Legislature(2005 - 2006)
02/27/2006 09:02 AM House W&M
| Audio | Topic |
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| Start | |
| HB418 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
February 27, 2006
9:02 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Ralph Samuels
COMMITTEE CALENDAR
HOUSE BILL NO. 418
"An Act relating to a mining production tax; relating to the
mining license tax; relating to production royalties on
minerals; relating to exploration incentive credits; and
providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 418
SHORT TITLE: MINING PROD. & LICENSE TAXES/ROYALTIES
SPONSOR(S): REPRESENTATIVE(S) SEATON
02/01/06 (H) READ THE FIRST TIME - REFERRALS
02/01/06 (H) W&M, RES, FIN
02/22/06 (H) W&M AT 9:00 AM CAPITOL 106
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(W&M)
02/24/06 (H) W&M AT 9:00 AM CAPITOL 106
02/24/06 (H) Heard & Held
02/24/06 (H) MINUTE(W&M)
02/27/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
STEVE BORELL, P.E., Executive Director
Alaska Miners Association, Inc.
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 418.
RICH HEIG, Vice President
Council of Alaska Producers (CAP);
General Manager
Greens Creek Mining Company
Juneau, Alaska
POSITION STATEMENT: Spoke in opposition to HB 418.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:02:11 AM. Representatives
Weyhrauch, Moses, Seaton, and Wilson were present at the call to
order. Representatives Gruenberg and Rokeberg arrived as the
meeting was in progress.
HB 418-MINING PROD. & LICENSE TAXES/ROYALTIES
9:02:18 AM
CHAIR WEYHRAUCH announced that the only order of business would
be HOUSE BILL NO. 418, "An Act relating to a mining production
tax; relating to the mining license tax; relating to production
royalties on minerals; relating to exploration incentive
credits; and providing for an effective date."
9:02:44 AM
STEVE BORELL, P.E., Executive Director, Alaska Miners
Association, Inc., recapped his testimony from the previous
hearing on HB 418 saying that the administration and past
legislation led those in the mining industry to believe
"[Alaska] is open for business." Many companies responded, he
noted, by investing in Alaska at a time when metal prices were
low. By 2004, the metal prices began to rise such that today
all precious metals, base metals, and coal prices are at
elevated levels - "the first time that this has ever happened
....," he said. He expressed that whereas the mining industry
has appreciated the past efforts of the administration to
improve business viability in the state, it "clearly does not
support this legislation ...." Referring to comparisons made at
the prior meeting between the mining and fishing industry, he
said that it is "not fair" to compare the two. He observed that
both industries do have a need for people and mobile equipment;
however, "beyond that, many of the things do not compare." He
relayed that the mining industry, unlike the fishing industry,
involves many requirements and expenses such as: the baseline
environmental studies and environmental impact statements (EIS)
that often last 3 or more years; the approximately 50 different
state and federal permits with the expense born by the company
itself; the guaranteed "pay-back" for use of state-built port
facilities, such as the one at the Red Dog Mine, which cost the
state $105 million to build and for which the mine owners have
paid back $208 million to date on the loan; and the building of
roads, electrical power plants, and processing plants, all paid
up front by mining companies before receiving any returns.
MR. BORELL then referred to prior comparisons made to mining
industries in other countries such as Canada where roads,
railroads, power plants, and even cities were built and paid for
by the Canadian government to provide jobs and infrastructure
for the timber and mining industries. He returned to a previous
discussion regarding foreign companies and foreign ownership in
Alaska and, in citing many examples of such in operation said,
"It's hard to understand why anyone would want to criticize
foreign investment in Alaska." In conclusion, he opined:
We believe that passage of this bill, even out of this
one committee, would be an extremely bad thing. It
would not be understood by the industry, and it would
have a negative effect ... and it would be bantered
about in other jurisdictions as "look ... Alaska just
changed the law on taxation; they turned it upside
down after 20 plus years of stability, and now they've
pulled the rug out from under the companies." So with
that, we urge that this committee not pass this bill.
9:16:55 AM
REPRESENTATIVE ROKEBERG asked Mr. Borell whether he perceives
moving HB 418 out of committee as "a positive pro-tax action by
a legislative body."
MR. BORELL said that he would. He informed the committee that
the [mining industry in Alaska] is currently in extreme
competition with British Columbia (BC). He explained that BC
has pass-through taxation such that a BC resident investing in a
mining company, which in turn invests its operations in BC,
treats that investment as an expense on his/her taxes - a
benefit not possible for Canadians when investing in companies
in Alaska who would likely be further discouraged by the change
in mining taxation proposed in HB 418.
