Committee on Resources
Subcommittee on Energy & Mineral Resources



Subcommittee on Energy and Mineral Resources

TO: Members, Subcommittee on Energy and Mineral Resources

FROM: John Rishel, Legislative Staff

DATE: October 20, 1999

SUBJECT: Subcommittee Oversight Hearing on "Effect of Federal Mining Fees and Proposed Federal Mining Policies and Royalties on State and Local Revenues and the Mining Industry"

The Subcommittee on Energy and Mineral Resources is scheduled to meet on Saturday, October 23rd, at 9:30 a.m. in Hearing Room #1 of the Jefferson County Administration and Courts Facility, 100 Jefferson County Parkway, Golden, Colorado to hold a hearing on the "Effect of Federal Mining Fees and Proposed Federal Mining Policies on State and Local Revenues and the Mining Industry."



The Subcommittee on Energy and Mineral Resources is holding this third oversight field hearing to gather factual information on: (1) the justification for the millsite opinion and its effect on the mining industry, (2) effect of proposed Federal policy proposals, such as charging a mining royalty, on the mining industry and state and local revenues, and (3). the state of domestic mining, including trends in domestic mineral exploration and investment.

Mining is a key economic activity which supplies strategic metals and minerals that are essential for agriculture, construction and manufacturing. Minerals are also essential in satisfying the basic requirements of an individual's well-being -- food, clothing and shelter. Mining makes possible our civilization, our high living standards and today's sophisticated technologies.

The United States is among the world's largest producers of many important metals and minerals, particularly copper, gold, lead, molybdenum, silver and zinc, and it still has substantial domestic reserves of these metals. Twelve western states containing more than 92 percent of U.S. public land account for nearly 75 percent of U.S. domestic metal production. Much of the future mineral supply of the United States will likely be found on public lands. According to the National Research Council, one of the primary advantages the United States possesses over its strongest industrial competitors, Japan and western Europe, is its domestic resource base. The domestic mining industry provides about 50 percent of the metal used by U.S. manufacturing companies.

During most of the 1990's global mineral exploration trends were strongly positive, while U.S. mineral exploration stagnated or declined. Recent evidence suggests the decline in U.S. exploration may be protracted. Without increased domestic exploration, significant declines in U.S. mineral production are unavoidable as present reserves are exhausted. Mining of metals and other mineral commodities is an international business -- one in which the United States must remain competitive with other nations for scarce investment capital. Much mining investment capital has already taken flight to other countries. A long term continuation of this trend will result in the loss of thousands of high-paying, skilled jobs in the domestic mining, mineral processing and manufacturing industries and increase reliance on foreign mineral supplies, boosting a worrisome national trade deficit.

Millsite Opinion

The Interior Department is using a Solicitor's opinion, known as the millsite opinion (issued in November, 1997), to prohibit a mine on public land from using more than 1 acre of land in support of the mine for every 4 acres within the actual mining area. Support acreage for a mine is used for mill facilities, maintenance shops, waste rock disposal, tailings ponds and transportation facilities. These arbitrary acreage limits apply to any mining operation governed by the general mining laws of the United States. Interior's limit on support acreage is simply not workable for many mines, particularly surface operations.

The millsite opinion was first applied, without warning on March 29,1999, when Battle Mountain Gold Co. and its partner, Crown Resources, were notified by the Departments of Interior and Agriculture that based on the millsite opinion the Record of Decision for the Crown Jewel Mine in Okanagan County, Washington had been vacated and approval of the Plan of Operations for the property, originally submitted in 1992 and approved in 1997, was withdrawn. The sudden recission of a previously approved action caused stock prices of the two companies involved in the Crown Jewel mine to drop significantly on the day it was announced.

Based on the original 1997 approval of Crown Jewel's Plan of Operations, Washington State had proceeded with its permitting effort. By February 1999, over fifty state and local permits had been obtained for the mine, and a bond exceeding $50 million was posted. Eighty million dollars had been spent on this project, and permitting alone cost some $20 million. According to the Director of the Washington Department of Ecology, the Crown Jewel permitting process represented "the most rigorous environmental analysis the state has ever conducted on a project of this type .... No other proposal has received this level of environmental scrutiny."

