Legislature(2015 - 2016)BARNES 124
02/24/2016 08:30 AM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB253 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 253 | TELECONFERENCED | |
| + | 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
condition.
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
smelting.
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
concentrate.
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
businesses.
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
[million].
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
questions.
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
public.
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
correct.
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
replaced.]
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
him.
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
information.
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
percent.
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
years.
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
hindered.
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
information.
[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 |