Legislature(2015 - 2016)BARNES 124

02/24/2016 08:30 AM RESOURCES

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08:35:25 AM Start
08:36:10 AM HB253
10:06:48 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time Change --
Heard & Held
-- Testimony <Invitation Only> --
Mining Overview
+ Bills Previously Heard/Scheduled TELECONFERENCED
       HB 253-ELCTRNC TAX RETURN;MINING LIC.  TAX & FEES                                                                    
8:36:10 AM                                                                                                                    
CO-CHAIR  TALERICO  announced that  the  only  order of  business                                                               
would be the  annual mining overview as it relates  to HOUSE BILL                                                               
NO.   253,  "An  Act requiring  the electronic  filing  of a  tax                                                               
return or report  with the Department of  Revenue; establishing a                                                               
civil  penalty for  failure to  electronically file  a return  or                                                               
report;  relating  to exemptions  from  the  mining license  tax;                                                               
relating  to the  mining  license tax  rate;  relating to  mining                                                               
license  application, renewal,  and  fees; and  providing for  an                                                               
effective date."                                                                                                                
8:37:20 AM                                                                                                                    
DEANTHA CROCKETT, Executive  Director, Alaska Miners Association,                                                               
began a PowerPoint presentation  titled "Mining Industry Update."                                                               
She indicated  that the Alaska  Miners Association (AMA)  has the                                                               
large  metal mines  and  projects in  their  membership but  also                                                               
coal, sand and gravel, placer  mining, and the business community                                                               
that does  business with the  industry.  Referring  to PowerPoint                                                               
slide  2,   titled  "Recent  Safety  Milestones,"   Ms.  Crockett                                                               
highlighted recent  safety milestones and discussed,  as a safety                                                               
moment,  a practice  used at  the  Fort Knox  Mine ("Fort  Knox")                                                               
disallowing cell phone use in a shop or moving vehicle.                                                                         
MS. CROCKETT  moved on  to slide  3, titled  "Potential," quoting                                                               
Governor  Walker, "If  Alaska were  a  country, we  would be  the                                                               
eighth most mineral-rich  nation in the world."   She stated that                                                               
although Alaska has world class  deposits, it has only six mines,                                                               
so it  is not producing  to that potential.   She went on  to say                                                               
that Alaska's  modern mining  history is young.   The  two oldest                                                               
metal mines started  operations in 1989 and  were permitted under                                                               
modern  environmental  laws,   like  the  National  Environmental                                                               
Policy Act and the Clean Water  Act.  Alaska's only coal mine has                                                               
a longer history, operating more  than 70 years and through three                                                               
generations of  the Usibelli family.   Ms. Crockett said  that in                                                               
the current  overview, she  wanted to focus  on the  potential of                                                               
the mining industry  to grow and contribute  to Alaska's economic                                                               
diversity, great jobs, state and  local revenue, and more.  While                                                               
Alaska has  only six large  mines, it does represent  some pretty                                                               
impressive economic benefits.                                                                                                   
8:39:38 AM                                                                                                                    
MS.  CROCKETT summarized  those benefits  as listed  on slide  4,                                                               
titled "Only 6 Large Mines."   The benefits include: 8,700 direct                                                               
and  indirect jobs  with an  average annual  salary of  $108,000;                                                               
$83.7 million  paid to state  government; and $18.5  million paid                                                               
to  local governments.   She  added that  mines were  the largest                                                               
taxpayers  in the  Fairbanks  North Star  Borough,  the City  and                                                               
Borough of Juneau,  and the Northwest Arctic Borough.   Mines are                                                               
major contributors in  the Denali Borough and the Nome  area.  In                                                               
2014,  $144 million  went to  Alaska Native  corporations through                                                               
Section 7(i)  and 7(j)  the Alaska  Native Claims  Settlement Act                                                               
revenue sharing  program, and to  date NANA  Regional Corporation                                                               
("NANA")  has received  over $1  billion  from the  Red Dog  Mine                                                               
("Red Dog")  and distributed  $705 million of  that amount.   She                                                               
added that the  benefits of Red Dog have touched  every corner of                                                               
the state.   She cited the latest AMA study  that revealed Alaska                                                               
mines  spend about  $500 million  annually with  over 600  Alaska                                                               
businesses.  She reminded the  committee members that all of this                                                               
spending comes  while maintaining  the highest  environmental and                                                               
safety standards.  She directed  the committee members' attention                                                               
to  the McDowell  Group Inc.  ("McDowell Group")  brochure titled                                                               
"The   Economic   Benefits    of   Alaska's   Mining   Industry,"                                                               
commissioned by  the AMA,  highlighting the  impact of  the small                                                               
mines in aggregate.                                                                                                             
8:41:34 AM                                                                                                                    
MS.  CROCKETT  referred  to  slide   5,  titled  "Alaska  Mineral                                                               
Development Timelines  and Investment,"  and asked  the committee                                                               
to  consider what  it  takes  to bring  a  mine into  production.                                                               
Since   1981  several   billion  dollars   have  been   spent  on                                                               
exploration  at dozens  of  projects, yet  Alaska  only has  five                                                               
metal mines.   To bring a large metal mine  into production takes                                                               
access to  a significant amount  of capital  and a great  deal of                                                               
patience.  She referred  to Fort Knox in the graph  on slide 5 to                                                               
point out that  even the shortest timeline was 12  years to bring                                                               
the mine  to operation.   She  then asked, "Why  does it  cost so                                                               
much and  take so  long?" She asserted  that these  are companies                                                               
that are  building major infrastructure projects  in really small                                                               
communities, and this sets the  Alaska mining industry apart from                                                               
other states and countries with which it competes.                                                                              
REPRESENTATIVE  NAGEAK  asked  if  the timelines  were  from  the                                                               
beginning of mining to today.                                                                                                   
MS. CROCKETT responded  that the timelines are  from discovery to                                                               
first day of production.                                                                                                        
8:43:01 AM                                                                                                                    
MS. CROCKETT referred  to slide 6, titled "Mining  Pays Its Way,"                                                               
to reiterate that mining  companies pay exploration, development,                                                               
and  construction  costs  up  front   and  [the  costs]  are  not                                                               
deductible from net  income.  The costs are  significant, as they                                                               
consist  of  modern  mining  projects   that  require  access  to                                                               
technically advanced  infrastructure often in remote  areas.  She                                                               
gave examples  of these large preproduction  costs, which include                                                               
establishing  power   supplies,  roads,  ports,   and  pipelines.                                                               
Compared  with less  remote  areas, Alaska  is  a very  expensive                                                               
place  to do  business  in  mining.   Alaska's  mines enter  into                                                               
reimbursable  service  agreements  (RSAs)   with  the  state  for                                                               
permitting,  monitoring,  and  oversight,  and  these  costs  are                                                               
billed to  the industry and not  borne by the public  sector.  In                                                               
addition, financial  assurance for  reclamation and  closure adds                                                               
to the cost.                                                                                                                    
MS.  CROCKETT referred  to  slide 7,  titled  "AIDEA's Return  on                                                               
Investment,"   to  describe   the  role   of  Alaska   Industrial                                                               
Development and  Export Authority (AIDEA) in  partnering with the                                                               
mining  industry and  making  investments  to stimulate  economic                                                               
growth.  She  stated that AIDEA's investment in the  Red Dog port                                                               
and road  represent one of  AIDEA's most  successful investments,                                                               
recouping their initial cost and  returning an annual rate of 6.5                                                               
percent.   She also  added that AIDEA's  investment made  the Red                                                               
Dog possible, bringing over a  billion dollars in net proceeds to                                                               
NANA, providing jobs and other contracting opportunities.                                                                       
REPRESENTATIVE NAGEAK  asked for clarification regarding  to whom                                                               
these payments were made.                                                                                                       
MS. CROCKETT replied that the payments were made to AIDEA.                                                                      
REPRESENTATIVE  NAGEAK then  asked  if  the mine  infrastructures                                                               
such as  roads and ports are  turned over to the  state after the                                                               
mines close.                                                                                                                    
MS. CROCKETT  replied that by mandate  the surface infrastructure                                                               
must  be  taken away  and  the  road  reclaimed to  its  original                                                               
