Copyright 1999 Federal News Service, Inc.
Federal News Service
AUGUST 3, 1999, TUESDAY
SECTION: IN THE NEWS
LENGTH:
1213 words
HEADLINE: PREPARED TESTIMONY OF
JOHN H.
HILL
SENIOR ANALYST, MINING & METALS
SALOMON SMITH BARNEY INC.
BEFORE THE HOUSE COMMITTEE ON RESOURCES
SUBCOMMITTEE ON
ENERGY AMD MINERAL RESOURCES
SUBJECT - MINING REGULATORY ISSUES-
THE
INTERIOR SOLICITOR'S "MILLSITE" OPINION AND
POTENTIAL
IMPACTS ON MINING OPERATIONS AND INVESTMENT.
BODY:
My name is John Hill. I am a senior analyst with Salomon Smith
Barney covering the mining and metals industry. In this capacity I perform
technical and financial evaluations of publicly-traded mining companies, and
provide investment recommendations to the clients of Salomon Smith Barney. By
training and experience I am a mineral economist, and have worked
internationally as a geologist, operations manager, and financial executive for
major mining companies.
The opinions expressed here and during my testimony
are mine and do not necessarily reflect the views of Salomon Smith Barney.
Thank you for the opportunity to provide input to the discussion of mining
regulatory issues, and specifically on the Interior Solicitor's November, 1997
"Millsite Opinion" and its implications for the mining industry
and investors. This discussion within the Interior Department appropriations
process is timely, and of pressing importance to companies mining gold, copper,
and other metals on public lands in the U.S. As a securities analyst, I view
this issue from the perspectives of the investment community, the affected
operating companies, and comparative international policy, and offer no legal
assessment.
I believe that the "Millsite Opinion" - that
the ratio of 5 acre millsite claims to 20 acre mining claims
cannot exceed one-to-one - represents a new standard that has not previously
been applied to the permitting or patenting of mining projects, and poses a
threat to the viability of the U.S. mining industry. While admittedly arcane and
poorly understood by investors, it is my opinion that this is unworkable from
the engineering perspective and potentially jeopardizes billions of dollars of
investment. I urge the Committee to reject it.I would like to address some of
the popular myths that surround regulatory discussion of hardrock metals mining
on public lands.
Myth #1: Mining is unregulated in the U.S. Opponents of
mining point to the absence of land reclamation provisions in the Mining Law,
implying that the industry is unregulated. In fact, between the Clean Air Act,
the Clean Water Act, the Endangered Species Act, the Community Right to Know
Act, the EPA, OSHA, MSHA, and State and local reclamation and land use
restrictions, the U.S. has the most highly regulated mining industry in the
world. We are familiar with projects holding over 40 individual permits covering
every aspect of operations, environmental management, monitoring, and
reclamation. A "short" EIS and permitting process in the U.S. is two to three
years; five to seven years is common.
Myth #2: The Mining Law of 1872 is a
"giveaway". Patent fees of $2.50 - 5.00 per acre are portrayed as providing
unfettered access and windfall profits to miners, when in fact the patenting
process is lengthy; discovering minerals and demonstrating economic viability is
expensive, and a moratorium has stalled any new approvals. Further, the public
is well-compensated through excise, property, sales, payroll, and income taxes.
Ten-year average return on capital for the major US gold companies that we track
is quite poor at 5.8%, barely above Tbill yields. Both the gold and copper
industries have been reeling from low prices since early 1998, and have seen
pervasive losses, write-downs, layoffs and mine closures. Exploration and
project development have come to a virtual halt, while equity investors have
seen precipitous erosion of share values. There is no windfall.
Similarly,
accounts of billions of dollars worth of minerals bought for $2.50 per acre are
a fiction, ignoring the capital and operating costs of extraction, the time
value of money, and business, technical, and commodity risk discounts. Fair
values suggested by the market capitalizations of companies benefiting from this
"giveaway" are a fraction of"headline" dollars. Measured by standard financial
ratios, relative industry rankings, and cumulative investment performance,
mining is in reality a high-risk, capital intensive business with weak long-term
profitability.
Calls for the imposition of royalties on mining often
overstate profitability and confuse metals economics with the higher-margin oil
& gas industry. Revenue-based royalties (usually called Net Smelter Return
royalties or NSRs) on metals mining of 1-3% are common features of international
fiscal regimes, project finance packages, and private property transactions, and
probably have a place in the U.S. Mining Law reform debate. Benefits are
simplicity and transparency. NSRs above 4-5% are rare, and are usually only seen
in production-sharing schemes as a substitute for complex taxation in unstable
countries (e.g. Russia). Sliding scale features tied to metals prices are
common, and the following example suggests that a 1-3% sliding scale royalty
might be practical. An alternate, although less common, model is the Net Profits
Interest Royalty (or NPI), which functions like a simplified income tax.Myth #3:
The "Millsite Opinion" reflects standard practice.
Although
comprehensive surveys of the subject are absent, it is my experience that large
metals mines tailor their millsite property packages for
optimum long-term materials handling and infrastructure utilization rather than
according to a set ratio of mine-to-mill claims. The one-to one ratio - implying
a millsite 25% the size of the mine using the standard 5
acre/20 acre claims - is impractical from the engineering perspective. Large
millsites are needed for processing facilities, equipment
maintenance, infrastructure, overburden storage, and tailings impoundments.
Extracted metals typically constitute a small fraction of the volume of ore
mined and processed (one-half ounce of gold per ton of ore is considered rich) -
thus the difficulty of storing material mined from 20 acres on a 5 acre
millsite. The "Millsite Opinion" embodies a new permitting
litmus test, and does not reflect standard industry practice. The
millsite ratio does not figure prominently in any of the
feasibility studies, investment proposals, or corporate financial reports of the
major U.S. mining companies that we research.
Conclusion
The US is
perceived as a high-risk country for minerals development due to its lengthy,
complex, and frequently hostile environmental permitting procedures. High
profile examples of politics prevailing over science, and a fear that "the rules
will change" to thwart mine development have helped accelerate the industry's
exodus to Central and South America. While the U.S.' mineral endowment is rich
and new exploration technology underscores the geologic potential of established
mining districts, the reserve base is not being replenished as mature mines shut
down, new projects languish at the permitting stage, and exploration dollars
flow abroad. Should the "Millsite Opinion" be allowed to stand,
we believe investors will interpret it as an effort to ban mining, and will take
a pessimistic view of U.S.-based production or development assets in the debt
and equity markets. The uncertainty as to company risk exposures, whether
"Millsite" provisions will shut down operating mines, allow
"grandfathered" non-conforming applications, or apply only to new development
projects will further chill investor sentiment.
END
LOAD-DATE: August 5, 1999