CHAPTER 6 GOVERNMENT TAKE TOTAL TAX BURDEN IMPOSED ON ACTIVE MINING OPERATIONS BY SELECTED POLITICAL ENTITIES
| Jurisdiction | United States |
(Feb 1995)
GOVERNMENT TAKE TOTAL TAX BURDEN IMPOSED ON ACTIVE MINING OPERATIONS BY SELECTED POLITICAL ENTITIES
Robert E. Cameron
Alva L. Kuestermeyer
Behre Dolbear & Company, Inc.
New York, New York
TABLE OF CONTENTS
I. FOREWORD
II. APPROACH
III. CHOICE OF POLITICAL ENTITIES
IV. THE POSTULATED MINING OPERATION MODEL
V. QUALIFYING FACTORS
VI. COMPARISON OF AFTER TAX CASH FLOWS AND DCFROR'S
A. Political Entity Basis
B. U.S. Repatriated Basis
VII. SUMMARY DISCUSSION AND OBSERVATIONS
VIII. ACKNOWLEDGEMENTS
IX. ADDENDA
LIST OF TABLES
1. Comparison of After Tax Net Cash Flow and DCFROR on an Earnings and Capital Non-Repatriated Basis
2. Comparison of After Tax Net Cash Flow and DCFROR on an Earnings of Capital Repatriation Basis
3. Matrix of Applicable Taxes
4. Constitution of Tax Take Among All 13 Entities on a Repatriated Basis
5. Present Value Ratios of Repatriated Net Project Equity Cash Flow to Total Government Take at Varying Discount Rates
6. Comparative Ranking of Repatriated After Tax DCFROR on a Pure Tax Basis and a Pure Cash Operating Cost
APPENDICES
Appendix A—Pre-Tax Cash Flows of Modeled Mining Operation and After Tax Cash Flows By Political Entity
Appendix B—Mechanics of Tax Burden Quantification By Political Entity
———————
[Page 6-2]
I. FOREWORD
Exploration for precious and non-ferrous metal deposits — the lifeblood of the minerals and metallic mining industry — has over the past several years declined in the United States. A number of causes are offered, ranging from excessive environmental regulation to prohibitively long and costly permitting procedures to political and grass roots hostility. The beneficiaries of the decline in U.S. based exploration activity have generally been the Central and South American countries, many of which are experiencing unprecedented levels of exploration and mine-development capital investment. The reasons are the opposite of those proffered for the U.S.
The paper examines the tax climate and quantifies the tax burden on mining operations of some of the beneficiary countries, as well as quantifying the consequent effect on the rate-of-return to the mining operation sponsor. The result or finding of the tax and rate-of-return quantification leads to the conclusion that, in addition to the causes and reasons put forward in the foregoing paragraph, the change in venue for exploration may also be influenced by taxation.
II. APPROACH
Behre Dolbear (BD) postulated a typical gold mining operation and, over two years of development and a ten-year mine operations life, prepared a leveraged, pre-tax cash flow generation estimate. The estimate yields a pre-tax discounted cash flow, rate-of-return (DCFROR), also known as the internal rate-of-return (IRR). The regulations of all major taxes — income and otherwise — were then applied to the model mining operation to yield a leveraged, after-tax cash flow generation estimate with attendant after-tax DCFROR. The cash flows and DCFROR's, on an after-tax basis are compared among 13 political entities (countries, states and provinces).
The comparison is two-fold, namely:
1. on a political entity basis, as if the generated cash remained in the country of origination;
2. on a U.S. sponsor basis, as if the generated cash were repatriated to a U.S. owner and investor.
[Page 6-3]
III. CHOICE OF POLITICAL ENTITIES
Thirteen political entities are compared, in alphabetical order:
1. Argentina
2. Bolivia
3. British Columbia
4. Chile
5. Colorado
6. Ecuador
7. Guyana
8. Indonesia
9. Mexico
10. Nevada
11. Ontario
12. Panama
13. Peru
The 13 entities were chosen because of their relatively well established tax regimes and, in the case of the 9 non-North American entities, because of the influx of exploration and development funding. More specifically:
1. Colorado — as the site of the International Resources Law II meeting, was felt by BD appropriate to serve as a "reference state".
2. Nevada — continues to attract exploration funding and provides a relatively favorable tax climate, possibly the most favorable in the U.S.
