Mining savings for a rainy day

The Alaska Permanent Fund gives each Alaskan an annual dividend cheque derived from investments made from oil and gas royalties the state has collected. Section 15 of the Alaskan State constitution reads: "At least 25 per cent of all minera

The Alaska Permanent Fund gives each Alaskan an annual dividend cheque derived from investments made from oil and gas royalties the state has collected.

Section 15 of the Alaskan State constitution reads: “At least 25 per cent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.”

At the start of 2014, the Alaska Permanent Fund was worth about $50 billion. Most of the investment income earned on that principal is paid out to Alaskans in yearly dividend cheques.

And it’s a tidy little dividend that each Alaskan receives. In 2014 it was $1,884 for every Alaskan. And that’s in U.S. dollars, too.

The Norwegians have chosen a different approach. They took their oil-and-gas royalties and related revenue and invested it in a fund that is now worth over one trillion dollars.

This fund has some unusual rules, such as: the government of the day can only withdraw four per cent of the funds’ assets in any given year; all the money is invested abroad; and there are ethical guidelines dictating how the money can be invested.

Norwegians don’t get an annual dividend cheque, but all that money will be available for when the oil revenue runs out.

Of course, we don’t have to look far to find a failed resource revenue fund. The Alberta Heritage Savings Trust Fund only has about $17 billion in it.

This is shocking when one considers that between 1980 and 2014, Alberta collected almost $190 billion in non-renewable resource revenue and royalties. They only managed to save less than 10 per cent. The rest, well, seems to have been fritted away by the government of the day.

There are no examples this author is aware of where these royalty funds are deriving their revenue from sources other than oil-and-gas reserves. It would take a jurisdiction particularly blessed in gold, silver, copper and zinc to even contemplate such an initiative. Such a jurisdiction could, of course, be the Yukon.

It is hard to estimate the value of the minerals extracted from the Yukon since the 1890s, but it’s safe to say it is probably a lot.

And doing a little thought experiment, if the Yukon had socked away $2 million a year each year, starting one hundred years ago, and then followed a Norwegian-style investment model, the Yukon could be sitting on a fund easily worth over $5 billion.

This does presuppose that whatever government in power, irrespective of political stripe, actually obtained a decent royalty for the minerals in the ground being extracted.

This isn’t happening now. In 2013 about $69.4 million worth of placer gold was extracted and the Yukon received just under $18,000 in royalties.

To get anywhere near the amounts calculated in the thought experiment stated above, the royalty rate on placer gold would have to be about two and a half per cent.

Oddly enough, that was the royalty amount set up way back in the early 1900s. The problem is that gold is always assumed to be worth $15 per ounce, the value it was a hundred years ago. Today the true value is about $1,200 an ounce.

Establishing a mineral heritage fund would have to be carefully managed. It mustn’t become an economic goody jar for whenever the government of the day runs into a financial problem.

A Yukon Mineral Heritage Fund should be set up to ensure the Yukon has a stable financial platform for those years when mining royalties are low or non-existent.

It should be careful how it is invested. The Norwegian fund (all one trillion dollars of it) makes it a point to not invest in Norway. They don’t want to create a bubble economy.

As to how the money is paid out, readers can look to either the Alaska fund (giving a yearly payout to residents) or the Norwegian one (basically good ol’ socialism in the Scandinavian style).

The key to all of this is getting a decent royalty from the mineral resources that are extracted. And then keeping the money safely away from the spendthrift governments of the day and saving it instead for a rainy day.

Lewis Rifkind is the mining analyst for the Yukon Conservation Society.

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