Environmental groups had challenged the Crown Jewel Record of Decision and approval of the Plan of Operations in court, but they lost on every substantive ruling. During the entire permitting process and ensuing legal challenges no one -- not Interior, nor any environmental group -- ever raised the excess millsite acreage issue.

Although the Solicitor maintains that the law clearly supports his millsite opinion, ample evidence to the contrary exists. The opinion contradicts both past practice and the current Bureau of Land Management and Forest Service manuals, which state that as many 5-acre millsites as are necessary for the safe and practical operation of a mine may be granted (without regard to any lode claim to millsite ratio). Prior to the Crown Jewel case, Interior has never taken an action to limit the acreage used by a mining operation on the basis stated in the millsite opinion, and in numerous instances, Interior has approved mining operations where the acreage exceeds the limits in this opinion. Moreover, patents in violation of this rule appear to have been routinely granted by the BLM for many years.

The qualification for millsite validity has always been that the non-mineral bearing land claimed as millsites must be used and occupied for mining or milling-related purposes. In other words, the land granted is determined by the actual amount needed for mining and milling-related purposes.

Except for lawyers with environmental groups, most attorneys familiar with the mining law flatly disagree with the Solicitor's millsite opinion. They say that Congress enacted the General Mining Law of 1872 to encourage mining on federal lands; thus, any arbitrary acreage limit on land needed to support a mining operation makes no practical sense. They also argue there has never been any express numerical limitation on the support acreage for a mine and the enormous body of case law interpreting the mining law contains no example supporting the Solicitor.

A broader concern with the millsite opinion is that it is really an attempt by the Solicitor to circumvent Congress and write legislation changing a law that he doesn't like. The Solicitor's dislike of the mining law is well-known. His millsite opinion essentially renders the mining law unusable for most surface mines. In his opinion, the Solicitor takes an extremely narrow interpretation of the mining law and expands the authority of the Interior Department to regulate mining. Is the Solicitor sacrificing a predictable legal system based on the rule of law in order to satisfy a political agenda?

The Solicitor's opinion, as well as the unexpected way in which it was invoked, will have widespread and devastating effects on operating mines as well as exploration on public lands. For some operating mines, Interior could revoke their Plan of Operations and shut them down, using the millsite opinion. The application of the Solicitor's opinion to the Crown Jewel project, without warning, caused the shareholders of Battle Mountain Gold and Crown Resources to suffer significant investment losses. One investment banker, ABN Amro, warned investors, "mining companies with limited U.S. exposure are likely to prove safer investments during the upcoming months than those with substantial U.S. exposure." If this attitude becomes widespread among investors, the ability of the domestic mining industry to raise needed capital at competitive rates will be severely impaired.

Before making long term investments in the hundreds of millions of dollars, investors want a predictable legal system and government by "the rule of law." They want to know a government will uphold property rights once an investment proves successful. Banana republics are characterized by government agencies that rewrite law on impulse. No one in full possession of their faculties will risk instant losses on their investment due to a "surprise" policy decision by an unelected bureaucrat. If we allow the Interior Department to unilaterally rewrite rules to satisfy a political agenda, how long can our nation remain the world's great economic engine?

Currently, the Interior Secretary is barred by law from applying the ratio test in the millsite opinion. The application of the opinion is part of the Interior appropriations debate. The House voted to require the Secretary to ascertain the millsite to lode claim ratio before acting upon grandfathered mineral patent applications or processing surface permits for mineral-related activities. The Senate approved a contrary provision prohibiting application of the millsite opinion.


