EDITORIAL Killing the goose

Governments suffer from an irresistible urge to ferret out successful mining companies, then devise extraordinary means to extract a portion of their profits for themselves. There is something about companies making money from extracting natural resources that bureaucrats and legislators just can’t abide. The latest effort comes in the U.S. where an 8% royalty on gold mining is being considered. It’s not hard to see why. While there are hundreds of mines and potential mines in the U.S., just two — both in Nevada — are expected to account for one-quarter of the country’s future gold production and one of them is owned by a Canadian company. The large producers are making reasonable profits, even with gold at depressed prices. Governments, therefore, feel compelled to find a way to rake in some of those profits for themselves.

The effect of those efforts — a royalty for example — might be to skim off some of the larger companies’ profits, but it would come at a tremendous cost. Not only would it render many smaller, higher-cost operations uneconomic in areas of the country that can least afford them, it would inhibit the flow of capital into a capital intensive business. In effect, it could end the western U.S. gold boom and ultimately kill the goose that laid the golden egg. Investors will simply choose to put their money where the rate of return is better.

The gold mining industry has been a true bright spot for the U.S. economy over the past decade. Output has increased tenfold, employment has gone from 9,000 to 76,000 and balance of trade is expected to be an $8-billion surplus during 1990-94 compared to a $6.7-billion deficit during 1980-84. The future growth and benefits that would be killed by a royalty is far greater than any revenue it is likely to generate.

This tax-it-’til-it-dies mentality is endemic to government, regardless of level or nationality. Canada tried introducing a similar scheme at the federal level years ago, but it never came into effect thanks to public opposition. When base metal mining firms were making good profits in the 1970s, Ontario’s provincial government couldn’t resist imposing a mining tax to skim off some of the gravy. Even municipalities have taken extraordinary measures over the years to get their piece of the pie. The most famous instance is Timmins, Ont. Once a medium-sized mining town, it is now the largest city in North America because a special Act of the provincial legislature enlarged its boundaries to take in the Kidd Creek mine. The city now comprises 16 townships (some of which still have no road access) and levies its own taxes on the Kidd Creek operation.

The principal of taxing natural resource extraction is based on the premise that natural resources belong to the nation as a whole and all citizens should benefit when the value of those resources is realized. In other words, mining companies should be required to pay more than the taxes and government-mandated costs paid by commercial ventures in other sectors of the economy.

That approach strikes a sympathetic chord with voters. When big mining companies like Newmont Gold or nickel producer Inco Ltd. chalk up large profits, it is easy to say they can afford to pay more. But that doesn’t recognize the cyclical nature of the business. The taxman can jack up the tax bill when the profits are flowing, oblivious to the downside of the cycle. Inco, for example, earned US$19.30 per common share in the past four years, but during the 4-year period from 1981 to 1984 it lost US$13.03 per share. That leaves a return on capital that is barely adequate to attract investment. Although Inco is not a gold producer, the analogy is that a royalty on a gold company that suffered such swings in earnings would reduce the return to a level insufficient to make up for the unique risks inherent in gold mining. The very biggest might survive, but many more would fall by the wayside.

Taking a long-term view is difficult for politicians whose time frame is usually only as far in the future as the next election, but considering a new royalty on a business that has performed so well during the past 10 years is simply irresponsible.