8:46:23 AM                                                                                                                    
MS. CROCKETT  referred to  the graph in  slide 8,  titled "Mining                                                               
Industry Trends."   The red  line on the graph  shows "production                                                               
value"  in  billions [of  dollars]  from  2000  to 2015  and  the                                                               
corresponding   ups   and   downs  during   that   time   period.                                                               
"Production value" is  the average metal price,  but Ms. Crockett                                                               
emphasized that this  is not actually what the mines  get for the                                                               
ore that is mined.  The  blue line, representing jobs, is seen to                                                               
correlate with the production value.   During this period of time                                                               
both  the Pogo  Project  ("Pogo") and  the  Kensington Gold  Mine                                                               
("Kensington") started  production.    In Alaska the  addition of                                                               
two mine production sites greatly  influences the trends shown by                                                               
the graphs.                                                                                                                     
MS.  CROCKETT  relayed  the  rates of  "Resident  Hire"  for  the                                                               
various mines  as shown  on slide  9.  They  are: 100  percent of                                                               
Fort Knox employees live in  the Fairbanks North Star Borough; 70                                                               
percent of Greens  Creek Mine ("Greens Creek")  employees live in                                                               
Alaska;  Usibelli Coal  Mine, Inc.   ("Usibelli")  is 99  percent                                                               
Alaska hire;  Kensington is  70 percent  resident hire;  and NANA                                                               
shareholders fill  57 percent of the  Red Dog jobs and  have a 79                                                               
percent Alaska hire rate.                                                                                                       
8:48:08 AM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  asked for  a  definition  of the  term                                                               
"production value."                                                                                                             
KAREN MATTHIAS, Executive Director,  Council of Alaska Producers,                                                               
explained  that  gross  production  value  is  derived  from  the                                                               
average price of a mineral  throughout the year, but she stressed                                                               
that this  is not the net  smelter return.  What  actually leaves                                                               
from the  State of  Alaska to  go to the  smelter or  refinery is                                                               
sold  at the  world price  by the  refiner after  refinement, and                                                               
they have  a profit margin.   Therefore, the price that  the mine                                                               
receives for the  concentrate is considerably less  than what the                                                               
refinery  receives  on  the  world  market.   The  price  of  the                                                               
concentrate  is  determined   through  negotiations  between  the                                                               
mining company  and the refinery  or smelter.   It is  similar to                                                               
the  fishing industry,  for example,  in which  the price  of the                                                               
fish  after  processing  is  greater  than  the  price  that  the                                                               
fisherman gets for the fish.   Ms. Matthias reiterated that there                                                               
is a difference  in price from what the mining  company sells the                                                               
concentrate  for and  the actual  daily spot  world prices  after                                                               
refinement.   Gross production  is often a  very big  number, but                                                               
that is not what the mining company is receiving.                                                                               
8:50:48 AM                                                                                                                    
REPRESENTATIVE  TARR asked  if the  "industry averaging"  used to                                                               
determine  Alaska's  production  value  includes  the  mining  of                                                               
copper, gold, silver, and zinc.                                                                                                 
MS.  MATTHIAS  pointed  out  that  copper is  not  yet  mined  in                                                               
sufficient  quantities  to be  a  part  of the  gross  production                                                               
value.    She stated  that  Alaska  has some  substantial  copper                                                               
deposits and the  Council of Alaska Producers  (CAP) look forward                                                               
to the  day when copper is  one of the major  metals produced and                                                               
part of the  gross production value.  In answer  to the question,                                                               
she said  Representative Tarr is  correct that the  state's gross                                                               
production  value  for  mining  includes  all  of  the  different                                                               
minerals with  value that are  produced and sold from  Alaska and                                                               
that this value  is derived from the average price  for the year.                                                               
She repeated that it is not  what the mining company receives for                                                               
the  concentrates, and  furthermore, the  smelter doesn't  always                                                               
pay for trace amounts of an ore in the concentrate.                                                                             
REPRESENTATIVE  SEATON  asked  for   confirmation  that  the  net                                                               
smelter  return might  be considerably  less than  the production                                                               
value but  represents the  actual value  that the  mining company                                                               
receives for the minerals produced.                                                                                             
MS. MATTHIAS responded "Yes."                                                                                                   
8:52:46 AM                                                                                                                    
REPRESENTATIVE JOSEPHSON asked about  the vast difference between                                                               
the form  of the  concentrate that is  produced by  the different                                                               
Alaska mines,  specifically the  gold bar  produced at  Fort Knox                                                               
versus  the massive  barges  of  unidentifiable concentrate  that                                                               
Hecla Greens Creek ships.                                                                                                       
MS. MATTHIAS replied  that Pogo and Fort Knox mines  pour a "doré                                                               
bar," which  contains a high percentage  of gold, in the  90s [by                                                               
percentage].   The  bar then  goes to  a refinery  and comes  out                                                               
being the  gold "as we think  of it," which today  is worth $1200                                                               
per ounce.   Kensington ships  its gold  out for refinement  in a                                                               
concentrate  form, which  has a  much lower  percentage of  gold.                                                               
Teck-Pogo,  Inc.    ("Teck")  produces  a  concentrate  that  has                                                               
significant  zinc, lead,  silver,  and smaller  amounts of  other                                                               
minerals,  and   it  ships  that  concentrate   out  for  further                                                               
MS.  MATTHIAS  further stated  that  Greens  Creek production  is                                                               
actually the most concentrated because  it is a polymetallic mine                                                               
and produces  in sellable amounts  gold, silver, lead,  and zinc,                                                               
and  she offered  her understanding  that it  also produces  some                                                               
trace copper.   A doré  bar is poured for  some of the  gold, but                                                               
then the other minerals are  combined in different amounts in the                                                               
8:54:58 AM                                                                                                                    
REPRESENTATIVE  TARR,  referring   to  the  illustration  labeled                                                               
"Mining  Activity in  Alaska"  in the  AMA  brochure titled  "The                                                               
Economic Benefits  of Alaska's Mining  Industry," asked  that the                                                               
presenters  clarify terms  referencing the  phases of  a project.                                                               
Other presentations have used  the phrase "advanced exploration."                                                               
This  state map  describes  the stages  of  development as  "pre-                                                               
permitting," "permitting," and "operating."                                                                                     
MS.  CROCKETT   replied  that  the  report   Representative  Tarr                                                               
referenced  is a  report that  the AMA  commissions the  McDowell                                                               
Group to prepare  every year and she doesn't know  why it differs                                                               
so much  from the state map.   "Advanced exploration" on  the AMA                                                               
brochure is generally considered by the  AMA to be a project that                                                               
is in  pre-permitting or in  permitting, so  it is one  that they                                                               
would see going through the  National Environmental Policy Act of                                                               
1969 (NEPA) process sometime soon.   She also mentioned that in a                                                               
few  slides   she  would  be   discussing  the  "farm   team"  of                                                               
development  projects that  don't show  up  on that  map but  are                                                               
projects that  have been explored  recently and are  being looked                                                               
at by  investors.  She  promised to use  "pre-permitting" instead                                                               
of "advanced exploration" to be clearer.                                                                                        
8:56:37 AM                                                                                                                    
REPRESENTATIVE SEATON said he was  trying to coordinate that idea                                                               
with the idea  of where the exploration credits come  from and if                                                               
they  stop  when  all  permits  are  received,  followed  by  the                                                               
development stage.   He asked if that concept  corresponds at all                                                               
to the timeline chart of investments.                                                                                           
MS.  CROCKETT   replied  that  it   was  her   understanding  the                                                               
exploration  tax credit  comes  in  effect once  the  mine is  in                                                               
production, since  that is  the point at  which you  have taxable                                                               
income.    She conceded  that she  was not familiar  with whether                                                               
the exploration  tax credit was in  effect when all of  the mines                                                               
shown in slide 8 came online.                                                                                                   
MS. MATTHIAS  added that it  is important to understand  that the                                                               
