The state, and hence the future, of Nevada’s mining industry may hinge less on what legislators and Nevadans think of Senate Joint Resolution 15 (SJR15), which would remove the mining industry’s 5% tax cap on net proceeds from the Nevada Constitution, and more on how they perceive the mining industry in general: a bunch of dirty guys with pickaxes.
The debate over tax policy vis-à-vis mining continues to rage, and as gold prices have dipped, the issue has grown even hotter.
So, where does that leave things? According to Nevada Mining Association President Tim Crowley, the state of the mining industry in Nevada is not bad. “We’re a business that has grown over the years,” he said. “We are diverse. We are putting people into some of the best jobs in the state. We have grown the economy by investing over a billion dollars a year over the last several years in new developments and new exploration. We are working with more and more Nevada-based businesses.”
Indeed, more than 2,300 businesses in the state have some level of connection to a mining operation, and that number is growing. Those companies cover a wide swath, starting with those engaged in exploration, “which is actually the first industry that got hurt in this slowdown,” says Pam Borda, Executive Director of the Northeastern Nevada Regional Development Authority (formerly ECEDA) in Elko. The grouping also includes firms involved in reclaiming the land in order to restore it to its previous state, including seeding and heavy equipment work.
There are, as Crowley points out, several issues that “complicate” the business at present. Workforce development, for example, is something with which the industry has grappled for the past several years. “We struggle from attrition issues, and just through growth we need more people. There have also been housing issues.”
Beyond these, permitting and moving projects from the point of discovery to the point of actually bringing the mineral into the market have proven to be a “very lengthy” and capital intensive process. “The longer it takes to get through permitting, the more risk is built into the project. We have struggled to shorten that timeline.”
“I think right now (the industry in Nevada) is in hold mode,” suggests Borda. “The price of gold going down, and the pending legislation to raise taxes has got them waiting to see what’s going to happen.”
In the worst-case scenario, Borda says, the tax issue “would be devastating, not just for the mining industry but for the communities and the counties in which they reside.” The reason, she explains, would be the domino effect that would follow.
“Ultimately, if you tax the mines to the point that they’re not profitable – with the price of gold dropping and huge taxes – it could easily reach that point,” she warns. “So if they’re not profitable and they pull in the reins, then the 2,300 companies that contract with them are going to slow down, and then all of your retail and government and everything else slows down, and it’s just a domino effect.”
There are, Borda estimates, roughly 11,000 Nevadans who work directly for the mines, and another 14,000 who work in the support companies. In fact, she points out, mining is offering Nevadans “some of the greatest jobs in the state. As long as they are growing and creating jobs, their average salary is $85,000 a year. Their low end is about $50,000 a year.”
Borda also agrees with those who feel that the boom in Elko is a direct result of mining. “We do have oil and gas, which to me is just another form of mining, which is going to be taking place here shortly. But until this point it has been solely mining.”
This year has not proven to be a good one thus far for mineral exploration, according to John Muntean, Ph.D, Director, Ralph J. Roberts Center for Research in Economic Geology and Associate Professor for the Nevada Bureau of Mines and Geology at the University of Nevada Reno. “Of course, gold dominates the exploration. Barrick and Newmont have cut back their exploration significantly since late summer of 2012, mainly laying off contractors, but some staff as well.” In addition, he adds, the share price of the major to mid-sized companies – Barrick, Newmont, Kinross, Goldcorp, Allied Nevada – “has gotten hammered.”
Though there are a few junior companies that are fairly healthy, Muntean contends, “most are on life support,” with only six to 12 months of cash left. “The share price of almost all of them has gotten hammered as well.” Many junior companies will disappear, he predicts, or survive by shutting everything down and existing as a shell to hold on to some assets.
Raising money for mineral exploration, Muntean says, is “virtually impossible for all but a few junior companies This is the worst financing environment in a long time. The stock market is currently doing great, and that’s where investors are putting money.” The drop in the price of gold since its high in 2011 and the precipitous drop this spring have not helped.
Among the projects still going forward, Muntean notes, are Nevada Copper and Pumpkin Hollow in Yerington, which he says is contingent on a federal land deal. Gold projects that could be in production by 2015 to 2016 include Newmont’s Long Canyon deposit near wells, Midway Gold’s Pan project, and Timberline Resource’s South Lookout Mountain project, both near Eureka.
“Like most mining companies, Barrick understands and plans for the particularly cyclical nature of our business, using conservative projections for our business planning purposes,” says Louis Schack, Director of Communications for Barrick Gold of North America in Elko. “Even with conservative projections, there is always a possibility that a sustained drop in the price of gold and/or increasing costs could result in reduced revenues and contraction within the industry.” Barrick Gold Corporation operates mines and advanced exploration and development projects on four continents.
“Despite the myths perpetuated by anti-mining activists,” Schack points out, “Barrick pays more taxes, on a per-employee basis, than any company in the state. Our opponents often ignore the fact that Barrick pays federal income taxes at the statutory rate of 35 percent. In Nevada, we also pay all of the same taxes any business pays plus an additional mining-specific tax of 5 percent on our net proceeds.”
