Ore bodies are created, not found
There is a widespread belief amongst people outside our profession that all ore bodies that have yet to be found already exist. They are imagined as out there, ready-made by nature, waiting for some lucky prospector or mining company to stumble upon them and so make their fortune. That is invariably the attitude of Government, who consider all ore bodies, both those known and those yet to be found, as belonging to them – hence they issue a licence to the exploration company to go out and locate them, and when they do, the Government will use its notional “ownership” of that asset as a justification for collecting money from the company for the right to exploit “their” resource. By this I do not mean the tax that every citizen or company has to pay on their income or profits, but special taxes, unique to the extractive industries, called a Royalty or a Resource Rent Tax[1] .
Ore bodies are not pre-existing things, location temporarily unknown, waiting to be found. Ore bodies are human artifacts and they are created, not found. Remember the correct definition of “ore” as a “mineral concentration that can be mined at a profit”. The word “profit” shows that this is an economic, not a geological definition. Ore bodies have as their basis some natural concentration of minerals, but once that concentration is located (no easy task) the making of an ore body is the result of human ingenuity, effort and risk-taking (a huge amount of that). A particular mineral concentration can become a profitable mine in the hands of one company and worthless low-grade mullock in the hands of another. Ore bodies should therefore be considered as human creations in the same sense that a work of art or a masterpiece of engineering is a human creation. A profitable mine is the joint production of a large team of people – geologists, mining engineers, metallurgists, financiers etc..
It is difficult being a miner. Not only are they subject to the unpredictable vagaries of geology, metal prices and government cupidity, the resource they exploit is fixed in place, and that makes them vulnerable. If a government imposes excessive taxes and regulations on a manufacturer, or expropriate their factories without compensation, the manufacturer can walk away and set up shop in another country competing for his business. Many countries, desperate for investment, offer cheap labor, skilled workforce or adequate infrastructure. But the miner is shackled to his resource – he cannot so easily walk away. Many 3rd World countries take advantage of this. There is a great temptation (not often resisted) to offer easy tax regimes to encourage explorers to locate and develop ore deposits in their country, then impose high tax/royalty regimes, or even expropriation, once the company has created a viable ore body and invested major capital expenditure to bring it to start-up. This is property theft, but governments who consider the ore body to be their property in the first place, don’t see it that way. They see it this way: “Thanks very much for finding that mine of ours that we had temporarily misplaced – as a reward we will let you mine it on our behalf so long as you take all the risks and let us have all the profits”
A good example is the giant copper/gold Oyu Tolgoi mine in the Gobi Desert of Central Asia. When discovered in 2001, the Mongolian Government, desperate to encourage metals exploration and foreign investment, offered favorable tax status for future mining operations. Once the mine was operating, however, and with $4 billion of Rio Tinto’s money already sunk in the ground, the Mongolian Government “re-negotiated” to secure for themselves a free 34% ownership of the deposit plus an additional 2% “Net Smelter Return[2]” on total metal production.
Only when the goose that lays the golden eggs has been finally squeezed to death, will some governments learn the error of their ways. An exceptional resource such as Oyu Tolgoi (or a behemoth like Rio Tinto) can stand a lot of squeezing, but what chance would a small to middling, average-grade mine, or a Junior Miner, stand in a regime like the current one in Mongolia? The example from Mongolia could be repeated from all around the world.
The vast majority of metal mines barely make a profit and when they do it is usually only for a few years until the resource runs out or the metal price crashes. It is only the possibility of finding the rare, large and rich deposit in a politically stable country in a time of high sustained metal prices that makes the game worth pursuing. But should a mining company hit that sweet spot and substantial profits start to flow, the cry will usually go up to tax them with a special “super profits” tax. Does anyone call for a super profits tax for the likes of Goldman Sachs, Microsoft, Amazon or Apple?
Who would be a miner?
[1] By definition, a royalty is money paid to the owner of an asset or intellectual property for the right to use that asset.
[2] A Royalty based on NSR (net smelter return) is the worst kind. It means that the recipient takes a fixed percentage of the value of metal extracted, irrespective of whether the mine is operating at a profit or a loss.