, argue that the security of tenure gained through patenting is a necessary incentive for those who take substantial financial risks to develop mineral deposits. Economic decisions in the mining industry require a long-term approach. Large preproduction costs are incurred before any returns are achieved. |
| After several years of contentious debate, two very different versions of Mining Law reform have reached the conference committee. The four major issues that will need to be resolved by the conferees are: patenting, reclamation, unsuitability reviews and royalties. Bills in both the House and the Senate were considered in 1993 that would generally carry out the Administration's proposal to reduce natural resource "subsidies" on Federal lands. The House passed its version, but the Senate balked, passing instead a mining industry-supported bill that would retain the patents and impose a much smaller royalty. The differences between these two bills now must be resolved in conference. |
| Economic impact studies of the proposed mining law reform bills were conducted by the Department of the Interior (DOI), the Congressional Budget Office (CBO), Evans Economics, Inc. (EEI), John Dobra/Thomas Harris, and Goldman Sachs. While many provisions of the proposed mining law reform bills were examined, the studies focused primarily on the economic impacts of imposing a royalty on hardrock mining. |
| This report examines the royalty question, which is the most complex economic issue in mining law reform. The royalty rate issue is not likely to prevent a compromise agreement in the conference. The major point of contention may be the unsuitability reviews in the House bill (H.R. 322). |
Mining Law reform may contribute to reducing exploration activity in the U.S. but, is one of several factors determining exploration activity. Mineral policy ranked third on a list of mineral exploration investment criteria according to a 1989 survey. Exploration is fundamental to the industry's long-term growth strategy. Mineral exploration which costs millions of dollars is carried out over vast tracts of land, and often in more than one country.
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| The purposes of the General Mining Law of 1872 were to promote mineral exploration and development in the western United States, to offer an opportunity to obtain a clear title to mines already being worked and to help settle land disputes in the West. The Mining Law granted free access to individuals and corporations to prospect for minerals on public lands, and allowed them, on discovery, to stake a claim on the deposit. Establishment of a valid claim gives the claimant the right to develop the minerals within the claim. The 1872 Mining Law originally applied to all minerals except coal. The claimants may file for a patent application for title (ownership) of surface and mineral rights. If approved, the claimant may purchase the surface and mineral rights at a rate of $2.50 per acre for placer claims and $5.00 per acre for lode claims. No royalty is paid on production from a mining claim under the 1872 law. |
| Critics of the present system argue that the minerals industry is now mature. The location-patent system, they say, is unnecessary and difficult to defend in light of budget deficits and environmental concerns. Supported by the Clinton Administration, these critics propose substituting a permitting system which would include permanent holding fees and a gross income royalty for the current patent system, with the aim of gaining a "fair market value" return to the public for mineral resources on Federal lands. On the other hand, proponents of the current location-patent system argue that the security of tenure gained through patenting is a necessary incentive for those who take substantial financial risks to develop mineral deposits. They point out that mining is a capital intensive process which often takes years of preproduction exploration and development before minerals are produced. |
| A permitting system for hardrock minerals would be very different from a location-patent system. Under a permitting system the Federal Government would retain ownership of the surface and minerals rights, and have discretionary control over development. The Government would establish the terms of the agreement, which would include, among other things, permit renewal, rents, royalties and environmental compliance. None of the proposals would establish a leasing system similar to that currently applying to oil and gas development on Federal lands. |
| After several years of contentious debate, two very different versions of Mining Law reform have reached the conference committee. Four major issues will need to be resolved by the conferees. |
- The present system gives miners full ownership, called a "patent", of Federal lands in which the mineral resources are located. Whether to retain or drop the patenting system is a conference issue.
- Federal regulation of reclamation versus incorporation of State requirements where they exist is another issue.
- Granting the Secretary of the Interior power to designate areas of Federal land "unsuitable" for mining development is likely to be a contentious issue.
- Present mining law provides for no royalties to be paid to the Federal government. There appears to be agreement that some royalties are appropriate, but there is controversy over the type and amount.
