A royal row

Like most companies, those engaged in mining are in the business of making money, and as much as possible. It’s no surprise then that alarm bells sound when new royalties have to be paid. The bells are currently ringing in Peru and Chile.

Peru recently passed a bill enacting a sliding-scale royalty of 1% to 3% on companies with annual concentrate (or ambiguously termed “equivalent”) sales of between US$60 million and US$120 million. Meanwhile, in copper-rich Chile, the government is fast-tracking a revised bill that subjects metallic miners’ sales to a 3% royalty and non-metallic miners to 1%.

Proponents of the schemes say many companies have enjoyed favourable taxation for years (a vestige of previous efforts to attract mining investment). They also claim that compensation is required for the removal of non-renewable resources. Not an unreasonable request, and not out of line with similar levies elsewhere in the world, including Canada.

In Chile, the funds generated by the royalties would be used to promote innovation. In Peru, the plan is to distribute the cash back to poor mining regions, aiming to close the gap between the haves and have-nots. The Peruvian plan sets aside 5% of the funds for universities — not much to build a lasting legacy to compensate for abandoned pits and depleted natural resources.

While the royalties may play well to the populace at home, particularly ahead of Chile’s local elections in October, the mining sector warns that the introduction of royalties sends a negative message to foreign investors, especially if they supersede existing agreements.

That message has already been received, as Anglo American and Southern Peru Copper, among others, have pulled out of the auction for the Las Bambas copper project in Peru, citing the new royalties as at least a contributing factor. Las Bambas had been tagged with a minimum price of US$40 million plus a 2% royalty; the royalty rate has since been left open to the highest bidder. The auction has been delayed by more than a month to allow for a congressional study of the royalties.

Southern Peru Copper, a unit of Grupo Mexico, stands to be one of the companies most affected by Peru’s new royalty scheme; unlike most other majors, it doesn’t have a tax-stability deal with the government. Also at risk are many smaller, family-owned mines, which can ill-afford additional payments.

The miners also complain that with royalty calculations based on sales instead of profit, marginal miners would be unfairly targeted. In addition, opponents say companies continued to invest when prices were low and that they should not be penalized now. In Chile, industry groups, which include some of the world’s biggest mining companies, have threatened legal action to block the royalties.

Despite the protests, a survey of companies published by the Fraser Institute earlier this year ranked Chile as the jurisdiction most attractive to investors; Peru tied for fifth with Quebec and Brazil, and Peru and Chile tied for third, based on mineral potential. The new fees may tarnish each country’s attractiveness but will ultimately do little to change those rankings, and the call of the dollar will continue.

With metal prices at their best levels in years, there is little doubt both plans will stick and mining companies will be left to hope for a fair deal. Thankfully, there has already been some compromise in Peru, where the government has approved an amendment preventing projects from being subject to a double royalty; a suggestion to consider historical metal prices in the calculations was nixed. In Chile, exemptions are allowed when metal prices fall to extreme lows.

In the end, few would argue that royalties on finite resources are unjust; the key is to come to a fair compromise. Governments need to establish one set of rules and provide a stable economic environment if they wish to attract and keep businesses. After all, no miners means no mining, which means no royalty payments.