mining  exploration tax  credit is  very different  from oil  tax                                                               
credits.  She relayed that the  first difference is that there is                                                               
no credit  or benefit to  the company financially until  the mine                                                               
is  developed  and goes  into  production,  and  there is  a  $20                                                               
million maximum for that exploration  credit.  Ms. Matthias asked                                                               
the committee to consider a  large mine going into production and                                                               
gave the  example of  Donlin Gold  Project ("Donlin"),  which has                                                               
spent hundreds of  millions of dollars on  exploration because of                                                               
a long  development timeline,  and the  most it  will be  able to                                                               
receive in  a credit  against its corporate  tax is  $20 million.                                                               
She added that  she knew that the exploration tax  credit was not                                                               
in existence when Greens Creek  and Red Dog came into production.                                                               
She said she is  not sure about Fort Knox but  could say for sure                                                               
that  Pogo and  Kensington  did come  into  production after  the                                                               
exploration tax credit was in place in the mid '90s.                                                                            
REPRESENTATIVE SEATON  asked for  clarification in regard  to the                                                               
timeline  in slide  8 and  how it  relates to  the stage  of mine                                                               
development and the accumulation of tax credits.                                                                                
MS. MATTHIAS  answered by saying that  [tax accumulation credits]                                                               
start with the point of discovery  on the current timeline.  This                                                               
means  that for  mines that  are part  of historic  placer mining                                                               
areas  with known  deposits, point  of discovery  is when  modern                                                               
discovery  was  made  and   significant  investment  dollars  for                                                               
exploration and permitting  followed to try to  bring the project                                                               
to production.  The chart ends with the beginning of production.                                                                
9:01:00 AM                                                                                                                    
MS. CROCKETT  referred to slide  9, titled "Resident Hire."   The                                                               
Alaska  Department  of  Labor  2014 report  shows  a  67  percent                                                               
resident hire  in the  mining industry.   Local mines  have above                                                               
average rate of  local hire workers and  provide year-round jobs.                                                               
In  2014 the  number of  non-residents working  in metal  fell 18                                                               
percent  and  the  resident  worker   number  decreased  by  five                                                               
percent.  She  added that these statistics  illustrate that there                                                               
are thousands  of Alaskan  miners and families  that depend  on a                                                               
healthy mining industry.                                                                                                        
MS.  CROCKETT  referred  to  slide  10,  titled  "Alaska  Mineral                                                               
Development  Timelines," showing  the  development timelines  for                                                               
the  five  metal  mines  from   discovery  to  pursuit  of  these                                                               
projects.  She  described these as snapshots  of projects working                                                               
toward  development.    Again  she  noted  that  for  mines  with                                                               
historical activity, this graph  reflects only current permitting                                                               
cycles.   She reiterated that  this graph  is a snapshot  of what                                                               
would represent thousands  of potential jobs, and any  one of the                                                               
mines  coming  into  production  would be  a  large  increase  of                                                               
revenue to  the state.   These are  long timelines taking  a very                                                               
large amount of  capital and patience.  Right now  AMA is looking                                                               
at how to access that  capital and convince investors that Alaska                                                               
is a good  place to invest.   She claimed that it  is a difficult                                                               
time to  convince investors because  of fewer  investment dollars                                                               
for global exploration right now and much tougher competition.                                                                  
MS.  CROCKETT moved  on to  slide  11, titled  "Lack of  Investor                                                               
Confidence," to explore  how Alaska insures it  receives its fair                                                               
share of  investment.  She  identified the  graph on slide  11 as                                                               
one  showing  an  electronically  traded  fund  that  tracks  the                                                               
Standard &  Poor (S&P)  Metals and Mining  Index.   She explained                                                               
that  investor  interest  in   mining  reflects  commodity  price                                                               
swings, with the graph showing  robust growth in the mid-2000s, a                                                               
sharp decline as a result of  the 2008 financial crisis, and good                                                               
recovery through  mid-2011, thanks to  China.  Now,  however, the                                                               
mining  industry has  suffered  through four  years of  declining                                                               
prices and investor interest.                                                                                                   
MS. CROCKETT  referred to slide 12,  titled "Exploration Spending                                                               
Declines," and  pointed out the declines  in exploration spending                                                               
on  a global  level  and in  Alaska.   The  graph depicts  global                                                               
mining  exploration  spending  in  the billions  of  dollars  and                                                               
Alaska exploration spending  in the millions of  dollars.  Global                                                               
exploration spending went down 50  percent between 2012 and 2014,                                                               
and in Alaska it  went down 71 percent.  She went  on to say that                                                               
this illustrates how Alaska has been hit worse than the average.                                                                
9:04:03 AM                                                                                                                    
REPRESENTATIVE TARR  asked if  the slide  showing the  decline of                                                               
exploration spending  in Alaska might  be a reflection of  so few                                                               
projects along with  a deep decline in the activity  of one mine,                                                               
the Pebble Mine, scaling back into very limited activity.                                                                       
MS. CROCKETT  replied in the  affirmative but offered  that there                                                               
are a  number of other factors  and the next slide  would address                                                               
other projects that had that impact.                                                                                            
MS.  MATTHIAS pointed  out that  Anglo American  ("Anglo") pulled                                                               
out  of the  Pebble  Project  in late  2013,  which impacted  its                                                               
exploration spending in  2014, but that the  decline started long                                                               
before that when  the Pebble Project was still  very much engaged                                                               
in  exploration.   She  added  that  there are  many  exploration                                                               
projects  and all  of  them  are impacted  by  the difficulty  in                                                               
raising the investment dollars to  do exploration in times of low                                                               
commodity prices.                                                                                                               
9:05:34 AM                                                                                                                    
MS. CROCKETT referred to slide  13 to illustrate what exploration                                                               
decline looks like in terms of  these smaller projects.  She then                                                               
referred to the AMA brochure  insert, titled "The Economic Impact                                                               
of Placer  Mining in Alaska,"  which enumerates the  placer mines                                                               
that didn't make the cut to  be on the centerfold of the brochure                                                               
but  were still  a significant  economic factor  in terms  of the                                                               
exploration community.   She went  on to  say that in  2012 there                                                               
were 24 exploration  projects that spent between  $100,000 and $5                                                               
million in  Alaska.  These are  in an earlier stage  and spending                                                               
less money,  but it is  AMA's hope  that they will  become larger                                                               
pre-permitting  projects.   In  2013  the  number of  exploration                                                               
projects went  down to 17  even though AMA expanded  the criteria                                                               
to include  projects spending between  $100,000 and  $10 million.                                                               
Those projects with preliminary exploration  work were cut off in                                                               
those years.                                                                                                                    
MS. CROCKETT  cited slide  14 to show  the impact  of exploration                                                               
spending by way of job  distribution throughout Alaska.  She said                                                               
that  in 2012  there were  120 communities  with mining  industry                                                               
employees.  In 2014 there were  only 50.  She claimed that mining                                                               
still has  an impressive  regional impact, but  AMA's goal  is to                                                               
increase the number of communities with mining industry jobs.                                                                   
9:07:48 AM                                                                                                                    
MS. MATTHIAS referred  to slide 15, titled "Goal  of Tax Policy?"                                                               
to  introduce  the  fundamental question  of  what  Alaska's  tax                                                               
policy should  be.  She  said that CAP  is looking for  a balance                                                               
between a reasonable  share for the state and  a competitive rate                                                               
for industry that  attracts investment.  She related  it is CAP's                                                               
belief  that a  robust and  responsible mining  industry provides                                                               
all  of  the benefits  highlighted  by  Ms. Crockett  previously:                                                               
jobs,  government revenue,  Native  corporation revenue  sharing,                                                               
and   procurement  and   contracting  opportunities   for  Alaska                                                               
MS.  CROCKETT  offered that  in  2014  the state  received  $83.7                                                               