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| This report examines the royalty question, which is the most complex economic issue in mining law reform. (For additional background information on other reform issues, see CRS Report 89-130, The 1872 Mining Law: Time For Reform ?) A number of studies which look at the economic impacts of proposed royalties have come to a wide range of conclusions based on varying assumptions. This report reviews these studies, with particular focus on the question: How would different royalties affect future exploration and development of Federal mineral resources, as compared to mining opportunities on non-Federal domestic land and abroad. |
|
| In 1993 both the House and the Senate considered proposals to eliminate the patent system and impose a royalty. The mining industry claimed these proposals were excessive. The bills generally would have contributed to the Clinton Administration's broad objective to reduce natural resource "subsidies" on Federal lands. The House passed a version along lines supported by the Administration and the Senate passed a mining industry-supported bill that would retain the patenting system and impose a much smaller royalty. These two bills now must be resolved in conference. |
| The House-passed bill (H.R. 322) sets an 8 percent gross income royalty, (a much higher royalty base than the Senate bill), imposes a permitting process before mining takes place and establishes an unsuitability review that could restrict certain lands from mineral development. A 5-year exploration permit and 10-year operating permit would be renewable as long as the terms of the agreement were kept. Once production begins, the claim maintenance fees would be credited towards the royalty payment. An abandoned mine reclamation fund would be created and funded partially by revenues raised through fees and royalties. Environmentalists generally support the House bill because it places minerals more clearly within a multiple-use land management framework, and includes a number of provisions to protect the environment from future mineral development and begins to address the problems associated with past hardrock mining. |
| The Senate-passed bill (S.775) establishes a 2 percent net income royalty and applies existing reclamation standards. It allows the claimant to take title (patent) to both minerals and surface, but requires payment of fair market value, based only on the surface value, instead of the current $2.50 or $5.00 per acre patent fee required. A financial guarantee for reclamation is required for all claimants and those with over 50 claims would pay an annual $100 per claim maintenance fee. |
| The mining industry generally supports the Senate bill. In its view the Senate bill would minimize the economic impacts on the industry, retain the security of tenure feature by allowing patents, and still raise revenue for the Federal Treasury. (For a more detailed comparison of H.R. 322 and S. 775 see CRS Report 93-632, Reforming the General Mining Law of 1872: A Comparison of S. 775 and H.R. 322). |
| In anticipation of major Mining Law reforms (and perhaps the elimination of patenting), many new patent applications have been filed. For example, a major gold mining firm, American Barrick Resources Corporation recently was granted title to nearly 2,000 acres of public domain land containing gold worth an estimate $8-$10 billion. |
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| Minerals are an exhaustible resource; when extracted today they are unavailable for extraction at a later date. The miner must decide whether to produce now or at a later date. If production occurs now, the miner must consider the value of foregone production. Ideally a mineral producer would like to extract the resource so that the present value of its net income is the same for each production period. Mining firms must constantly explore for new minerals to replace those they have extracted. |
| Economic decisions in the mining industry require a long-term approach. To optimize its return on investments in development of a mineral resource, a company must estimate how much it will gain over many years of production, and make sure that it recovers the costs of finding and developing the resource. Large costs are usually incurred before any returns are achieved, so the estimating process involves high risk and many uncertainties. As a result, mining firms pursue a high rate of return on their investments. |
| Three types of risk are involved: geologic, economic and political. Geologic risk is associated with the uncertainty in the size and quality of the ore body. Economic risk includes those risks associated with the capital and operating costs of achieving production and the price the company will receive when it sells the commodity. |
| For a company, political risks may be the most complex and difficult to predict. Major determinants for mineral investment include: the general and legal framework for business activity in the country; mining law and policy; environmental and land use regulations (these affect cost and time); and political stability (as well as constitutional stability). Other mining industry concerns may be access to land, taxation, and exploration promotion (e.g. geologic information available). Access to land is needed for exploration, a fair tax regime is desirable for increased profitability, and Government cooperation in providing geologic information and research support may also be sought by the industry. These factors impact on the competitiveness of mineral exploration projects. Stable governments and governmental policies also are important to evaluating risks associated with prospective mining projects. |
