Mr. Grijalva, why imposing royalties on hard rock mining is a bad idea
by Jonathan DuHamel on Oct. 18, 2011, under Geology, Politics“U.S. Rep. Raúl Grijalva wants to know if taxpayers are getting a good deal on the extraction of hard-rock minerals and oil from public lands.” (Arizona Daily Star).
The answer is a resounding yes. Mining provides the natural resources we need to sustain our civilization, to manufacture all the goods we use, provide energy, and supply the food we eat. Mining provides well-paying jobs to the miners and jobs for all the suppliers to the mine. Mining provides tax revenue to local governments and to the federal government directly and also indirectly from the additional business given to suppliers. Domestic mining also helps ensure our national security by securing a source of a valuable commodity.
From time to time there has been talk of charging royalties on minerals extracted from public land. There are two kinds of royalties: gross royalties based on the value of the mineral extracted, and net proceeds royalties based on the profits derived from mineral extraction.
Gross royalties are charged on the mineral value regardless of the cost of extraction. Net proceeds royalties are a tax on profit and therefore not much different from corporate income tax which is already paid. Both types of royalties reduce corporate profit, if any, hence would reduce income tax payments to government and hence to the taxpayers.
There is a more basic reason for not imposing royalties: they reduce the amount of minerals that can be extracted from a deposit, thereby depriving us of mineral wealth that would otherwise be available to us. Here’s why:
After the usually very expensive exploration phase of a mineral deposit is concluded, and before the even more expensive capital construction costs, mining engineers do a feasibility study to determine how much of the mineral deposit is ore, that is, how much can be extracted at a profit. Within any block of rock in the deposit, a certain amount is the mineral to be extracted, the rest is waste. The grade, or amount of valuable mineral in any block of rock varies considerably. The engineers determine which and how many blocks can be mined at a profit given the expected price and costs. The relationship between ore, waste, and cost is not linear. For our porphyry copper deposits and most other mines, there is much more low grade (or lower value) rock than high grade rock. Therefore, any increase in cost makes a disproportionally larger amount of rock unprofitable to mine. And that deprives us of use of a valuable resource. For certain deposits which are mostly low grade, the additional cost of a royalty would preclude profitable mining at all. Maybe that’s Grijalva’s goal, but it would deprive us of the commodity.
Royalties and regulations impose costs. Both tend to diminish the amount of metal that can be extracted at a profit.
Yes Mr. Grijalva, taxpayers are getting a good deal on minerals extracted from public land.
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