million  dollars  in  revenue  from mining.    Slide  16,  titled                                                               
"Mining Pays  Its Way," puts  that revenue into  categories based                                                               
on information from Alaska's Mineral  Industry Report produced by                                                               
the Department of  Natural Resources (DNR) and  the Department of                                                               
Commerce, Community  & Economic Development (DCCED).   The report                                                               
shows  that the  Alaska Mining  License  Tax (AMLT)  in 2014  was                                                               
$38.7  million  and the  state  corporate  income tax  was  $17.3                                                               
million.   Ms. Crockett pointed  to a  blank space on  the report                                                               
regarding state  fuel taxes and  noted that for 2013  that amount                                                               
was  about a  million dollars  for the  industry and  most likely                                                               
about the same  for 2014.  She itemized  the remaining categories                                                               
in the report  as follows: AIDEA facility user  fees that consist                                                               
of  predominately  the Red  Dog  port  and  road and  the  Donlin                                                               
Mountain  transportation system  at  $12  million; state  mineral                                                               
rents  and  royalties at  $13.5  million;  state coal  rents  and                                                               
royalties at $1.4 million; state  material sales at $600,000; and                                                               
state mining miscellaneous fees at  $200,000.  She explained that                                                               
AMA does not believe that the  RSAs are represented in the chart,                                                               
so that  would be an additional  amount over and above  the $83.7                                                               
9:10:06 AM                                                                                                                    
REPRESENTATIVE SEATON asked for a  breakout of the "state mineral                                                               
rents and royalties."                                                                                                           
MS. MATTHIAS replied that the  mineral industry report provides a                                                               
little more  detail. She said  committee members could  access it                                                               
online which  is available on  line or  she could provide  it for                                                               
them.   She  asked  Representative Seaton  if  he had  particular                                                               
REPRESENTATIVE SEATON stated that as  he looks at the AMLT figure                                                               
and  the   state  mineral  rents   and  royalties   figure,  both                                                               
calculated  as  a  percent  of   net  income,  he  is  unable  to                                                               
understand why  the license tax  figure, at seven percent  of net                                                               
income,  is  so  much  greater in  proportion  to  the  royalties                                                               
figure, at three percent of net  income.  He added that combining                                                               
the  mineral  rents with  the  royalties  makes interpreting  the                                                               
amount of royalties even more difficult.                                                                                        
MS. MATTHIAS answered that upcoming  slides have more information                                                               
on royalties.   She  clarified that  the $13.5  [million] royalty                                                               
number is  a grouping for this  report, and it does  break out to                                                               
the rents, royalties, and the annual  labor fees that are paid on                                                               
claims.   She  restated  that she  could provide  a  copy of  the                                                               
report to the committee.                                                                                                        
9:12:44 AM                                                                                                                    
REPRESENTATIVE  HAWKER thanked  the testifiers  on trying  to get                                                               
the legislature focused on total  government take.  He stated his                                                               
hope  was that  someone at  the  Department of  Revenue (DOE)  is                                                               
listening to this presentation and  understands the importance of                                                               
presenting to the committee this  kind of information in terms of                                                               
total government  take so that  decisions made are  holistic, not                                                               
myopic and uninformed.                                                                                                          
REPRESENTATIVE JOSEPHSON  asked Ms. Matthias  if the cost  of the                                                               
permits are included in the RSAs.                                                                                               
MS.  MATTHIAS  replied  that  the state  bills  the  company  for                                                               
permitting work, oversite during operations, and monitoring.                                                                    
REPRESENTATIVE  JOSEPHSON asserted  that  the RSA  should not  be                                                               
included in the chart [slide 16] as  it is a cost that Alaska has                                                               
to absorb and is different from the other elements in the chart.                                                                
MS. MATTHIAS confirmed that the RSA  does not go into the general                                                               
fund for  use in other  areas; however, from the  company's point                                                               
of  view all  of the  costs paid  to government  are part  of the                                                               
expenses  of  doing  business  in   Alaska.    Therefore,  it  is                                                               
extremely important from both the  industry point of view and the                                                               
investor point of view to understand all of the costs.                                                                          
9:14:41 AM                                                                                                                    
MS. MATTHIAS referred to slide  17, titled "State Revenue > State                                                               
Costs" and  asked the  question, "Where  does that  $87.3 million                                                               
go?" The  graph on  slide 17  comes from  the "Fiscal  Effects of                                                               
Commercial Fishing, Mining, & Tourism.   What does Alaska receive                                                               
in revenue:  What does  it spend?" released  by the  Institute of                                                               
Social and Economic Research (ISER) in January of this year.                                                                    
MS.  MATTHIAS  stated that  for  the  mining industry,  the  vast                                                               
majority of revenue that comes to  the state for mining goes into                                                               
the general fund and can help  pay for schools, roads, and public                                                               
safety.   She further stated a  very small percentage is  used by                                                               
the  state  to  manage  the   operations  for  working  with  the                                                               
industry.  She maintained that  it is important to underline that                                                               
mining in  Alaska is highly  regulated, but because of  the RSAs,                                                               
that oversite is  billed to the company rather than  borne by the                                                               
MS.  MATTHIAS,  moving  on  to  slide 18,  titled  "How  Does  AK                                                               
Compare?" warned that  it is not valuable to look  at any payment                                                               
in  isolation  because  it  is  the total  that  matters  to  the                                                               
company's bottom line  and to the investment  community.  Looking                                                               
at  one  part  in  isolation  could  end  up  with  a  misleading                                                               
conclusion.  A  higher royalty in one place might  be offset by a                                                               
lower mineral license tax or by no corporate income tax.                                                                        
MS. MATTHIAS  asserted that  it was  important also  to recognize                                                               
that Alaska is the only state  with multiple use state land.  The                                                               
state received millions of acres  from the federal government for                                                               
which the mineral potential was  completely unknown.  She alleged                                                               
that having a  lower royalty [rate] encourages  explorers to risk                                                               
their capital in  an attempt to find mineral sources  that can be                                                               
developed, thus  adding to the  state's economy.  She  added that                                                               
an attractive  royalty rate encourages  exploration of  this vast                                                               
amount of unknown land to see  if deposits can be found and could                                                               
be  turned into  producing mines  for the  good of  the state  in                                                               
terms  of   jobs,  economic  activity,  and   opportunity.    She                                                               
concluded  that Alaska  is  unique in  having  the potential  for                                                               
mines on state  land; therefore, state royalty is in  some ways a                                                               
unique  Alaskan issue.   Lots  of mines  are on  federal land  or                                                               
private land,  but there's no royalty  to the state if  the state                                                               
is not the land owner.                                                                                                          
9:17:24 AM                                                                                                                    
MS.  MATTHIAS then  explored net  income using  slide 19,  titled                                                               
"How is  net income  calculated?" She  maintained that  Alaska is                                                               
very prescriptive  on deductible expenses.   She referred  to the                                                               
first   sentence   "Gross   revenue=net  smelter   revenue"   and                                                               
reiterated that this  is not the same as the  world price for the                                                               
refined  product.    She  defined  "net  smelter  revenue"  as  a                                                               
negotiated price between the seller,  the mining company, and the                                                               
smelter or  refiner minus the  cost of transportation to  get the                                                               
material from the mine to the smelter or refiner.                                                                               
REPRESENTATIVE JOSEPHSON inquired about  the cost of transporting                                                               
the product to  the smelter and stated his  understanding that it                                                               
was not a great cost.  He asked if the cost varied a lot.                                                                       
MS.  MATTHIAS  contended  that  cost depends  on  what  is  being                                                               
transported,  the  mode  of   transportation,  and  the  distance                                                               
transported.   For this reason  the net smelter revenue  is minus                                                               
the cost of transportation.                                                                                                     
REPRESENTATIVE  SEATON   asked  what  would  be   the  "point  of                                                               
production" for a  mine selling a concentrate  in calculating the                                                               