| The question to be answered is: would royalties lead to a significant shift away from exploration and development of Federal mineral resources, either to non-Federal U.S. lands, or to resources abroad? As the following analysis indicates, the royalty debate probably can be resolved in a way that minimizes its effect on minerals exploration and development. |
|
| A mineral royalty is a payment to the resource owner for the extraction of the mineral. Typically, in the mining industry the royalty is based on production (dollars per ton) or income (percent of gross or net income). Royalties are a small portion of the overall costs of a large-scale mining operation, although they can influence mining investment decisions. A wide range of income-based royalties are now applied to hardrock mining on private and State-owned lands. The Government objective of obtaining revenues from mining operations on Federal lands must be balanced with the goal of maintaining a viable U.S. hardrock industry. |
| The two types of royalties being debated in the conference are: a net smelter return (NSR) royalty, also referred to as a gross income royalty (H.R. 322) and a net income royalty (S.775). |
| A net smelter returns royalty is based on the gross revenue minus smelting charges and transportation costs. This type of royalty would generally guarantee royalty revenues when production occurs. Collections and administra-tion are relatively simple and inexpensive. However, the added costs could cause some mines to be uneconomic. The royalty would apply even when the operation was unprofitable; if it caused the mine to shut down, all royalties would be lost. Assessing royalties at the smelter stage could also lead to mining only the highest quality ore. |
| A net income royalty would be applied after all costs were subtracted from gross income, and would be based on the profitability of the mine. This royalty would focus not on gross production but on the operation's economic rent; that is, any profit in excess of that necessary to maintain the mine in operation. The net income royalty would be expected to have less impact on marginal mines, and thus be less likely to shut them down. one disadvantage with this type of royalty is that it would require a much higher percentage royalty to achieve the same level of revenue flow. In addition, when there are no profits, there are no royalties, unlike the net smelter royalty. The mining industry argues that this is "socially equitable", because the royalty is applied to what it defines as excess profits or rents. |
| Critics argue that the net income royalty would be difficult to administer. According to the Department of the Interior, it can be subject to "creative accounting," meaning that mining firms could increase deductions to show little or no net profits, thus avoiding payment of the royalty. |
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| For a mining firm to produce in the very short-run, revenues must be sufficient to only cover operating costs (e.g. labor, energy, materials, etc.); in the medium run fixed costs must be covered (as well as the firm's rate of return); in the long run the revenues must be sufficient to cover additional costs such as risk premiums, and the exploration and mine development costs. New royalty and environmental costs would be added to the firms operating costs. |
| Table 1 below presents an illustration of how a hypothetical mining firm would reach its net income and cash flow under each royalty. It also shows where the two types of royalties would be applied and compares the results of each. The net smelter return royalty is applied in Column A and the net income royalty is applied in Column B. In the example, the NSR royalty would generate $7.5 million royalty return to the Government versus about $145 thousand using a net income royalty. The firm's Federal taxes would be about $1.2 million less with the application of the NSR royalty versus the application of a net income royalty. The result of the 8 percent NSR royalty would be the $7.5 million in royalties less the $1.2 million in reduced Federal tax revenues, or a net gain to the Treasury of $6.3 million. The net profit to the firm would be $2.9 million under a NSR royalty and $7.1 million under a net income royalty. The depletion allowance is a tax deduction available to the hardrock mining industry that helps it recoup its capital costs. This benefit to the industry reduces the Federal tax base considerably. The industry adds back depreciation and depletion deductions to reach its cash flow value. A firm could have zero net profits, but a positive cash flow based on this procedure. |
| Table 1 Mining Revenue and Cost |
| |
Column A |
Column B |
| Gross Revenue |
$100,000,000 |
$100,000,000 |
| (smelting costs) |
(5,000,000) |
(5,000,000) |
| (trans. costs) |
(1,000,000) |
(1,000,000) |
| Net Smelter Returns |
94,000,000 |