9:18:55 AM
REPRESENTATIVE WILSON sought confirmation of her understanding
that most companies are able to deduct expenses and most don't
see a profit for several years, and asked Mr. Borell to compare
this between those businesses in Alaska and Canada.
MR. BORELL clarified that he is referring to the individuals,
not the companies, and the tax deductions they are allowed to
make when investing in Canadian companies. This flow-through
benefit would not be applicable in Alaska due to there being no
personal income tax for residents in this state, he explained.
In further response to questions, he said it was to BC
residents' personal advantage to see their money invested within
BC rather than outside the province. He highlighted that this
"flow-through" investment advantage is also available on a
national level in Canada as well. However, he mentioned that he
was not familiar with the specifics of either benefit.
REPRESENTATIVE SEATON sought confirmation that Mr. Borell was
referring specifically to Canadian [investors], not investors
worldwide.
MR. BORELL said he believed this is correct.
REPRESENTATIVE SEATON then asked Mr. Borell whether the
companies interested in allowing those investors are leaning
toward using a Limited Liability Company ("LLC") or S
corporations in Alaska "so that they do pass the taxes through
and so that they're not paid in Alaska."
MR. BORELL said he did not know.
9:22:51 AM
REPRESENTATIVE GRUENBERG suggested that those Canadian investors
allowed to take deductions on their income tax could be "lured"
to Alaska where no state income tax is paid.
MR. BORELL specified that he is referring to investors, not
individual workers, and added that the industry "does everything
it can to find those Alaskans [seeking employment] and put them
to work, especially in their local communities." In response to
questions by Representative Wilson, he recalled that according
to a recent study by the Canadian Consulate, over 50 percent of
the different mining investments in Alaska are Canadian. He
opined that the United States (U.S.) has "basically run the
mining industry out over the past couple decades" due in part to
federal mining laws; the extremely stringent, often punitive,
environmental requirements; and the trend in consolidation of
some of the U.S. mines by foreign companies, such as the
purchase of the Homestake Mining Company in South Dakota by the
Canadian mining company, Barrick Gold Corporation. He concluded
that "we just don't have the investments coming to the United
States that we did at one time."
9:25:21 AM
REPRESENTATIVE SEATON asked Mr. Borell to compare the difference
between the net smelter return (NSR) rates currently paid by
those companies mining on private lands - such as the Fort Knox
Mine on the Mental Health Trust lands and the Red Dog Mine on
Native corporation lands - to the tax Alaska receives from those
mines operating on state land.
9:26:25 AM
MR. BORELL replied that he did not know what these rates would
be, and furthermore was not certain how a comparison could be
made. He reminded the committee that there are only five large
mines in the state: Usibelli Coal Mine, Inc., Greens Creek
Mine, Red Dog Mine, Fort Knox Mine, and the Pogo Mine Project.
He highlighted that the Pogo Mine Project is the first mine
being operated purely on state land.
REPRESENTATIVE SEATON explained that the purpose of this bill is
to assure a reasonable return. Prior testimony has been heard
indicating that "a net smelter return royalty rate will kill
every mine in Alaska," he said, and "it's got to be [maintained
at] 100 percent of the net." However, he indicated that those
big mines developed recently on private lands have paid higher
NSR rates than those proposed in HB 418. He sought
clarification as to why those companies are willing to pay the
higher rate on private land and not on state land.
MR. BORELL said he has not heard it said that "an NSR would kill
all the mines in Alaska." He said he "presumed" Red Dog Mine
has an NSR, however, noted that neither the Greens Creek Mine,
the Fort Knox Mine, nor the Pogo Mine Project have an NSR. He
stated that he was "at a loss to know which mines are on private
land that have negotiated an NSR." In response to Chair
Weyhrauch, Mr. Borell confirmed that the Pogo Mine Project is on
state lands. In regard to whether there are any distinctions
between the tax rate that's assessed against a mine and the
lands on which they operate, he explained that the Mining
License Tax is the same for every operation irrespective of the
land ownership. He noted that the production royalty is
strictly against state land, however, as well as payment of
rent, which escalates over time.
9:31:25 AM
REPRESENTATIVE WILSON requested Mr. Borell repeat his
explanation of which mines are on which lands.
MR. BORELL clarified that Red Dog Mine is on NANA Regional
Corporation lands owned by Alaska Natives of the Northwest
Arctic, Greens Creek Mine is on federal land and private lands,
Fort Knox Mine is on Mental Health Trust lands, Pogo Mine
Project is on state land, and Usibelli Coal Mine, Inc. is on
state land. He highlighted that these are the only 5 mines in
Alaska and they employ over 100 employees.
CHAIR WEYHRAUCH asked if there is a distinction between
exploration and development.