net income amount.                                                                                                              
MS. MATTHIAS responded  by saying the mine receives  the value of                                                               
the  product when  it leaves  the mine  to go  to the  smelter or                                                               
refinery, as negotiated with the smelter or refinery.                                                                           
REPRESENTATIVE SEATON asked  if the "net smelter  return" was the                                                               
value of the product at the point of sale.                                                                                      
MS.  MATTHIAS confirmed  that for  the  mines in  Alaska that  is                                                               
9:21:12 AM                                                                                                                    
MS.  MATTHIAS returned  to slide  19 to  make a  second important                                                               
point, which was  that the initial and  ongoing exploration costs                                                               
for the one-time $20 million  credit opportunity for new mines is                                                               
not a  deductible expense, nor  is the  cost of permitting.   The                                                               
assets   developed  prior   to   production,   however,  can   be                                                               
depreciated.  These  include the milling and  camp facilities and                                                               
pieces  of  equipment.    She   stressed  that  these  costs  are                                                               
significant.   As an  example, Pogo spent  $50 million  last year                                                               
and  $50 million  the year  before in  additional exploration  to                                                               
further define its  ore body and ideally prolong the  life of its                                                               
mine.   It was an investment  to improve the chances  of success,                                                               
but again,  she stressed, these  are not deductible  expenses for                                                               
net income.                                                                                                                     
REPRESENTATIVE   JOSEPHSON  asked   Ms.   Matthias  to   describe                                                               
conceptually the difference between depreciation and depletion.                                                                 
MS. MATTHIAS  responded that depletion  is a way  of depreciating                                                               
an  asset.     She  quoted  from  the   U.S.  Geological  Service                                                               
publication,  "Minerals  Commodity  Summaries  2015  Appendix  B,                                                               
which read as follows:                                                                                                          
     The  depletion allowance  is a  business tax  deduction                                                                    
     analogous to depreciation, but which  applies to an ore                                                                    
     reserve   rather    than   equipment    or   production                                                                    
     facilities.   Federal  tax  law  allows this  deduction                                                                    
     from taxable corporate income,  recognizing that an ore                                                                    
     deposit is a depletable  asset [that must eventually be                                                                    
MS. MATTHIAS reiterated that depletion is  not a tax credit but a                                                               
form of depreciating an asset, which is the ore body.                                                                           
9:24:05 AM                                                                                                                    
REPRESENTATIVE  TARR  asked  what  happens in  a  scenario  where                                                               
continued exploration work  would find a new  opportunity and how                                                               
the  value of  that  asset  would be  assessed  at  that time  to                                                               
incorporate the depletion.                                                                                                      
MS. MATTHIAS  replied that the  question involves  accounting and                                                               
math that  is beyond her  capacity, but  she stated she  would be                                                               
happy to provide more information.                                                                                              
9:24:42 AM                                                                                                                    
REPRESENTATIVE SEATON  asked what the  effect was of  using "cost                                                               
depletion"  and "resource  depletion"  on net  income before  the                                                               
percentage calculation of tax.                                                                                                  
MS.  MATTHIAS  responded  that  discussion  of  the  cost  versus                                                               
percentage depletion  requires an accountant, and  since she does                                                               
not have those  skills, she would have to follow  up on this with                                                               
REPRESENTATIVE  SEATON   returned  that  he  thinks   that  [cost                                                               
depletion  and resource  depletion]  are  important concepts,  as                                                               
they  are major  factors in  how much  can be  deducted from  net                                                               
income and  can be considered  applications of the  percentage of                                                               
tax that  mines don't have  to pay,  because the tax  is directly                                                               
related to the net income.                                                                                                      
MS.  MATTHIAS agreed  that they  are deductions  from net  income                                                               
because they  are costs  that are  borne, just  like wages  are a                                                               
deduction  from  net  income.     They  reflect  the  significant                                                               
investment that has gone into  bringing the mine into production,                                                               
whether the  exploration costs or  the permitting costs,  both of                                                               
which are depreciated like an asset  as in other industries.  She                                                               
mentioned again  that the  question was  beyond her  capacity but                                                               
she  would  make   sure  that  someone  is  able   to  give  more                                                               
REPRESENTATIVE  SEATON   stated  that   he  realized   that  cost                                                               
depletion  does not  allow  for tax  to be  offset  more than  50                                                               
percent,  but  further conceded  that  he  was  not sure  of  the                                                               
percentage  of offset  due to  resource depletion,  and he  asked                                                               
that Ms. Matthias obtain that information as well.                                                                              
9:27:59 AM                                                                                                                    
MS.  MATTHIAS returned  to the  PowerPoint to  discuss slide  20,                                                               
titled "Major  Metal-Mining Areas."  The  U.S. Geological Service                                                               
map shown  in this  slide compares major  metal mining  states in                                                               
the country.   She pointed  out the leaders, Arizona  and Nevada,                                                               
which  have significantly  more  metal mining  than  many of  the                                                               
other states in  the country.  She asserted that  if Alaska wants                                                               
to  be   a  leader,  attract  investment,   increase  the  mining                                                               
industry, and increase jobs and  opportunities for Alaskans, then                                                               
mineral  tax  comparisons  with these  two  leaders  is  helpful.                                                               
Nevada,  she pointed  out, has  5  percent net  proceeds tax,  no                                                               
corporate income tax,  2 percent gross payroll  tax, and property                                                               
and sales taxes.  Referencing  Arizona on the chart, Ms. Matthias                                                               
explained that  what is shown  as "gross value" is  "net proceeds                                                               
tax" as  well.  The  tax is on  the difference between  the gross                                                               
value and the production cost.                                                                                                  
REPRESENTATIVE SEATON asked  if "net proceeds tax"  in this chart                                                               
was just another way of saying "net smelter return."                                                                            
MS.  MATTHIAS replied  that each  state  has a  different way  of                                                               
calculating  net income  and repeated  that  Alaska has  specific                                                               
rules about  what can and can't  be considered an expense.   Both                                                               
Nevada and  Arizona have their  own definitions of  "net proceeds                                                               
tax," and  she acknowledged that  since the wording  differs from                                                               
state to state, comparisons are difficult.                                                                                      
REPRESENTATIVE SEATON asked  if the sales taxes were  on the sale                                                               
of either the concentrate or the mineral.                                                                                       
MS. MATTHIAS  answered that the  sales tax  was on the  goods and                                                               
services that are  subject to sales tax and are  purchased by the                                                               
mining company in the state.  In  Nevada, sales tax is one of the                                                               
largest portions of the total government take.                                                                                  
REPRESENTATIVE SEATON asked for  reassurance that [sales tax] did                                                               
not represent tax on the sale of the mineral sold.                                                                              
MS. MATTHIAS confirmed that to her knowledge that was correct.                                                                  
9:31:11 AM                                                                                                                    
MS. MATTHIAS resumed her presentation.   She maintained that even                                                               
though  information  has  been   provided  about  Wyoming,  South                                                               
Dakota,  Wisconsin,  and  Colorado,  she has  chosen  to  do  the                                                               
comparison with  only the  major metal  mining states  of Arizona                                                               
and  Nevada, rather  than the  other  four, which  are not  major                                                               
metal mining states.                                                                                                            
MS.   MATTHIAS   referred   to   slide   21,   titled   "Selected                                                               
International Mining Income Taxes -  Top Rate," to illustrate the                                                               
impact of federal  tax on the mining industry  in Alaska compared                                                               
with  other   countries.     This  chart   shows  Alaska   to  be                                                               
significantly  higher  for  corporate  income  tax  predominantly                                                               
because the U.S.  federal corporate tax is one of  the highest in                                                               
the developing world,  at 35 percent.  She compared  the U.S. tax                                                               
rate with  Canada's tax  rate of  15 percent.   Any  company that                                                               
does  business  in  Alaska  or   the  U.S.,  whether  foreign  or                                                               
domestic,  is subject  to U.S.  tax  laws and  pays that  federal                                                               