94,000,000 |
| (8 percent NSR royalty) |
(7,520,000) |
|
| Gross Mining Income |
86,480,000 |
94,000,000 |
| (operating costs) |
70,000,000 |
70,000,000 |
| |
|
|
| Net Operating Income |
16,480,000 |
24,000,000 |
| (depreciation) |
(2,000,000) |
(2,000,000) |
| Predepletion Income |
14,480,000 |
22,000,000 |
| (deletion @50 percent of predepletion income) |
7,240,000 |
11,000,000 |
| Pretax Profit |
7,240,000 |
11,000,000 |
| (Federal Tax @32 percent) |
(2,317,000) |
(3,520,000) |
| Net Profit After Fed. Tax |
3,120,000 |
7,480,000 |
| (State Tax) |
(206,000) |
(250,000) |
| Net Profit |
2,914,000 |
7,230,000 |
| 2 percent net income royalty |
|
(144,600) |
| |
|
|
| Net Profit After Royalty |
|
7,085,400 |
| Add: |
|
|
| depreciation |
2,000,000 |
2,000,000 |
| and depletion |
7,240,000 |
11,000,000 |
| CASH FLOW |
12,154,000 |
20,085,400 |
|
| A discounted cash flow method is used in the mining industry to find the present value of the after-tax positive and negative cash flows over the life of the mining operation. Table 2 illustrates how the hypothetical mining firm's cash flow value is used to find the net present value (NPV) for evaluating a project. Cash flow analysis is used by the mining industry as an economic criterion for making investment decisions. The net present value for both cases in the illustration is positive, thus profitable . However, the difference between the two is large. The NPV with an 8 percent NSR royalty is $13.8 million. The NPV with a 2 percent net income royalty is $45.4 million. This large difference is attributable to the size of the royalty and where the royalty is applied. The impact of a net smelter return royalty would be more significant if the cash flows were much smaller, perhaps causing the net present value of the project to be negative and uneconomic. An investment decision would take into account the present value of the cash flow (given a selected discount rate and price) before making major mine development decisions. However, investment decisions may put more weight on the firms long-run growth strategy than any single economic criteria. |
| Table 2 Discounted Cash Flow |
| |
Column A |
|
| Year |
Cash Flow (8 percent NSR
royalty) |
Cash Flow (2 percent net
income royalty) |
| 0 |
- $10 million (preproduction costs) |
- $10 million (preproduction costs) |
| 1 |
- $10 million (preproduction costs) |
- $10 million (preproduction costs) |
| 2 |
- $10 million (preproduction costs) |
- $10 million (preproduction costs) |
| 3 |
$12.1 million annual cash flow
- $10 million development costs |
$20.1 million annual cash flow
- $10 million development costs |
| 4 - 13 |
$12.1 million annual cash flow
- $10 million development costs |
$20.1 million annual cash flow
- $10 million development costs |
| 14 |
$12.1 million annual cash flow |
$20.1 million annual cash flow |
| 15 - 10 |
- 10 million reclemation costs |
- 10 million reclemation costs |
| NPV of Cash Flow |
$13.8 million |
$45.4 million |
| NPV of Royalty |
$52 million |
$1 million |
|
| The net present value of each royalty stream to the Treasury was calculated based on a discount rate of 7 percent. The annual royalty revenues used in the calculation were $7.5 million (NSR royalty) and $144.6 thousand (net income royalty). The NPV royalty calculation does not include the losses in Federal taxes because of the NSR royalty. If reduced tax revenue of $1.2 million annually were considered, the NPV of the NSR royalty would be about $44 million. |
| How Important Is Mineral Policy? |
| A mining industry survey of 32 large-scale mining firms examined some of the most important factors to a firm's long-run exploration and development strategy. "Mineral policy" ranked third on a list of mineral exploration investment criteria according to the 1989 survey by Dr. Charles Johnson of the East-West Center of Hawaii. Geologic potential and government stability were ranked first and second respectively. The cost and availability of capital (including the cost of internal funds) and recent mineral prices were perhaps the two most important factors influencing the overall level of exploration activity. |
| The survey also ranked countries for mineral exploration based on the first three ranking factors. Johnson concluded that the United States, Canada, and Australia are the most stable investment environments, but not the most geologically attractive. Some of the most geologically attractive areas, which include Peru, Argentina, Chile, Mexico, and Brazil, have not always been politically stable. The right to mine, once geologic potential is determined, leads the list of concerns. Over 75 percent of the companies agree that the right to mine after discovery is a most critical factor considered before a major exploration project begins. He concludes that rewriting mining policy in these countries would make them more attractive for exploration during the 1990s. |
| Johnson also concluded that corporate growth is the primary rationale for making exploration decisions. Exploration is fundamental to the industry's long-term growth strategy and is often partially funded out of a mining firms retained earnings or internal funds. Mineral exploration which costs millions of dollars is carried out over vast tracts of land, and often in more than one country. |