3. British Columbia and Ontario — were chosen to provide a comparison with the U.S. as the "other part" of North America.
4. Mexico — illustrates the effect of NAFTA.
5. Panama — was felt by BD to offer the most favorable combination of benign tax regulations and bulk tonnage (open pit) mining potential.
6. Peru, Chile and Bolivia — constitute the classic core of metallic mining in South America.
7. Argentina — currently enjoys the greatest "boom" in exploration funding of all of the South American countries.
8. Ecuador and Guyana — given their relatively small land size, both countries are experiencing unprecedentedly high levels of exploration funding.
9. Indonesia — was chosen to provide a comparison with South American countries. Indonesia is currently the recipient of significant exploration funding for its bulk tonnage, open pit mining, copper and gold potential.
[Page 6-4]
There are a number of additional political entities which were considered for inclusion. The entities considered and the reasons for exclusion are as follows:
1. Venezuela and
2. Brazil — the respective governments appear too recent and the respective fiscal regimes appear in too great a state of change to provide credence to the applicability of current tax regulations.
3. Colombia — depending on the location within the country, in addition to regulatory taxation, there is a form of additional and significant taxation as payments to guerrillas and drug cartels in return for "peace in operations". Because of this political and civil situation, the country is an enigma.
4. Many of the C.I.S., former Russian republics — taxation regulations do not appear fixed and, in part, do not exist. The government "share" is often negotiated, with at best modest similarity between the results of two agreements negotiated by unrelated parties, each with the same government.
IV. THE POSTULATED MINING OPERATION MODEL
The model is an open pit, agitation cyanide leach operation producing gold dore. Three million tons of ore grading 0.06 oz gold per ton of ore are processed per year at a waste-to-ore ratio of 5 to 1. The operation occupies and controls three square miles.
Gold production the first year is 153,000 ounces at a recovery of 85%. Thereafter, gold production is 165,000 ounces annually at a recovery of 92%. Total mine operating life is 10 years. The average constant realized gold price is $380 per ounce.
Operating costs per ton of ore processed excluding the first year of production are $9.91 broken out as:
1. mining — $5.10
2. processing — $3.81
3. G and A — $1.00
Of the $9.91 per ton of ore processed operating cost:
1. 30.2% or $2.99 is labor
2. 56.0% or $5.55 is consumables and supplies
3. 9.7% or $0.96 is power
4. 4.1% or $0.41 is fuel
[Page 6-5]
There is a two-year development and construction-to-production period. The capital cost is $71,300,000, of which 15,000,000 is mining equipment. Pre-production stripping of waste costs an additional $6,750,000. The mining equipment is replaced towards the end of year 5 for an additional cost of $15,000,000.
The initial required capital of $71,300,000 is leveraged two-thirds loan capital and one-third equity capital. The interest rate is 10% and the loan repayment period is 5 years from the start-up of production.
The pre-production stripping cost of $6,750,000 is 70% expensed and 30% capitalized. The expensed portion results in a tax loss carry forward. The capitalized portion is amortized over the first five years of operations.
The above described, pre-tax, leveraged mine operating model generates interest payments of $16,260,000, and a net cash flow of $214,969,000. The DCFROR is 43.24%. The pre-tax unleveraged mine operating model generates a net cash flow of $231,229,000 and yields a DCFROR of 29.98%.
V. QUALIFYING FACTORS
The comparison of after-tax cash flows and DCFROR's assumes that, irrespective of the political entity, operating costs in each country, state or province are identical. This assumption is obviously fantasy.
While BD believes it has taken into account all major taxes for each political entity, BD has ignored payroll taxes. Payroll taxes vary widely among the political entities, and taking such taxes into account would require the input of labor productivity, an effort of considerable magnitude.
BD has also not taken into account:
1. property or claim acquisition costs;
2. minimum alternate tax calculations;
3. foreign tax credits.
All of the above, if considered, would render the comparison unnecessarily more complicated, and ignoring the above is not believed by BD to compromise the validity of the comparison.
[Page 6-6]
Finally, BD points out that it is not a firm of accountants, and that consequently there may be incorrect interpretation of some of the regulations resulting in tax quantification errors. However, consistency in interpretation has been applied, yielding what BD believes to be good accuracy in the comparative differences among the political entities considered.
VI. COMPARISON OF AFTER TAX CASH FLOWS AND DCFROR'S
A. Political Entity Basis
Table 1...
To continue reading
Request your trial