Schack points out that his and other mining companies invest hundreds of millions of dollars in exploring for minerals in Nevada. “This is money coming into the state before any resources are extracted,” he notes. If ore is discovered, it can take between seven and 10 years to permit a mine or a major expansion. During these periods of exploration, permitting and development, no income is generated.
“In addition to making large up-front capital investments to develop mining projects,” he adds, companies like Barrick are strong community partners. “We actively engage with host communities during every stage of the mining process, providing financial and resource support as well as employment even before we are in the production phase or recover any profits from our operations.” The company employs approximately 4,300 people in Nevada.
Borda agrees that there is a significant disconnect among average Americans when it comes to the industry. “The average person knows absolutely nothing about mining, so there is this perception out there of the guy with the pickaxe, from the old days of mining.”
In addition, Borda continues, the industry has been the recipient of a lot of bad press, “particularly in the southern end of the state, with a lot of statements about mining that are nowhere close to being true. For example, that they don’t pay their fair share.”
The reality, she says, is the industry pays more in taxes than any other industry in the state. “It is absolutely a fact. If you were to do all the numbers, it works out to $24,000 per employee, versus the state average, which is $6,000. And if you take the next-highest industry, it’s still only (approximately) $9,300.” The $24,000 in taxes paid per employee, she adds, is “absolutely a lot of money for one of the smallest industries in the state to be paying.”
One problem, Borda feels, is that most Nevadans are being told that the net proceeds tax is the only tax the mining industry pays. “Not true. They pay all the same taxes that every other business in the state pays, and on top of that they pay 5% of their net proceeds.”
Crowley is adamant that there are those working on each of the challenges facing the industry. “Absolutely. We are working to address the workforce development issues.” Public perceptions are important, which is why industry groups like his are reaching out to a broader audience to inform them of what it means to be a miner.
“What I think people may assume is the job of being a miner is usually far from the truth,” Crowley explains. “It is a highly sophisticated, high-technology industry. It is innovative. We are faced with engineering, design-process problems on a day-to-day basis. If young people coming out of school are looking to challenge themselves and be problem solvers, it’s a great industry to get into.” The solution to the workforce challenge, he says, is “reaching out to a younger audience and making them aware of what we’re doing, how we’re doing it and what opportunities exist.”
“What most people do not understand is the risk involved in exploration, and the amount of time it takes between discovery and production – five to 15 years,” Muntean explains. “This greatly affects the annual return on investment.” In comparison, he notes, if a petroleum discovery is made, a company can produce product rather quickly after discovery.
The general public, he feels, “does not understand the importance of exploration, and how difficult it is to find and develop ore deposits. Many geologists can spend an entire career without playing a significant role in a discovery. It’s a tough business.” It’s a risky endeavor, he points out, “the last thing a company of any size wants to face is uncertainty in the rules — changing environmental regulations, taxes, access to public lands, etc.”
What happens to mining throughout the rest of 2013 and for at least the next year will likely depend on what the legislature does with taxes. If SJR15, which was introduced in the Senate on Mar 28, 2011, were to be defeated “then they would go back to business as normal, and the outlook would be great,” Borda conjectures. The industry would continue growing “like they have been for the last several years, and we’d be just as busy as we have been.”
On the other hand, she adds, if SJR15 passes, “no decisions are going to be made for basically another couple of years. Then, it is much more likely that they will go on hold and that will hurt. They wouldn’t shut anything down necessarily, but they wouldn’t continue at the level of growth that they’re currently doing.”
It has happened elsewhere, she explains, specifically in Quebec, Canada. The Province started talking about raising the mining industry’s taxes a few years ago, “and as a result just of the talks they went from number one in mining worldwide to number 11.”
What Borda calls her real concern here is the unintended consequences that might come about. She does not feel that the state legislature has spent the time to look thoroughly enough at the impact of this bill. “The other thing that is really disturbing is that once again they are looking at a revenue source that is totally unstable. It’s worse than gaming.”
Borda’s advice to Nevada legislators is simple. “We’ve got to stop looking at things that are quick band aids and start looking at longterm, solid, sustainable solutions. Mining is not it. With the ups and downs of the prices of precious metals and all the other variables, it’s just not the source they should be looking at.”
“I think production looks good for the near future,” Muntean says. Last year, he says, was the third year in a row of increasing gold production, albeit at very modest rates. “These three consecutive years of increasing production followed nine years of decreasing production. New gold mines will be coming on board in the next two to five years.”
“Recent weakness in the gold market and growing challenges at some of our international operations have forced us to take a more disciplined approach to the investment of capital in Nevada and elsewhere,” says Schack. “Barrick has invested several billion dollars in Nevada over the past several years. These investments have yielded excellent results, and we hope to continue operating successfully in Nevada.”