Mining Company Risk
By David Morgan

May 07, 2008

In last weeks column we discussed some risks associated with the junior mining sector. In this week’s article it is important to recognize what has just been reported about mining operations in Venezuela, an article posted on International Business Times yesterday stated, "Hecla Mining’s Isidora gold mine is the third operation in just one week in Venezuela’s mineral rich Bolivar State to suffer a roadblock. Venezuelan workers have stalled operations of the country’s largest gold miner, citing poor working conditions and demanding that President Hugo Chavez nationalize the mine."

In the March issue of The Morgan Report (TMR) we interviewed Laura Skaer of the Northwest Mining Association to look at some potential mining law changes that are proposed in the United States.  But we went on to state that we forecast more difficulty in the mining sector on a worldwide basis. The Hecla situation will most likely be resolved and we are not out to make more of it than is evident, but we consider it our duty to give you the big picture and the long-term perspective. Most people do not follow the mining industry closely but some proposed changes have potential long-range effects.

The U.S. House of Representatives passed House Resolution 2262, "The Hard Rock Mining and Reclamation Act of 2007," on November 1, 2007. This bill is a disaster for the United States mining industry and potentially other jurisdictions as well. This bill will create serious problems for the mining industry in the United States if it becomes law.

There are many significant changes in HR 2262, but some of the high points are that it imposes a 4% gross royalty on existing operations with commercial production and an 8% gross royalty on all other claims, subjecting the Unites States to significant takings litigation. Why? Because the United States Supreme Court has ruled that valid, unpatented mining claims are exclusive possessor interests in federal land for mining purposes, which entitle claim holders to extract and sell minerals "without paying any royalty to the United States as owner." Union Oil Co. v Smith, 249 U.S. 337, 348-349 (1919). So as this proposed change moves through the Senate, we expect to see several modifications made. However, this does not mean that the compromises made will be beneficial to mining in general.

Our thinking is that the royalty will be knocked down for existing miners and perhaps made into a net royalty rather than a gross royalty. This still would put many projects into jeopardy and it could hurt the mining industry. Additionally, our guess is that new mines or start-ups would be charged at a higher proportion. If our guess were correct, this would make it even more difficult for a new project based in the U.S. to be built. It could put further pressure on new projects, and we think, possibly, that companies that already are mining might be at an advantage over those that need to be developed.

Our concern went beyond the United States when in our report we asked, “What is to prevent Mexico, South America, Canada or Australia from looking at the U.S. as a guideline for them to impose new mining legislation that profits government and hinders the mining industry?”

So, we strongly appeal to our readers to take action, get on the North West Mining Association Web site and send letters to those who represent you if you live in the U.S.  We also suggest that those in the industry take our lead and get this message out to the press, radio, and even the business television audience. This, in our view, is the most important issue in the mining industry today, and hardly anyone is talking about it. It might just be one of the reasons the junior miners are doing so poorly. Perhaps the market senses some very detrimental legislation over the next few years.

David Morgan
E-mail: ibtimes@silver-investor.com