GEOL 3300: Earth Resources

Mineral Economics

MINERAL ECONOMICS
I. Introduction A. Overview 1. mineral deposit is a concentration of mineral/commodity in the Earths crust 2. before extraction, it must become an ore deposit a. that is, it can be extracted at a profit given current economic, legal, environmental and political conditions 3. what is a profit is determined by the organization extracting or considering extracting the commodity a. corporation it would be operating cost minus expenses b. for company owned by the government it might be jobs 4. mineral economics are complex B. Types of Organizations C. Mineral Taxes 1. income: rate or percentage of the operating profit a. may have sliding scale higher rate for higher profits 2. depletion allowance special deduction a. extraction of non-renewable resource b. destroying its reason to exist as produces c. deduction compensates producer for the loss of its asset d. in U.S., there are two methods to calculate a depletion allowance 1) cost depletion: deduction even if no profit made a) calculate value of ton and multiply it by the number of tons produced 2) percentage depletion a) multiple percentage times revenue 3) corporations have to calculate both and use the largest 3. tax holidays: periods in which no taxes imposed a. encourage exploration or production in areas with high employment b. used in Australia (for gold) and Ireland (for zinc) successfully no expiration date 1) ultimately taxes returned to normally after operation successful c. used in Canada for gold but was a disaster 1) had an expiration date 2) companies high-graded in extraction (removed all high grade ore) a) reduce value of low-grade ore causing early mine closures 4. ad valorem taxes: tax value of assets and commodity that is produced a. paid whether profit made or not b. reserve tax: levied on physical property 1) generally, a percentage of the propertys value c. severance tax is applied to a unit of production 1) applies to production from state or province land 2) applied to reimburse citizens for lose of their natural heritage d. royalties are paid to a private landowner for production from his/her land 1) in this case, the producer would also have to pay a severance tax e. excise tax: based on value of production 1) doesnt matter if operation was profitable or not II. Mineral Law and Land Access A. Introduction 1. landownership can be very complex a. simplest case would be where one controled the surface and everything beneath it 2. more commonly divided into separate parts called rights

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GEOL 3300: Earth Resources

Mineral Economics

a. surface 1) generally defined to stop below immediate surface 2) in Texas goes down 200 feet b. water c. timber d. mineral 3. split ownership of land is common in older mineral producing districts a. for example, Appalachian coal mining areas 4. mineral ownership follows two general principles a. English mining law: owner of surface owns minerals 1) United States and Canada b. regalian legal systems: state owns minerals regardless of who owns surface 1) Germany B. Landownership 1. in original colonies and some older states, land divided irregularly a. based on English system of metes and bounds b. indicated by landmarks such as trees and fences 2. in southwest, land originally done by Spanish land grants 3. land west of Pennsylvania was surveyed under the Land Ordinance Act of 1875 a. divided land into tiers and ranges that is a six mile grid pattern b. divided into sections that are a square mile with 640 acres (2.59 km2) 4. U.S. has 9.3 million km2 that is roughly divided equally between federal, state and local governments and private groups and individuals a. of this land, 4.6 million km2 was controlled by the federal government but has been transferred b. 1.6 million km2 was transferred to individuals under the Homestead Act of 1862 and the Desert Land Act of 1877 1) person could get 160 acres (a quarter section) if you lived on it and improved it 2) most homesteaders actually failed c. 1.33 million km2 went to states 1) for constructing schools, railroads, canals and other infrastructure projects d. 562,000 km2 went to companies and states to build railroads through the West 1) generally, odd-numbered sections of land in a strip 20 miles wide centered on the railroad route 5. federal land includes national parks, monuments, scenic and recreational areas and wilderness areas a. national forest, grasslands C. Federal Land Laws 1. access to U.S. land for mineral exploration is controlled by a number of laws (see table) 2. mostly controlled by the discovery-claim system a. based on experience of prospectors in California gold rush of 1849 b. discoverer of deposit had right to claim ownership 1) codified in General Mining Law of 1872 2) combination of Lode Mining Law of 1866 and Placer Mining Law of 1870 3. law divided mineral deposits into two types a. those in bedrock - lodes b. those in river and stream gravels placer 4. any individual or company can stake an unlimited number of claims a. size varies with type of deposit 1) measure 600 x 1500 feet for lode deposits 2) 20 acres for placer deposits