corporate tax.                                                                                                                  
MS.  MATTHIAS then  turned  to slide  23,  titled "Corporate  Tax                                                               
Rates," to make  the comparison between Alaska  and other states,                                                               
which are  all subject to the  35 percent federal [tax]  rate but                                                               
have different state  [tax] rates added to them.   Alaska's [tax]                                                               
rate is  one of the highest  at 9.4 percent.   The chart compares                                                               
Alaska with other mineral mining  states and two Canadian mineral                                                               
mining provinces.  In Canada,  as she pointed out, the provincial                                                               
tax rate is high, but it is tacked onto a low federal tax rate.                                                                 
MS.  MATTHIAS further  emphasized the  tax burden  on the  mining                                                               
industry in  Alaska by adding  the federal corporate tax  rate of                                                               
35  percent to  the state  [tax] rate  of 9.4  percent, and  then                                                               
adding on  the seven  percent Alaska mining  license tax  and the                                                               
three percent royalty  [rate] if the mine is on  state land.  The                                                               
total  percentage  government  take   then  comes  to  almost  55                                                               
9:34:29 AM                                                                                                                    
MS. MATTHIAS referred  to slide 24, titled  the "Fraser Institute                                                               
Survey  2014," to  answer the  question "How  is Alaska  doing in                                                               
being a competitive environment  for attracting investment to the                                                               
state for mining?"  The Fraser  Institute does an annual study of                                                               
mining  executives  all over  the  world  who have  knowledge  of                                                               
jurisdictions for  their perceptions of the  various aspects that                                                               
makes a region  or jurisdiction attractive or  not for investment                                                               
in mining.  She conceded that  it is just a survey of perception,                                                               
yet  maintained that  the  results track  over  time and  reflect                                                               
where actual dollars are spent, so it remains a valuable tool.                                                                  
MS. MATTHIAS  directed the committee's  attention to  the "'Pure'                                                               
Mineral  Potential" column  of the  table to  illustrate Alaska's                                                               
ranking assuming a best practices  policy regime.  In 2014 Alaska                                                               
ranked third; last  year it ranked first, and it  always ranks at                                                               
or near  the top.   She went  on to say  that looking  at "Policy                                                               
Perception,"  which  includes  taxation, the  regulatory  regime,                                                               
political  stability, labor  issues, and  trade barriers,  Alaska                                                               
ranks  twenty-third.   She  concluded  that  even with  the  best                                                               
deposits in  the world, low policy  perception hinders attracting                                                               
investment and  conversely, the best  policies will  not overcome                                                               
poor deposits for attracting investment.                                                                                        
MS. MATTHIAS  moved onto  to slide  25, titled  "Fraser Institute                                                               
Survey  2014,"  to  look  at an  additional  measure  of  overall                                                               
investment  attractiveness,  which  is  in  terms  of  the  "pure                                                               
mineral potential"  to "policy perception"  ratio.   Pure mineral                                                               
potential" is weighted at 60  percent and the "policy perception"                                                               
at 40  percent for  this ratio.   Last  year Alaska  ranked tenth                                                               
among other countries and states and  fifth the year before.  Ms.                                                               
Matthias  concluded  that  since   the  nine  jurisdictions  that                                                               
surpassed Alaska in this ranking  were all in developed countries                                                               
and  subject to  modern environmental  laws, there  is no  reason                                                               
Alaska  cannot compete  with them  in investment  attractiveness.                                                               
Alaska  has  the deposits,  but  she  contended that  the  policy                                                               
perception has disadvantaged Alaska.                                                                                            
9:37:30 AM                                                                                                                    
REPRESENTATIVE JOSEPHSON asked Ms.  Matthias why Wyoming does not                                                               
have major metal  mining areas according to the  previous map but                                                               
is ahead of Alaska in the current list.                                                                                         
MS. MATTHIAS  explained that  the institute  looks at  all mining                                                               
for  this ranking,  including coal  and  other non-metal  mining.                                                               
She pointed out  that the pure mineral potential is  not the best                                                               
weighted  ratio because  it doesn't  take into  consideration the                                                               
current environment on the ground.   Therefore the institute also                                                               
asked  the mining  executives about  current mineral  potentials.                                                               
Instead of assuming the best  possible mining policies, they were                                                               
asked what  they thought  of the  jurisdiction under  the current                                                               
policy  environment and  whether  they thought  it encouraged  or                                                               
discouraged mining.   Alaska, in  2014, ranked  twenty-eighth for                                                               
this survey, down  from eleventh in 2013 and sixth  in 2012.  She                                                               
recommended that the legislature be  aware of and concerned about                                                               
this   downward   trend   and,  considering   [Alaska's   mining]                                                               
potential,  charged  them  with  asking what  is  being  done  to                                                               
attract the investment  and grow the industry.   She offered that                                                               
it is  one of a  few industries to  have the potential  to double                                                               
and, therefore,  could be part  of the solution to  Alaska's need                                                               
for economic diversity.                                                                                                         
9:39:46 AM                                                                                                                    
REPRESENTATIVE JOSEPHSON  commented that  although it is  not the                                                               
fault of  the mining industry,  Alaska is  so used to  dealing in                                                               
multiple  billions of  dollars  from the  oil  industry that  the                                                               
revenue  picture  of mining  pales  in  comparison, even  if  the                                                               
mining industry doubled.  He  said Alaska does need to diversify,                                                               
and  he  opined that  anyone  who  denies that  is  appropriately                                                               
marginalized.    He  suggested   that  from  a  public  relations                                                               
standpoint, this is something Ms.  Matthias and CAP need to think                                                               
about.   He suggested  that it  was hard to  think of  the mining                                                               
industry figures outside of this comparison.                                                                                    
MS. MATTHIAS conceded that she could  not agree more.  She stated                                                               
that the  two industries  are so  different and  the scale  is so                                                               
different.    She  claimed, however,  that the  mining industry's                                                               
perspective was at the local level,  and she cited examples.  She                                                               
noted the  importance of Fort  Knox to Fairbanks, with  Fort Knox                                                               
being  the  largest  single  property   tax  payer  in  Fairbanks                                                               
employing more than  600 Fairbanks residents.  In  Juneau the two                                                               
largest  taxpayers are  mines, Kensington  and  Greens Creek,  an                                                               
impact which gives  a different view of  comparing mining revenue                                                               
with oil  and gas  revenue.   Red Dog  is an  incredible economic                                                               
engine for  Northwest Alaska.   She concluded  by saying  that at                                                               
the  local  level,  those  jobs,  opportunities,  and  local  tax                                                               
revenues are absolutely  vital to the health  of the communities.                                                               
She  went on  to  say she  would never  argue  that mining  could                                                               
surpass  oil and  gas for  overall economic  impact, but  because                                                               
Alaska needs  economic diversity,  mining, fish, and  tourism are                                                               
all important to provide that value at the local level.                                                                         
9:42:15 AM                                                                                                                    
REPRESENTATIVE  TARR asked  to what  Ms. Matthias  attributes the                                                               
change in  public policy  perception, since  Alaska has  not been                                                               
contemplating  any changes  in  mining taxes  over  the last  few                                                               
MS.  MATTHIAS  responded with  two  reasons:  the impact  of  the                                                               
changing regulatory environment and the  back and forth change in                                                               
oil tax in  Alaska that has introduced an element  of doubt about                                                               
the tax regime causing international  investors to wonder if that                                                               
could happen in the mining industry.                                                                                            
REPRESENTATIVE TARR asked  Ms. Matthias to give  specifics on the                                                               
regulatory issues to  which she alluded in her  answer, asking if                                                               
the water  rights issue  was a factor  and what  other regulatory                                                               
issues were factors.                                                                                                            
MS.  MATTHIAS agreed  there were  federal regulatory  issues that                                                               
have  had  a major  impact,  but  also state  regulatory  issues,                                                               
including recent water  rights decisions, which were  made in the                                                               
Chuitna Coal Project  in late 2015, and those in  the Bristol Bay                                                               
region in  December 2015.   These projects are not  factored into                                                               
