Mining royalties, another bad, job-killing idea from Raul Grijalva

Southern Arizona Representative Raul Grijalva is pushing another anti-mining bill, this one inappropriately named the “Abandoned Mine Cleanup and Taxpayer Fairness Act.” (See full text here.)

A major provision of this stupid bill is the imposition of a 12.5% gross income royalty on minerals produced from mining claims.  Mr. Grijalva argues that the oil and gas industry pays such a royalty, so mining should also.  Grijalva also contends that the royalty would garner more money for the federal government.  Not so, as I will show below.

Grijalva’s argument by analogy is invalid because the oil and gas industry and the mining industry are fundamentally different.  Mining requires a very expensive, up-front capital investment; the oil and gas industry doesn’t.  Secondly, the oil and gas industry enjoys a 12.5% depletion allowance on taxes to spur more exploration; the mining industry doesn’t.

Gross royalties, as proposed by Grijalva, are charged on the mineral value regardless of the cost of extraction. Net proceeds royalties are a tax on profit..  Both types of royalties reduce corporate profit, if any, and therefore would reduce income tax payments to government and hence to the taxpayers.  The extra dollars Grijalva sees are illusionary.

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 is 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.  The mineralization that cannot be extracted at a profit is waste. 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, such as a royalty, 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.

Geologist David Briggs confirms my view and goes into more detail on royalties in a guest opinion in the Arizona Daily Star today.

Some other recent “bad Acts” by Grijalva include:

The “Southern Arizona Public Lands Protection Act of 2013,” proposes to ban new mining claims on all National Forest and Bureau of Land Management lands in Pima and Santa Cruz Counties.  Grijalva has introduced similar bills every year since 2007. This would preclude almost all new mineral exploration and production in Southern Arizona.  We don’t really need all those jobs, economic development, and tax payments, do we?

Grijalva’s “Grand Canyon Watershed Protection Act” would make permanent the “temporary” withdrawal (for 20 years) of one million acres near the Grand Canyon to prevent uranium mining under the pretext that the Colorado River could become contaminated.  Uranium mining on the Colorado Plateau near the Grand Canyon poses no danger to the Colorado  River water quality according to several studies. (See a report from the Arizona Geological Survey here.)

Grijalva’s “Santa Cruz Valley National Heritage Area Act” would establish a 3,325 acre National Heritage Area in Pima and Santa Cruz Counties which could have adverse affects on private property.

Arizona should boycott Grijalva at the next election.

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4 comments

  1. You mean to tell us that they pay zero dollars for mining on US government land? We taxpayers get nothing in revenues from this? It seems to me that in the free market economy they should pay at least something!! Would any of us allow a mining company to set up a mine on our land and not charge them royalties? That’s crazy.

    1. Mining companies pay a fee for mining on federal land, it’s called income tax. Mining companies have no real objection to a net proceeds royalty because it is the same as income tax. On private land, mining companies commonly pay royalties to the owner or have a complete buyout, or both, and still pay income tax to Uncle Sam. And mining companies spend millions up front to prove and develop a mineral deposit.All that money goes into the economy.

      1. You mean like how General Electric made $14 billion in profit in 2010 and didn’t pay a dime in federal income tax?

        That federal land and minerals underneath it belong to us, the American taxpayers. If mining companies pay royalties to owners of private land, why shouldn’t we taxpayers expect the same level of royalties? And sure mining companies invest money up front to develop a mineral deposit, just like McDonalds has to invest money to buy a location and build a restaurant before they sell their first burger.

      2. The same level of royalties as you say for private land would be a net proceeds royalty, not a gross income royalty that Grijalva is promoting. Most mining companies have not objection to a net proceeds royalty. Any yes, the minerals under federal land belong to all of us, but how many of us will put up money to get them?

        I don’t know the details of GE, but it sounds like they have very good lawyers and accountants to take advantage of loopholes in the law as written by Congress.

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