| Exploration for both base metals (e.g. copper, lead, zinc) and gold peaked in the United States around 1980, then declined during the early 1980s. The late 1980s reflected a renewed interest in gold exploration and production. However, according to a Gold Institute survey, expenditures for gold exploration in the United States fell from $170 million in 1989 to $149 million in 1992. Gold exploration expenditures rose in Latin American countries from $14 million in 1989 to $35 million in 1992. |
| Gold exploration projects abroad are expected to continue to rise because of new mining policies and the geologic potential. The United States will also attract a considerable amount of exploration and development because of its political stability. |
| On balance, the United States is viewed by domestic and foreign mining firms as a favorable investment climate because of its political stability, tax benefits and the absence of a royalty on production or rents on Federally owned surface lands. However, since the mid-1970s it is believed that under Federal Land Policy Management Act (FLPMA), withdrawals of public domain lands resulted in the cancellation of some domestic mineral exploration programs. Public policies such as FLPMA may have contributed to the trend toward foreign mineral exploration, but, also the trend is based on the fact that mining interests go where the minerals are. |
| Because of the geologic potential, and to help reduce political risk, mining policies in many developing countries are being rewritten. As a result, several of the mining companies in the survey are targeting developing countries for active minerals exploration. Most of the best undiscovered mineral deposits exist in developing countries and former centrally planned countries. The geologic occurrences of South America are good, and many regions are much less explored than in North America. Gold is the mineral of choice because of its price. |
|
| Economic impact studies of the proposed mining law reform bills were conducted by the Department of the Interior (DOI), the Congressional Budget Office (CBO), Evans Economics, Inc. (EEI), John Dobra/Thomas Harris, and Goldman Sachs. While many provisions of the proposed mining law reform bills were examined, the studies focused primarily on the economic impacts of a royalty on hardrock mining. The results presented in table 3 are based on the impact of an 8 percent net smelter return royalty. Three of the studies (DOI, Dobra/Harris and Goldman Sachs) targeted the gold mining industry because gold is the most significant hardrock mineral being produced on Federal land. Revenues from gold production represent about 83 percent of the total value of hardrock minerals produced on Federal lands. The results of the studies are difficult to compare because of the wide range of assumptions, but together they suggest that imposing an 8 percent royalty will not radically affect mining economics in the United States. Below is a review of the estimates and some of their assumptions. |
| Table 3
Summary of Economic Impact Studies |
| Study |
Economic Output (million
$U.S.) |
Employment |
U.S. Treasurer
Revenues (million $U.S.) |
| DOI |
- $88 |
- 1,100 |
+ $133 |
| CBO |
- $58 to + $174 |
- 500 to +2,900 |
+ $20 to + $146 |
| EEI |
- 15 percent of production |
- 17,800 |
- $505 |
| DOBRA/HARRIS |
- $120 direct and indirect |
- 1,040 |
+ $122 (gross revenues) |
| GOLDMAN
SACHS |
between 2 - 13 cents per share
losses
for selected mining firms |
No Estimate |
+ $58 (8 percent gross)
+ $4.1 (2.5
percent net income) |
|
|
| Department of the Interior |
| The DOI study concluded that the long-run impacts from major mining law reform (H.R. 322) on mining industry investment may be negligible and that technological change may have more impact on mining exploration and investment than policy changes. The DOI predicted that as private U.S. mineral reserves were depleted, a major increase in mineral production on Federal lands would occur in the long-run. |
| The DOI study estimated that H.R. 322 would generate up to $133 million in revenues annually plus, result in a net loss of around 1,100 jobs. Further, in the short-run, the mining industry would invest $88 million less in the United States for exploration and development activity. This figure represents about 20 percent of total annual investment in mining on federal lands. Other major results of the study include lower income tax revenue for the Government and high-grading by mining companies. Also, an additional $22 dollars per ounce would be added to the operating costs of gold mining based on an 8 percent net smelter return royalty, and $22 dollars per ounce would be added based on environmental provisions in H.R. 322. |
| Some of the major assumptions used in the DOI report are as follows: a production base ranging of $650 million to $1.8 billion; an average variable cost of gold range from $162 - $298 and an average gold price of $330; between 20-30 jobs are lost based on $1 million reduced in exploration spending; about the same number of jobs are created from increased reclamation spending; mine production declines one-third of one percent of total production for each percentage increase in royalty revenues generated under a gross income royalty. The results stated above are based on an 8 percent gross income (or net smelter) royalty. |