the survey  results although  the applications  have been  on the                                                               
record for  some time.   She contended  that the State  of Alaska                                                               
has been very  "bullish" on the potential  of mineral development                                                               
from  a policy  perspective  for many  years  and cited  Governor                                                               
Walker's statement  in slide 26,  titled "Potential,"  as further                                                               
confirmation  of  a positive  attitude  toward  the potential  of                                                               
mining in Alaska.                                                                                                               
REPRESENTATIVE TARR  stated that  she appreciated  Ms. Matthias's                                                               
comment because of  the high profile legislation  over a two-year                                                               
period  addressing  the  issue   about  water  reservations,  and                                                               
expressed  relief  that  it didn't  have  a  significant  impact.                                                               
Representative Tarr went on to ask  what can be done by Alaska to                                                               
impact the federal regulatory environment.                                                                                      
MS. MATTHIAS replied that the state  has done a number of things:                                                               
court  cases; work  by the  congressional  delegation on  federal                                                               
regulatory issues;  and Alaskans  voicing concerns  about federal                                                               
regulatory issues.  She stated  that she felt the mining industry                                                               
has had  tremendous support  from the state  to help  the federal                                                               
agencies  understand  what makes  Alaska  unique  and to  try  to                                                               
impose accuracy  and reality into  a process that is  designed in                                                               
Washington, D.C., for the entire  country, without realizing that                                                               
the standard approach does not work in Alaska                                                                                   
REPRESENTATIVE TARR  requested the need for  specific examples to                                                               
back up  complaints regarding federal  regulatory issues  so that                                                               
she could be better informed.                                                                                                   
MS. MATTHIAS  replied that CAP would  be happy to provide  a long                                                               
list of particular examples and would follow up.                                                                                
9:46:58 AM                                                                                                                    
MS.  MATTHIAS referenced  "Alaska's Mineral  Industry Report"  on                                                               
slide 27,  put out by  DNR and DCCED.   The chart shows  that the                                                               
gross production  value, which  is more  than what  the companies                                                               
actually receive  in aggregate,  has decreased 4  percent between                                                               
2013 and 2014.   Estimated revenue to  the Alaskan municipalities                                                               
has  also gone  down.   She pointed  out that  a small  change in                                                               
commodity  prices and  production can  have a  big change  in net                                                               
income  because  of  so  many  fixed  operating  expenses.    She                                                               
directed attention to  the decline in exploration  spending of 45                                                               
percent between 2013 and 2014,  which greatly reflects the impact                                                               
of lower commodity prices.                                                                                                      
9:47:56 AM                                                                                                                    
REPRESENTATIVE HAWKER  requested Ms. Matthias return  to slide 26                                                               
to discuss the  concluding statement: "Are the  right policies in                                                               
place  to encourage  development and  production of  critical and                                                               
strategic minerals in Alaska?" He  alluded to the presentation of                                                               
the proposed  legislation [HB 253]  by the  administration, which                                                               
gave  the  committee  [the   administration's]  analysis  of  the                                                               
impacts of the tax proposal.                                                                                                    
REPRESENTATIVE  HAWKER  addressed  his   first  question  to  Ms.                                                               
Matthias.    He  drew  attention  to  slide  9  of  a  PowerPoint                                                               
presentation  titled   "New  Sustainable  Alaska   Plan:  Pulling                                                               
Together to  Build Our  Future," which  was presented  during the                                                               
House  Resources Standing  Committee 2/15/16  hearing on  HB 253.                                                               
He  noted  that the  impact  analysis  for large  and  profitable                                                               
mines,  on  slide  9,  reported that  "most  income  falls  above                                                               
$100,000,  so effective  tax rate  goes up  from 7  percent to  9                                                               
percent," and  that "in  2014, 13 entities  paid at  this level."                                                               
He  reiterated  that  this  was  the  sum  total  of  the  entire                                                               
rationale   this  committee   was  given   for  supporting   this                                                               
legislation.   His  question  to Ms.  Matthias  was whether  only                                                               
noting  that the  tax rate  goes up  2 percent  was a  sufficient                                                               
impact analysis in order to  truly understand what will happen to                                                               
the [mining] industry.                                                                                                          
MS. MATTHIAS  responded that she  and CAP believe there  needs to                                                               
be greater understanding  of how the figures were  arrived at and                                                               
what the  impact would  be.   She further  disclosed that  it was                                                               
concerning that  it is  billed as  a 2  percent increase,  but as                                                               
they have discussed and as  Co-Chair Talerico has made clear, the                                                               
actual payment  goes up 29 percent,  or 28.5 percent.   This is a                                                               
significant increase  when commodity prices are  really putting a                                                               
crunch  on   operations.    Members  in   her  organization  have                                                               
expressed concern that there is a  tipping point that can go into                                                               
neutral or negative cash flow  that greatly impacts their ability                                                               
to be successful.   She went on to say that  because of such high                                                               
investment costs,  the ability to  make a profit and  recoup that                                                               
investment is huge.                                                                                                             
REPRESENTATIVE HAWKER prefaced his  next question to Ms. Matthias                                                               
by  saying  that  the  administration's  presentation  identified                                                               
large mining projects in Alaska,  and the presentation included a                                                               
footnote  which  said  "operation is  temporarily  suspended"  in                                                               
regard to the Nixon Fork Mine.   He asked why the Nixon Fort Mine                                                               
was suspended.                                                                                                                  
MS.  MATTHIAS  answered  that  it   was  suspended  for  economic                                                               
reasons.  The mining company  was not able to continue production                                                               
under the  current economic conditions  and metal prices.   There                                                               
were no regulatory problems associated  with the suspension.  The                                                               
suspension was temporary  due to the fiscal  environment and lack                                                               
of incoming  revenue.  She  emphasized that the situation  is not                                                               
unique, nor  is it an  easy decision for  the mine to  make since                                                               
investment and financing bills are still coming in.                                                                             
9:52:24 AM                                                                                                                    
REPRESENTATIVE  HAWKER   directed  his   next  question   to  Ms.                                                               
Crockett.   He  drew  attention  once again  to  slide  9 of  the                                                               
PowerPoint  presentation  titled  "New Sustainable  Alaska  Plan:                                                               
Pulling Together  to Build Our  Future," and maintained  that the                                                               
impact analysis  provided by the administration  to the committee                                                               
for  [HB 253]  as it  relates to  small mining  operations states                                                               
that there is  "little or no effect in tax  rate change; however,                                                               
removing  the 3.5-year  exemption may  deter some  future mines."                                                               
He questioned whether  that was a sufficient  impact analysis for                                                               
the committee to  understand how the legislation  will affect the                                                               
small mining operations.                                                                                                        
MS.  CROCKETT   relayed  that  the   AMA  appreciates   that  the                                                               
Department of Revenue  (DOR) understands the removal  of the 3.5-                                                               
year exemption  would affect  small placer  mines.    In  a small                                                               
project  an  entrepreneur  has  taken a  gamble  on  whether  the                                                               
project will  work and  invested everything  to move  it forward.                                                               
Nevertheless, the  impact analysis is  not the full  picture, and                                                               
does  not  give her  what  she  needs  to represent  [the  mining                                                               
industry] on the proposed legislation.                                                                                          
REPRESENTATIVE HAWKER went  on to say that the  other impact that                                                               
the Department of Revenue provided  was the revenue impact, which                                                               
is  the collection  of an  additional $6  million more  per year,                                                               
starting in 2018,  and $25,000 more in fees.   He noted that this                                                               
revenue  impact  does  not  account for  any  changes  in  mining                                                               
activity.   He asked Ms.  Crockett if this analysis  as presented                                                               
should have  accounted for impact  of changes in  mining activity                                                               
or  if she  believes passing  this bill  will not  result in  any                                                               
changes in mining activity for them to consider.                                                                                