A major public lands mining issue is, "What constitutes a fair share of revenue for the Federal government from a mineral deposit?" The federal government has not levied a royalty on hardrock minerals (gold, silver, lead, zinc, copper, iron and many non-metallic minerals) extracted from public land since 1846. After a royalty administered by the War Department on lead mines in Missouri and the Wisconsin territory proved to be a revenue-raising failure, Congress repealed the mineral statute imposing this royalty.

The federal government does, however, impose a royalty on coal, potash, phosphate and sodium mineral production, and many critics of the general mining law say that it is only fair to charge a royalty on hardrock mineral production too. Suggested mining royalties range from 3 percent of net proceeds to 12.5 percent of gross proceeds. Some even advocate levying a fee on minerals produced from former public lands which have been privatized over the years under the mining law.

One of the problems with determining "a fair return to the taxpayer" is the propensity of proponents of royalties to greatly exaggerate the "values" of mineral deposits. They often imply that the raw land within mining properties is worth billions of dollars. Inflated values used in the rhetorical war against the mining industry are predicated upon grossly optimistic estimates of the "in-place" value of minerals using the market price determined in the best of times for the metal in a finished state, without respect to actual recovery rates of the mineral, the time value of money or any costs associated with finding, mining and refining the mineral to a marketable product.

For example, Secretary of the Interior Babbitt estimated the "value" of a patent given to ASARCO in December, 1995, at $3 billion. Yet, the stock market values ASARCO, the second largest producer of domestic copper and the fourth largest privately-owned copper producer in the world (see Attachment 1), at around $705 million or less than one-fourth Secretary Babbitt's estimated value for the undeveloped property he transferred to ASARCO. An even more egregious example of this tactic is the Stillwater Mining Co. patents in Montana. During debates in Congress over mining law issues, the "value" of this land has been estimated at $35 to $38 billion. Once again, using the stock market valuation of Stillwater Mining Co., this company is worth $855 million. Remember, this includes the mine plant and infrastructure, which was built at the company's expense -- not the government's. In fact, $38 billion is enough to buy the North American mining industry (Attachment 2) and still have several billions left over! Imposing a royalty based on such outrageously inflated values would seriously damage the mining industry in the West.

A Federal royalty on hardrock mineral deposits is more complex than it seems. About 80 locatable (i.e, claimed under the mining law) mineral commodities and a wide diversity of mineral deposit types occur on public lands. Unless care is exercised in determining a royalty, mining of some commodities and many lower-quality mineral deposits will be uneconomic. For example, a high gross royalty penalizes producers in high cost regions. Also, costs of production are not equal for all commodities. For example, smelting, refining and ore transportation costs at some gold mines consume less than ten percent of the metal's selling price, whereas for zinc mines these costs account for about 65 percent of the metal's selling price. A high gross royalty based solely on the economics of mining the nation's richest gold deposits makes zinc mining uneconomic.

The Federal government profits from the existence of a mineral deposit somewhere beneath public lands only when that deposit is found and developed. For a royalty to generate the maximum return on the "public's assets," it must not reduce exploration or mining activity.

A royalty must be based on the ability of most mines to pay -- not the ability of one or two of our country's most profitable mines to pay. Unlike private landowners, the Federal government receives income in the form of taxes from mining on public lands. If a Federal royalty is imposed which causes many mines to close and makes future mines uneconomic, the government will lose hundreds of millions in personal and corporate income tax revenues -- a loss greatly exceeding any revenue gains from the royalty.

State and local tax revenues are also severely impacted by a high Federal mining royalty. Federal royalties are deductible from the base on which many State and local taxes are levied, and State and local governments also share in tax losses caused by reduced mining activity. A state like Nevada will lose millions in tax revenues if an unreasonable Federal royalty is imposed.

The experience of the British Columbia provincial government with mining royalties provides an excellent practical example of the severe impact of a high, government-levied gross royalty. British Columbia imposed a 5 percent gross mining royalty in the early 1970's. Grassroots exploration ceased, mines closed and new mines were not developed. More than 5,000 jobs were lost. This ill-conceived gross royalty was quickly repealed once its devastating effect became obvious.

