A cost-benefit analysis

Wednesday September 21, 2011

By Richard Mostyn

It’s impossible to support the Liberal and Yukon parties’ indifference toward 106-year-old placer gold royalties.

But it is clear why they are turning a blind eye. The costs outweigh the benefits by a wide margin.

In this election, both the Liberals and the Yukon Party are positioning themselves as the players best able to manage the economy.

And, amid this metal-price-driven boom, business people are a skittish bunch - a bit like a colt, worried the wrong rider will plunge them over a cliff.

Radical actions, like raising royalties, would be considered reckless.

So it’s not going to happen.

The Liberals are wooing this group - taking an aggressive approach to power generation, promising stable taxes and royalties.

But they are also including a strong mix of progressive policies - preservation of the Peel, a downtown sobering centre, support for an animal shelter, child-care assistance and supported housing initiatives.

The Yukon Party is promising a continuation of the last eight years by promising low taxes and royalties and wide-open development, including, it is assumed, development of the Peel. It is tossing crumbs to the social side - a yet-to-be-defined tax credit to people caring for their loved ones and some undetermined money to build lifts for seniors.

It has also announced a youth shelter, but it won’t say whether it will be a new or existing facility.

And both will maintain placer gold royalties that were set in 1906 when gold was $15 an ounce and gas was a staggering 14 cents a gallon (equivalent to about $4 a gallon in 2004 dollars), which, at the time, prompted calls for research into a cheaper alternative fuel, like alcohol.

So today, placer operations in the territory are paying 37.5 cents an ounce on gold they wash from the territory’s rivers. Currently, the price of an ounce of gold is $1,790.

Both the Liberals and the Yukon Party assert the placer industry is marginal and, while gold prices have gone up (they have risen 300 per cent since 2006, when it was $600 an ounce) they suggest, lamely, so have gas prices (a barrel of oil was $62 in 2006, today it’s $86, and it’s still relatively less expensive than it was in 1906).

As a result, neither will monkey with the placer royalty.

It is, if you like, the cost of these politicians doing business with business.

In 2009, the territory’s placer operations mined 43,500 ounces of gold.

The territory collected $16,000 on that gold. The industry sold it for $47.6 million, less the amount it spent on diesel fuel.

A nominal increase in the placer royalty to, say, 2.4 per cent of the current price of gold (equivalent to 1906), would net the territory $1.1 million a year, enough to cover the cost of a new animal shelter, but not a lot in the territory’s federally fueled $1 billion budget.

And it would cost the support of skittish business types, who see any increase to taxes or royalties, no matter how reasonable, as an attack on their bottom line.

So the Liberals and Yukon Party won’t pull the trigger.

But the NDP will.

Already seen as an anathema to business, it has nothing to lose. So, like the Liberals, it will protect the Peel. And, unlike the Liberals, it has promised to raise the royalties on placer gold to some yet-to-be-determined figure. But, before announcing its new royalty regime, it must consult.

The money it secures in the end will flow to a trust, similar to Alberta’s Heritage Fund - though it certainly won’t be as flush.

If Hanson haggles hard, and achieves a 2.4 per cent royalty, it would take 1,000 years at current placer production to reach $1 billion.

Certainly not enough for the territory to pay its own way.

But it’s a start.