| Quantifying the additional costs to gold mining as a result of new environmental standards is uncertain at best, although some new reclamation costs are likely. The DOI did not consider the prospects of increased mineral exploration and development abroad when estimating the impact of mining law reform and mining on Federal lands. Exploration and mineral development abroad might reduce the DOI's estimates for mineral production on Federal lands. |
| Congressional Budget Office |
| Based on the proposed 8 percent gross income royalty, the Congressional Budget Office estimates production decreases of $60 million annually, gross job losses between 800 - 2,000, lower tax revenues, and upwards of $120 million in total economic losses. On the revenue side, major mining law reform was estimated to generate $83 million in annual royalties and $85 million in annual holding fees. Economic output gains are estimated at between $32 million and $294 million and employment gains are estimated between 300 and 4,900. The net impacts are reflected in table 3. |
| Some of the major assumptions used in the CBO analysis are: the value of economic output would decline by $1.5-$2.0 million for each $1 million reduction in hardrock mineral production and about 14-33 jobs are created for every $1 million in spending. |
| The CBO analysis recognizes that mineral production declines and employment losses would occur, but also suggests that jobs would be created from reclamation spending and other environmental cleanup activities. It is not clear whether the new jobs created would be where the jobs were lost or would have a positive impact on the mining communities affected. |
| Evans Economic Institute |
| The results of the Evans Economic Institute's analysis show that an 8 percent gross income royalty rate on hardrock minerals would lead to an estimated 15 percent decrease in hardrock mineral production over a 10 year period. In addition, 17,800 jobs lost, and $505 million in revenues were lost to the Federal Treasury. |
| The Evans study assumes that there is no technological change, no compensating effects from reclamation spending and all U.S. nonfuel mineral reserves are exhausted (and no new reserves from nonfederal lands). Other major assumptions in the Evans report are that existing mines would not close as a result of new a royalty or fees and new investment would be a function of profitability levels. The Evans study also assumes that more mineral production would occur from Federal lands as private mineral lands become depleted. Some of these assumptions may contribute to the large difference between these study results and those of the other studies. |
| Other analysts point out the gross job losses are over the long-term (a ten-year period) during which time new jobs are created or found by the former mine workers. If mining on specific Federal lands were to be uneconomic, mining firms might shift some resources away from the Federal lands towards private lands. As a result of this shift, the overall level of mining and mining services in the United States might not decline. |
| Dobra/ Harris |
| University of Nevada Professors John Dobra and Thomas Harris conducted a study on the impact of major mining law reform on Nevada's economy. They estimated the impact of decreased exploration and discovery in the State. Their results showed an estimated outflow from the State to the Federal Treasury would be $122 million and inflows would be $61 million resulting in a net loss to the State of an estimated $61 million. They predict that general economic activity in the State would decrease by an annual $120 million and personal income would decline $95 million and a net job loss of 1,040. About $26 million are collected in holding fees. No figures for royalty collections are provided. The authors state that the abandoned mine fund has no "beneficial economic impact" and it creates no jobs, because the fund is not a basic industry and thus has no multiplier effects. |
| Some of Dobra's/Harris's assumptions include the price of gold is $350 per ounce, no new mine closures, and no direct loss of employment or drop in production. |
| Dobra's conclusions do not consider jobs created from reclamation efforts and does not seem to reflect the fact that gold exploration in Nevada is still relatively high and is expected to continue because of the gold mining potential, gold prices and new technology that allows reevaluation of previously uneconomic ore bodies and better evaluation of new ore bodies. |
| Goldman Sachs |
| The Goldman Sachs study examines how the mining law reform proposals could affect selected gold mining firm's earnings. The proposed gross income and net income royalty would affect the earnings of gold mining firms producing on Federal lands. Goldman Sachs calculated that based on an 8 percent gross income royalty revenues to the Federal Treasury would increase by $58 million and income per share for major gold mining companies would be reduced from a low of 2 cents per share (Lac Minerals) to 13 cents per share (American Barrick). It estimated income for Echo Gold would be reduced 10 cents per share. An estimated $36 million in Federal revenue would be raised based on a 5 percent gross income royalty. A 2.5 percent net income royalty would generate $4 million in annual royalties and was estimated to reduce earnings 2 cents per share for American Barrick and Echo Gold. Goldman Sachs concluded that a 3 percent-5 percent gross income royalty could be imposed on hardrock minerals produced on Federal lands. |