MR. BORELL said that although various jurisdictions in the world
would interpret this differently, in Alaska development begins
once the construction of facilities begins. In further response
to questions, he explained that "the break point," is clearly
defined under the Mining License Tax as the point at which a
company has all its permits in place to start [development]. He
remarked that "if you can jump through all the hoops to get your
permits, you're very pleased to start construction, typically."
CHAIR WEYHRAUCH sought confirmation of his understanding that
the most expensive part [of the mining business] is exploration
during which companies typically go through a permitting
process, perform studies and environmental analysis, address
litigation, perform infrastructure development, and transport
gear to the site.
MR. BORELL commented that the aforementioned explanation is
slightly mixed between exploration and development. He exampled
Kensington Mine, which prior to construction had a camp in
place, a road to the site, an adit driven into a mountain,
entries developed off the adit to obtain bulk sampling - all of
these steps taken before it was determined to be economic to
build the mine and go forward. "That's when the development
starts," he explained. Furthermore, all permits have to be in
place to make that decision.
CHAIR WEYHRAUCH asked if there was a point at which the company
could say, "We're not in exploration anymore, incurring those
costs and overhead; we're in construction and development." He
noted that Kensington Mine does not have all its permits, such
as Section 404 of the Clean Water Act (CWA), yet it is
constructing.
MR. BORELL explained that Kensington Mine did have that permit
at one time but it was withdrawn and [development] was stopped.
He said that the company did not start construction of its
facilities until all permits were acquired.
9:35:41 AM
REPRESENTATIVE SEATON informed the committee that neither the
current mining tax nor the proposed tax differentiates between
exploration and construction. The proposed tax is applied after
construction starts, at the time of production.
MR. BORELL said his understanding of the bill is that it focuses
on production and not on exploration and construction, "except
for the piece that removes the investment incentive."
REPRESENTATIVE SEATON informed the committee that the portion of
the bill addressing investment incentives is under Section 15.
MR. BORELL opined that the investment incentive has done
"exactly what we hoped it would and what ... the legislature
hoped it would." He said during discussions with former
governor Tony Knowles, there were questions raised as to the
possibility that providing [investment incentives to the mining
companies] would "strip out any revenues that the state was ever
going to get from mining." He relayed that his response to this
was that it would be many years before any project could
potentially receive a benefit from the proposed incentive. In
fact, he expressed his belief that no company within the last 10
years has been able to take advantage of and receive a benefit
from this exploration incentive. More than anything, he opined
that the benefit is more of an encouragement to companies and to
"stop it now is very, very wrong."
9:38:44 AM
REPRESENTATIVE ROKEBERG asked how long it takes a mining company
to obtain state and federal permits to bring a project online.
Additionally, he asked Mr. Borell to comment on the failure rate
of earlier mining projects in Juneau and surrounding areas.
MR. BORELL relayed that it took Pogo Mine three years and one
month to go through the permitting process which was considered
to be a "fast process." Kensington Mines, however, has been
through the EIS process three times, with the initial process
taking over two years, he said. By the time it was completed,
he explained, the price of gold had decreased such that the
project was no longer economic. The company then went through
two more lengthy periods of completing the required supplemental
EISs for each period - the first of which was completed just
when the price of metal had decreased again and the completion
of the second was followed by the closure of the mine.
9:42:39 AM
CHAIR WEYHRAUCH sought clarification on earlier testimony
attesting that no exploration credits have been used to date.
MR. BORELL suggested that more information could be provided by
the Division of Mining, Land and Water in the Department of
Natural Resources (DNR). He said to his knowledge, there have
been companies which were certified, however, none that have
ever been able to apply exploration credits to taxes owed.
REPRESENTATIVE SEATON, in response to a question by Chair
Weyhrauch, explained that "the exploration credits were against
the Mining License Tax and ... since the Mining License Tax was
repealed, then everything that applied to the Mining License Tax
no longer applied." However, he informed the committee that it
was his understanding that those companies previously certified
would still "under law" be able to apply the credit.
REPRESENTATIVE ROKEBERG questioned whether this would hold true
when a law is repealed. He then commented on the lengthy
periods of time for the Pogo and Kensington mine developments,
and asked whether Mr. Borell could provide the committee with a
more precise estimate on the amount of time required to
establish a mine to the point it's "sanctioned for investment."
MR. BORELL explained that the years to which he referred for
both these mines were for the period of time each company was
working on environmental impact statements. He added that there
are many years before the completion of the environmental impact
process and during which mining companies spend considerable
lengths of time exploring, designing, and evaluating the scope
of the project and time involved.