MS. MATTHIAS replied  that she agrees that CAP would  like to see                                                               
greater study of impact and  how [the administration] came to the                                                               
conclusions  that there  would be  no  impact due  to changes  in                                                               
mining activity.                                                                                                                
REPRESENTATIVE HAWKER thanked her  and expressed appreciation for                                                               
the presentation.                                                                                                               
9:54:56 AM                                                                                                                    
MS.  MATTHIAS   showed  slide  28,  titled   "Are  We  Attracting                                                               
Investment?" which  she said sums up  the points she made  on the                                                               
importance and value  of mining in the state.   These points were                                                               
that it  is harder to  compete for investment dollars  and Alaska                                                               
has  challenges   in  terms  of  infrastructure,   distance,  and                                                               
transportation costs.  She concluded  that the one thing that the                                                               
State  of Alaska  does  have  control over  are  the policies  on                                                               
taxation and revenue.    She asked if Alaska  is making decisions                                                               
that will  attract investment  and grow  the industry  to provide                                                               
more  jobs  and  revenue  in  the long  term.    Ultimately,  she                                                               
contended,  limited   capital  will  go  to   jurisdictions  that                                                               
encourage   mineral  development.      Alaskan  communities   and                                                               
thousands  of  miners and  their  families  depend on  a  healthy                                                               
mining industry.                                                                                                                
9:55:53 AM                                                                                                                    
REPRESENTATIVE SEATON  referred back to slide  [25] regarding the                                                               
encouragement  or discouragement  of the  mining industry.     He                                                               
asked  how lowering  taxes  on the  oil industry  was  seen as  a                                                               
negative to  the mining industry for  encouraging or discouraging                                                               
mining in the state.                                                                                                            
MS.  MATTHIAS answered  that  the  oil tax  rate  has changed  in                                                               
Alaska multiple  times and  investors look  for certainty.   They                                                               
are looking for signs that if  they make a huge investment, there                                                               
isn't  going  to be  a  massive  change  that will  impact  their                                                               
investment.   She  stated that  although Senate  Bill 21  passed,                                                               
there  was a  huge campaign  to repeal  it which  shows a  lot of                                                               
uncertainty.  Investors  look to see if Alaska  is a jurisdiction                                                               
with a  stable tax  regime.  The  changes and  emotional campaign                                                               
related  to  oil  and  gas  taxation  causes  concern  for  other                                                               
industries in  the state  and affects  the overall  perception of                                                               
attractiveness of  the state  for investment  in general  and the                                                               
stability of taxation.                                                                                                          
9:58:36 AM                                                                                                                    
REPRESENTATIVE   HAWKER  said   he   has  had   a  long   ongoing                                                               
conversation in his  legislative career with Ms.  Matthias on the                                                               
subject of  Alaska's royalty production tax  and total government                                                               
take structure on  the mining industry.  He  acknowledged that he                                                               
has been very critical of  the administration's job of developing                                                               
and presenting  a rational argument  for its legislation,  and he                                                               
stated his  belief that the State  of Alaska really does  need to                                                               
reconsider  the  mechanisms  used   for  the  matrix  of  royalty                                                               
production taxes and total government  take.  He also stated that                                                               
he has  been very concerned  about net income-based  royalty with                                                               
the allowance of  exploration credits against that royalty.    He                                                               
affirmed  his  belief that  it  is  inappropriate for  anyone  to                                                               
remove  a  natural resource  from  the  State of  Alaska  without                                                               
leaving [Alaska] something for it,  and he warned that net profit                                                               
basis  allows billions  of dollars  of the  state's non-renewable                                                               
resource  wealth  to be  taken  out  on  the  hope that  "we  get                                                               
something at the backend."   He re-emphasized the importance of a                                                               
holistic approach to the "total  government take value chain that                                                               
is involved here."  He contended  that his desire was to continue                                                               
to  work  with mining  industry  representatives,  to think  this                                                               
through, and  to find  a truly  competitive fair  share mechanism                                                               
that  is founded  upon  total government  take  and assures  that                                                               
every ounce  of natural  resources that is  taken from  the state                                                               
results in the state getting its fair share.                                                                                    
10:01:03 AM                                                                                                                   
REPRESENTATIVE JOSEPHSON  commented that  relative to  changes in                                                               
oil and  gas tax, while  he understands that the  perception from                                                               
the industry  might be that  the referendum  created uncertainty,                                                               
his thoughts about  that exercise - that is the  election held in                                                               
August 2014 -  was that it was a thoroughly  American exercise in                                                               
every respect.    He stated that is something  he doesn't want to                                                               
change   regardless  of   industry  reaction;   the  process   of                                                               
initiative referendum dates back to  Teddy Roosevelt and is built                                                               
into the Constitution of the United States.                                                                                     
REPRESENTATIVE   JOSEPHSON  referenced   slide  27   and  further                                                               
commented that he understands that  mineral value is nothing like                                                               
the profit  that is  taken by  the mining  industry, and  he also                                                               
understands  that [profit  information]  is  proprietary, yet  he                                                               
looks at  $3.5 billion [mineral  value figure] in relation  to $6                                                               
million tax.   He admitted  his reaction  is a reflection  of his                                                               
elementary view of  the information and need for more  study.  He                                                               
insisted  that he  still does  not understand  the impact  on the                                                               
[mining]  industry  and  remains  puzzled at  the  idea  that  in                                                               
today's commodity prices, it is  $6 million of tax spread through                                                               
five hard  rock mining sites, and  he wonders if that  is a deal-                                                               
breaker [for the mining companies].                                                                                             
MS. MATTHIAS replied to Representative  Josephson by promising to                                                               
provide  him  with more  explanation  of  the difference  between                                                               
gross production  value and  the reality of  what is  received in                                                               
the state  to the extent  that she can given  the confidentiality                                                               
of these  very tough negotiated  deals with the smelters  and the                                                               
refiners.  She further agreed  that having more information about                                                               
how hard  it is to do  business in Alaska might  put that overall                                                               
gross production value in better context.                                                                                       
10:03:58 AM                                                                                                                   
REPRESENTATIVE TARR indicated that  without specific examples, it                                                               
is  challenging to  understand  the impact  of  any changes  that                                                               
would  make the  mines less  promising at  a time  of low  profit                                                               
margin due  to commodity  prices.    She attested  that she  is a                                                               
supporter of  the industry considering  the good-paying  jobs and                                                               
[positive] impacts  on local communities.   She  recognized areas                                                               
where the  [mining] industry may  be in conflict with  the salmon                                                               
[industry], but  otherwise said she  sees opportunities,  like at                                                               
Donlin Creek  with the  potential for  energy transmission.   She                                                               
asked  the presenters  to help  the committee  members understand                                                               
instances where  mining profit  is on  the margin  and operations                                                               
MS. MATTHIAS responded  that she and Ms. Crockett  would do their                                                               
best to provide the committee with more information.                                                                            
10:05:32 AM                                                                                                                   
REPRESENTATIVE  SEATON told  the testifiers  that he  appreciated                                                               
them  coming forward  to talk  to the  committee and  pledging to                                                               
provide more  information as requested.    He mentioned  that the                                                               
[mining] industry  calculates its  own taxes  and DOR  audits the                                                               
taxes, and  the legislators  are unable  to get  information from                                                               
DOR on  single tax-payer specific  information.   Consequently he                                                               
said  he appreciates  the AMA  providing  this needed  additional                                                               
[HB 253 was held over.]                                                                                                         

Document Name Date/Time Subjects
HRES-SRES AMA CAP mining update FINAL 2016-02-24.pdf HRES 2/24/2016 8:30:00 AM
HB 253