Expected Witnesses

Twelve witnesses (Attachment 3) are scheduled to testify, including two mining consultants, the President of the Colorado Mining Association, two environmental witnesses, and two attorneys specializing in mining law.

For further information, please contact Bill Condit at x59297 or John Rishel at x60242.

Attachment 1

ASARCO. -- Market Value on June 30, 1999 = $705 Million. Phelps Dodge Corporation recently made a tender offer valued at about $977 million for Asarco. Both of these values are well below Secretary Babbitt's $3 billion "value" for a patent given to Asarco in late 1995. What does Secretary Babbitt see that the stock market and Phelps Dodge are missing?

Asarco, is one of the world's leading producers of nonferrous metals, principally copper, zinc, silver and molybdenum. Asarco also produces specialty chemicals and aggregates. Asarco

and its subsidiaries operate mines in the United States, Peru, Canada and Mexico.

Asarco's beneficial mined copper production is around one billion pounds, including its share of Southern Peru Copper Corporation (SPCC), a subsidiary of the Company. Asarco is the fourth

largest private sector copper producer in the world. Copper is Asarco's most important product, representing 65% of total sales. Approximately 68% of copper mine production comes from the Company's mines in the U.S., with the balance from SPCC's mines in Peru. Asarco has also developed one of the largest copper ore reserve positions in the industry.

Asarco also mines zinc, principally in Tennessee. Annual zinc mine production is about170 million pounds.

Silver is produced as a by-product of the Company's other mining operations and from the mining operations conducted through the Company's 50% owned Silver Valley Resources which has two mines in Idaho.

Asarco's specialty chemicals business and its aggregates business consist of Enthone-OMI, a

worldwide leader in specialty chemicals for the electronics and metal plating industries, and American Limestone which provides a variety of crushed stone and related construction products.

Asarco's North American copper business includes the Mission mine south of Tucson, Arizona; the Ray mine north of Kearny, Arizona, copper smelters in Hayden, Arizona and El Paso, Texas; and a copper refinery in Amarillo, Texas. Asarco also owns a 49.9% interest in Montana Resources' copper-molybdenum mine in Butte, Montana, a 75% interest in the Silver Bell copper mine west of Tucson where a new leaching and solvent extraction/electrowinning (SX/EW) operation is nearing completion, and an 84.3% interest in the Minto mine project, a new copper- gold mine under development in the Yukon Territory, Canada.

The Company's Peruvian copper business, conducted through Southern Peru Copper Corporation

(SPCC), a subsidiary of the Company, produces copper at the Toquepala and Cuajone mines, the Ilo smelter and the Ilo refinery, all located in the southern part of Peru.

Attachment 2

Market Capitalizations of Mining Companies With U.S. Properties

(as of June 30, 1999)

Company Market Capitalization (millions)
Anglogold Limited $ 4,134.0
ASARCO $ 705.3
Barrick Gold $ 7,295.0
Battle Mountain Gold $ 459.7
Brush Wellman $ 275.4
Cleveland Cliffs $ 358.7
Coeur d'Alene Mines $ 95.8
COMINCO $ 1,388.0
Cyprus AMAX $ 1,199.0
Echo Bay $ 193.3
Hecla $ 124.6
Homestake $ 2,082.0
Kinross Gold Corporation $ 566.4
Meridan Gold $ 331.2
Newmont Mining $ 2,947.0
Phelps Dodge $ 3,439.0
Placer Dome $ 2,547.0
Stillwater Mining $ 854.4
Total Market Capitalization $ 28,995.8

Attachment 3

Committee on Resources

Subcommittee on Energy & Mineral Resources

Saturday, October 23, 1999, 9:30 a.m.

Jefferson County Administration and Courts Facility

Golden, Colorado

Proposed Agenda

Oversight hearing on:

Effect of Federal Mining Fees and Proposed Federal Mining Policies and Royalties on State and Local Revenues and the Mining Industry

Witnesses Invited To Appear

# # #