Hard luck on those hard rock royalties

Lewis Riftkind Those who are immersed in the Yukon mining sector - and they are getting to be few in numbers these days given the collapse in commodity prices - might have noticed a bit of a buzz around some proposed hard rock mining projects. Kaminak Go

COMMENTARY

by Lewis Riftkind

Those who are immersed in the Yukon mining sector – and they are getting to be few in numbers these days given the collapse in commodity prices – might have noticed a bit of a buzz around some proposed hard rock mining projects.

Kaminak Gold has its White River region Coffee Creek project splashed all over the media, and last week BMC Minerals hosted community open houses on its Finlayson Lake area Kudz Ze Kayah project. Both of these projects are gearing up to go through the Yukon Environmental and Socio-economic Assessment Board and then the Yukon Water Board.

Should they proceed to the mine operating stage, there will be excitement over the jobs they will create, the contracting opportunities open to Yukon companies and, of course, the royalties they will pay to the Yukon territorial government.

No doubt there are those who dream that one day the Yukon will be self-sufficient and not require transfer payments from Ottawa because mining royalties, such as the ones from Kaminak and BMC Minerals, will pay for everything.

And if you believe that I’ve got a pedestrian suspension bridge over the Pelly River I’d like to sell you. Don’t like that one? How about a Miles Canyon pedestrian suspension bridge? Two for the price of one? Sorry, that’s just a fantasy, much like the royalties from hard rock mines.

This column is not about Yukon placer mining royalties, although let’s take this opportunity to remind everyone there is an outrageously low royalty charged on placer gold, 37.5 cents an ounce, regardless of the current price of gold. As of mid January 2016, the gold price is $1,090 per ounce. In 2013 Yukon placer miners extracted $69.4 million worth of gold but only paid about $18,000 in royalties. This column is about hard rock royalties, which is what the big mines pay, and for the Yukon public the news on hard rock royalties isn’t much better than the placer royalties.

Before we go any further, it is important to define a royalty. A royalty is not a tax, but a payment to governments (either First Nations or Yukon) for non-renewable and scarce resource such as metals like gold, zinc, copper etc., that a company extracts. The value of the royalties should not be based on the company’s ability to pay, but on a real estimate of the social, ecological and economic value of the minerals extracted to both present and future generations. The minerals in the ground belong to Yukoners, and we should get paid royalties when a company removes them.

Unfortunately the Yukon government has, in its wisdom, chosen a profit royalty as opposed to a net smelter royalty. In the Yukon a profit royalty is based on annual mineral production and sales on a stand-alone mine basis. Under this system there is no royalty on the first $10,000 of output and after that the royalty rate varies with the output of a mine up to a maximum rate of 12 per cent on output of greater than $35 million.

The real kicker, though, is the value of the output of a mine is determined by subtracting eligible expenses and allowances from the value of minerals produced by a mine during the calendar year.

A royalty should be the government’s share of the mineral extracted, regardless of the costs incurred in doing that extraction. But in the Yukon, companies get to subtract expenses and thus reduce the amount of royalties paid.

A better system is the net smelter return. This formula comes closest to ensuring the Yukon receives its share of the value of the minerals extracted through mining. It is the formula that mining companies rely on when they are negotiating with each other. It is also the formula being used between Selkirk First Nation and the Minto mine operators. The Minto mine is on Selkirk First Nation Category A land, so the First Nation gets all the royalties from that particular mine.

Net smelter return royalties are calculated on the amount received by the mine from the sale of the mineral product to the treatment plant that converts the output of the mine to marketable metal. (The Yukon government also calculates a profit-based royalty for Minto and transfers that money to the Selkirk First Nation.)

From the gross proceeds received there may be deductions for costs incurred by the owner after the product leaves the mine property and before sale, such as the costs of transportation, assaying, refining and smelting, but no deductions are made for the operating costs of the mine. It is not an absolute royalty, which would mean a company would have to pay on the value of the minerals they have extracted without the benefits of any deductions.

However, any hard rock mines that operate on land controlled by the Yukon are not subject to this more reasonable royalty calculation, only profit royalties. The profit royalties allow the deduction of so many expenses before the profit calculation that it is almost impossible to arrive “in the black” at the end.

For example, in the two years that the Wolverine mine near Frances Lake was actually operating it didn’t pay a single penny in royalties. In the four years that the Bellekeno mine in Keno was running it only paid $724,113 in royalties.

In comparison the Minto mine, on Selkirk First Nation land but using the net smelter return royalty system and not the Yukon government’s profit royalties method, has paid over $13.5 million in royalties over seven years.

Should Kaminak and Kudz Ze Kayah mines reach the operating stage it is highly unlikely that the Yukon government will see much, if any, money for royalties for the non-renewable minerals that will be permanently removed from the Yukon.

Lewis Rifkind is the Yukon Conservation Society’s mining analyst.

Correction: An earlier version of this commentary stated that royalties from the Minto Mine were calculated using a net smelter royalty and not a profit royalty calculation. In fact, both are used. The Yukon government calculates a profit-based royalty (and then transfers it to the Selkirk First Nation) and there is also a net smelter royalty between the mining company and the Selkirk First Nation.

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