8% royalty is 40% of profits on a mining company.
Most companies use figures of between 5 and 7 to one to relate a gross product royalty to net profit.
Hollinger Mine, a very rich high-throughput gold mine made 25% profit on their ore run. This proposed US royalty would be 30% of their profits.
A large low grade mine makes as little as 1.5% on their cash flow.
Inco made 10% on their investment for 100 years. I am not sure what 8% would be on their total cash flow, but I believe it could be 50%.
Ontario liberal governments proposed and backed off an 13% royalty on diamonds mined in this province. Diamond mining is fairly profitable but DeBeers had a 7.5 years payback on that one. (Don't know what discount rate they were using) So 13% off the top could be 97% of before tax profits!!!
60% of the gold mines in Nevada would close down on an 8% royalty.
This kind of confiscation does not figure well by the Laffer curve. But I don't think that is the point of it.
The TSXV set a maximum royalty that a company could pay at 3% of gross. They would not countenance a deal where the NSR was more than that as financeable. That is what is called a net smelter return. It is called net, as the smelter was assumed to be at arm's length to the company, so the smelter charge backs were deducted.
Now is you are a property vendor, you may like to earn 3% on the gross. That is the max you will be able to negotiate and the max you can get the exchange to allow in a deal. If the government wanter 8% on top of that, then on the average between 55 and 77% of cash flows would be eaten by royalties. If they were taken before payback, then most mines would not even be able to pay the help, (cash costs are rarely less than 60% of total cash flows.) -- let alone pay the capex back. That would make 100% of all domestic mines unfinanceable. Whale watchers and green noses might applaud but we all know they want their bread buttered on both sides by god.
Workers, energy, maintenance development and consumables get 60% of the money that a mine or any other enterprise generates.
The rest goes to servicing the loan. Finally we get profits. If the money were borrowed, and makes 24% IRR, and the loan is at 8%, then there is 40%-(Capex X .08 + Capex/5) say 18% to pay royalties, and profits. Half of that 18% is taken by the government anyway, and they take 33% of what the worker's make, which is often equal to 45% of the total, or sometimes much more. Worker's %age can equal 65%. So the government gets perhaps 25% of the proceeds even during payback, not counting what they get in tax from the capital equipment in VAT, income and corporate taxes. What the hell do they need a royalty for?
To kill evil mountains of coal and iron on government owned lands. Nasty steel, evil copper, conniving gold. Bad. Oil? Well Hey! Hold on a minute! Something needs to feed government lawyers' and environmentalists' SUVs. Where did all that copper, zinc and iron come from in those metal, glass, plastic and rubber monsters? Over there in Asian mines, they figure. So who is working? They slam their SUV door and wave. Their nephew it appears, doing reports on settling waves of rich immigrants to the pacific coast. Financial tourists, it seems, who are eager to buy up our natural resources and source our markets. Ouch! Those bullets in the foot really hurt.
EC<:-} |
