§ 6.8 - Mineral Leases

• Jurisdiction: Washington

§6.8 MINERAL LEASES

This section discusses terms and conditions applicable to mineral leases on federal, state, and private lands.

(1) Federal and state lands

The terms and conditions under which coal, oil and gas, and leaseable minerals may be removed under a lease from the federal government are basically fixed by statute and regulation. See 30 U.S.C. §§ 181-287 (and regulations thereunder).

Under some special statutes, other minerals, including minerals that normally would be locatable under the General Mining Act, may be leased under special provisions. The statute establishing the Ross Lake and Lake Chelan National Recreation Areas in Washington provides that locatable minerals may be leased. 43 U.S.C. §387. This is in addition to the lease of minerals normally handled by a lease under the federal leasing statutes.

Mineral leases of state lands and minerals reserved by the state are entirely under terms established by statute and regulation. See Chs. 79.14 & 79.15 RCW.

Mineral leases of Indian lands are jointly negotiated by the Indian tribe involved and the Bureau of Indian Affairs of the Department of the Interior under 25 U.S.C. §396, and regulations thereunder.

(2) Mining leases

Mining leases have proven almost impossible to standardize, and there are many variations. The simplest approach, applicable to coal and some other bedded deposits, may simply provide for payment to the lessor of a unit price for materials removed. Many times this type of arrangement has a price adjustment clause, depending upon market conditions and/or other variants to adjust the price.

The same type of reasoning is carried into metalliferous mineral leases that are drawn on the basis of payment of a percentage of the gross production from the property, typically referred to as "net smelter returns." The historic concept of net smelter returns is a formula to value the production at the point of shipment from the property. In regard to minerals shipped to a smelter, the value generally is the same as that determined as "gross income from the property" under I.R.C. §613. Under this approach the basic lease document may include adjustment procedures based upon the grade of material processed, the price of metals, or other considerations.

Because of the difficulty in dealing with a fixed percentage of gross under fluctuating market conditions in which the gross may have no necessary relationship to profits, a surprisingly high percentage of...