EDITORIAL PAGE — A taxing effort

For those who want more money spent on exploration in Canada, a ray of hope shone from an unexpected quarter recently. To wit, the U.S. House of Representatives, where Secretary of the Interior Bruce Babbitt lambasted American Barrick’s attempt to patent its Nevada Goldstrike claims.

Barrick’s crime had been to follow the law to the letter by fulfilling all requirements of the patenting procedure in the U.S.

Not satisfied that Barrick’s so-called “$10-billion resource” was netting the government its requisite pounds of taxable flesh, Babbitt vowed to stall the patent application until new legislation comes into force. That legislation, wending its way through Congress, calls for royalties of up to 12.5% on hard-rock mines situated on federal public lands in the U.S. Once the dust settles on this legislative brouhaha, there is no question that royalties of some description will be imposed. The American Mining Congress seems convinced of it, as are a few Canadian mining executives whose companies have U.S. interests. The only question now: What will be the eventual royalty percentage level? Mining people say it must not reach the levels imposed on the oil and gas industry. Operating margins in mining are much tighter.

But what will be the net results of production royalties? First, it will have the laudable effect of adding to U.S. federal coffers. (U.S. taxpayers should not hold their breath waiting for a commensurate decline in the deficit. As in the Great White North, politicians only talk a good line on deficit reduction.)

On the negative side, expect immediate or near-term closures of high-cost producers. In the gold industry, mines near or beyond the US$300-per-oz. level (cash operating costs) will die. With gold at about US$330 and a production royalty of between $26 and $41 for each ounce produced, marginal operators would shelve development and exploration plans. Thus, when current economic reserves run out, closure will inevitably follow.

Longer term, companies might suddenly find Nevada and other states less congenial targets for their mine-finding dollars. Exploration, therefore, will decline.

But why should any government threaten a mine-finding system capable of yielding the vast riches of a Goldstrike or the potential of the Pipeline project held by Placer Dome? Isn’t it enough that these companies spend hundreds of millions of dollars exploring for these deposits? That they spend hundreds of millions more developing them? That they spend hundreds of millions operating them?

This new administration is savvy, however. Having decided on mining royalties, it has set its sights on the right target for a public campaign — a foreign company making fat profits from a rich, vast (but American) gold deposit said to contain some 30 million oz.

This whole affair, by the way, might not be the easy public sell it is today. Gold companies in the past reported reserves only two or three years ahead of development and with grade and tonnage figures, not “contained ounces.” Now, Babbitt can spout off about a “$10-billion resource” (a rhetorical value, not an estimate of true economic worth) that Barrick can acquire for $5 per acre. This will surely elicit the desired public response: “Gee, that fat-cat company is grabbing a $10-billion mine for only $5 per acre — nail ’em.”

But every cloud has a silver lining. If Canadian explorationists suddenly deem it inadvisable to collar their drills in U.S. rock, perhaps the Canadian Precambrian will seem more appealing once again.