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GEOL 3300: Earth Resources

Mineral Economics

b. must be marked on ground c. registered with Bureau of Land Management (BLM) 5. under original law, claims could be held forever by doing $100 of exploration work (assessment work) annually on each claim a. changed in 1993 Appropriations Act to annual rental of $100/claim 6. can also purchase the surface and mineral rights to the land, patenting a. original requirements: 1) $500 of improvements on the claim 2) public notification of intent 3) payment depending upon type of claim a) $2.50/acre for placer b) $5.00/acre for lode b. abused to get land for vacation homes among other things c. changed so claim could be patented only if they contain deposits: 1) good enough to merit work by prudent person; and 2) had a marketable minerals 7. the 1872 mining law, allowed claims only in Alaska, Arkansas, Arizona, California, Colorado, Florida, Idaho, Louisiana, Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming 8. Federal Land Policy and Management Act of 1976 required registering of all active mining claims by October, 1979 a. removed minimum of 1.2 million acres of inactive claims 9. 1872 law was designed for small deposits covered by a few claims a. contains extralateral rights that allows following vein underground if it moves outside the claim area b. gives miners priority over all other users c. no payment of fees to hold land d. no environmental safeguards D. Mineral Leasing System 1. 1872 law did not work well for large or concealed deposits such as oil, coal, gravel, etc. 2. creation of a second series of laws governing access to federal lands for mineral exploration and production 3. started with Mineral Leasing Act of 1920 a. applied to coal, oil, oil shale, natural gas, sodium minerals and phosphate rock 4. later amended to include sulfur in New Mexico and Louisiana a. also potassium minerals and geothermal 5. leases acquired by: a. competitive bidding required for lands with known mineral deposits b. noncompetitive bidding 6. big discoveries and quick profits were often made of the noncompetitive leases a. series of laws eliminated this b. allowed noncompetitive bidding only on land offered for competitive bidding but that did not sell 7. leases now require a. payment of royalties b. rental fees c. federal government also retains title to the land E. Administration 1. Bureau of Land Management has responsibility for mineral resources on federal land a. Forest Service has authority for things on forest land 2. must determine environmental affect of all activities on federal land a. do an environmental assessment

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GEOL 3300: Earth Resources

Mineral Economics

1) basis for decision on land use 3. if land open for mineral exploration a. they review and approve/disapprove the exploration plans 4. BLM does onshore leasing and Minerals Management Service does offshore leasing a. identify tracts of land for potential lease and offer them for bid b. annual rental is: 1) onshore gas and oil a) $1.50/acre for first five years b) $2.50/arce afterward c) royalty of 12.5 % of production value 2) offshore gas and oil a) shallow water: 16.66 % b) deep water: 12 % c. bids must have work plan with an environmental assessment 1) compared on basis of a) work plan b) bonus bid: nonrefundable bid offered for right to explore lease 2) first years rent and bonus bid due on signing 5. federal leases are broken down as follows a. 70 % for oil and gas b. 15 % for coal and other minerals c. 10 % on Native American land 6. mineral production from federal land is the major component of US production and large source of funds for U.S. treasury a. between 1950 and 1989 produced: 1) 16 Bbbl oil 2) 123 Bcf natural gas 3) 2 billion tons of coal 4) 100 million tons of phosphate, potash and sodium b. in 1990, offshore leasing was the fourth biggest revenue source - $3 billion c. bonus bids are important because of size and paid whether or not anything produced 1) from 1954 to 1992: $57 billion from bonus bids 2) in same period, royalties paid $40 billion

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