| The results are based on the assumption that the price of gold is $365 per ounce, and operating costs as low as $159 per ounce for the largest gold producer on public lands, American Barrick. |
| Investors would likely be attracted to the major gold mining firms because of their ability to explore for minerals worldwide and because of current and expected gold prices. These mining firms are looking for the least-cost, profit-maximizing operation in the long-run. These large international mining firms are in a position to shift financial resources to other parts of the world where mining costs may be lower and investment climates more hospitable than in the past. These large mining firms could rema in healthy while reducing operations in the United States. |
|
| Mining Law reform may result in less mining exploration activity in the United States but probably will not be the dominant factor in any decline. The studies reviewed point to some job losses in the mining industry, but a direct cause and effect relationship between the economic impacts and the proposed gross income royalty is not fully apparent. In other words, if no royalty were imposed on hardrock mining, the trends of declining exploration and development in the United States and of increasing exploration activity abroad would be expected to continue. Increased exploration abroad is based on known geologic occurrences, other territory not fully explored, and foreign governments rewriting their mining laws. There is still opportunity to explore for hardrock minerals in the United States (on both public and private lands). Prices will continue to be one of the major factors in the level of mineral exploration whether the exploration takes place in the United States or abroad. |
| Endnotes |
- Public domain lands are those retained under Federal ownership since their original acquisition by treaty, cession, or purchase as part of the general territory of the United States, including lands that passed out of but reverted back to Federal ownership. Acquired lands -- those obtained from a State or private owner through purchase, gift, or condemnation for particular purposes rather than as general territory of the United States -- are not covered by the 1872 Law. Lands must be unreserved and "open" to entry at the time of staking for a claim to be valid.
- A placer deposit is an alluvial deposit of sand or gravel containing valuable particles of minerals; a lode or vein deposit is of a valuable mineral consisting of quartz or other rock in place with definite boundaries. (Source: Dictionary of Mining, Mineral and Related Terms, by the Bureau of Mines).
- For a detailed discussion on economic rent in the mining industry see C. Richard Tinsley, et.al., Finance for the Mineral Industry, New York 1985, p. 293-309.
- John Tilton et.al. eds., Competitiveness in Metals: The Impact of Public Policy, London, 1992, p.40.
- Ibid.
- Using a discount rate of 15 percent, the values shown in table 2 are offered only as a simplified cash flow of a hypothetical mine for a partial illustration of the investment analysis process. In this example, preproduction costs occur in years 0-3; annual cash flow is positive for years 3-14, then the present value of reclamation costs are deducted in year 15. Some popular uses of the discounted cash flow analysis include finding the net present value or the internal rate of return. For a detailed discussion on these methods see Mine Investment Analysis, by T.J. O'Neil and D.W. Gentry, 1984, and Economic Evaluation and Investment Decision Methods by F.J. Stermole and J. M. Stermole, 1990.
- Charles Johnson, Natural Resources Forum, Ranking Countries For Minerals Exploration, August 1990, p.180.
- In Search of Gold, The Gold Institute, Washington D.C., 1993.
- Beginning in 1992 holding fees of $100 per claim were imposed.
- Department of the Interior Task Force on Mining Royalties, Economic Implications of a Royalty System for Hardrock Minerals, Washington D.C., August 1993.
Congressional Budget Office (CBO) Testimony Before the Subcommittee on Mineral Resources Development and Production, March 16, 1993.
Evans Economics, Testimony Before the Mineral Resources Development and Production Subcommittee on S.257, The Mineral Exploration and Development Act of 1993, March 16, 1993.
John Dobra, Ph.D., and Thomas Harris, Ph.D., The Economic Impacts of Proposed Federal Hardrock Mineral Royalties in Nevada: Reclamation Does Not Create Jobs, University of Nevada, Reno, March 16, 1993.
Goldman Sachs, Mining Law Reform, New York, November 23, 1993.
- For example, during the 1980s high gold prices and new heap-leaching technology created the investment environment that allowed previously passed over or uneconomic (low-grade) gold deposits to become attractive. Technology has led to re-evaluation of already explored areas and to some significant discoveries.
- DOI estimates that the value of minerals on Federal lands to rise from $1.8 billion in 1992 to $6.0 billion in the year 2030.
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