REPRESENTATIVE ROKEBERG expressed concern for the considerable
amount of time and effort the legislature has spent in the last
decade in creating the exploration credit taxes in addition to
the expense of providing geophysical aerial mapping "to enhance
the investment and development of the mining industry in
Alaska." He relayed that if he could see any substantive
progress in "narrowing this window of development [to a more
reasonable time frame] so it would have a net present value
positive on investment and jobs in this state, [he] might be
more amenable to looking at the government-take situation [as
proposed in HB 418]."
9:46:41 AM
REPRESENTATIVE WILSON asked Mr. Borell whether the fact that
companies have not yet taken advantage of the incentives tax is
because they haven't made sufficient profits to do so. She also
inquired as to whether profitability was impacted by which lands
were involved - Mental Health Trust Lands, Native lands, or
state lands.
MR. BORELL said he did not know the answer to the latter
question. To the first question, he explained that the reason
"no tax has been taken" is that no [mining] project has
progressed far enough to be in operation and to then [apply] a
credit. He expressed his belief that Pogo Mine, newly in
production, will be the first to do so, and Usibelli Coal Mine,
Inc. is close to taking the credit as well. He clarified that
the investment incentive credit can be applied against the
Mining License Tax, state royalties if the operation is on state
land, or a corporate income tax. However, he relayed that if a
company is not in operation, there is no way it can take the
credit, and furthermore the credit can be applied to no more
than 50 percent of the required tax. He opined that the
incentive credit program was "an extremely well thought-through
process."
REPRESENTATIVE WILSON restated her question as to whether "who
owns the land" makes a difference to mining companies and how
much of a difference.
MR. BORELL said he was not certain of the answer. However, he
highlighted that during former president Bill Clinton's
administration, no one explored on federal land and only
recently has such been considered. He relayed that there are
many reasons beyond the required royalties that affect
consideration of where to mine, such as political stability or
the cost and value of [the available minerals].
9:52:07 AM
REPRESENTATIVE SEATON, referring to Table 2 of the "Revenue
Collections Detail," directed the committee's attention to the
$2,568 entry for "Alaska education credit" and the $29,736 entry
for "mineral exploration incentive credit" in fiscal year 2003
(FY 03). He then referred to a previous committee hearing on HB
418 when Rick Van Nieuwenhuyse of NovaGold Resources, Inc.
testified that one of the differences between mining in Alaska
and British Columbia (BC) is the higher energy costs in this
state. Representative Seaton questioned whether the proposed
installation of a [power] line to run from the Four Dam Pool
hydroelectric project in Alaska to BC, should move forward. In
light of comments made that those operating in Alaska, as
opposed to BC, could not expect a reasonable return with any
increase to taxes because of the already high electric costs, he
pointed out that this power line would provide electricity to BC
at possibly higher rates than those charged in Alaska.
MR. BORELL said he did not know the economics to this, though he
suggested that "the incremental cost of selling that power is
probably pretty miniscule" and it could possibly provide "low-
priced power."
REPRESENTATIVE WILSON relayed that everyone connected to that
power grid in her district and "clear up into South Central"
will have lower electrical prices.
REPRESENTATIVE SEATON clarified that his previous comment was
made in an attempt to create more discussion on his observation
that the reason why the [mining industry] tax structure in
Alaska can't be equivalent to Canada's is due to the fact that
Canada provides infrastructure and power to its industry whereas
Alaska, with its lower tax rates, [must] charge more for power.
9:56:43 AM
RICH HEIG, Vice President, Council of Alaska Producers (CAP);
General Manager, Greens Creek Mining Company, said he wished to
clarify for the record that he did not hear Mr. Van Nieuwenhuyse
say that "any NSR tax will kill the mining industry in the
state." He said he would like to comment from the investor's
perspective. When his company is considering where to invest,
he explained, it models the life of the mine for x-number of
years and figures in a range of costs from production, operating
costs, capital costs, smelting and refining charges, and all
applicable taxes. An NSR tax, he said, reduces the net income
and "raises the hurdle for a project to be developed."
Additionally, with a drop in metal prices, an NSR tax makes the
project more difficult to be approved from an investment
standpoint, he opined, and is viewed as "a regressive tax" - a
definite factor in evaluating a project. Regarding the fair
market value appraisals on federal lands, he relayed that the
Greens Creek Mining Company has a net island return on some
parts of its federal lands. This type of return, he explained,
is similar to an NSR; however, it's based on varying metal
prices where lower metal prices lower the tax and higher ones
raise the tax. He relayed that his company is currently
considering other properties on federal lands - lands which are
viewed as a "negotiated item" at fair market value of the
property and potential minerals paid for up front at an "NSR
type return." However, he said that it is his company's intent
to "steer away" from NSRs in negotiating on federal lands.
10:01:44 AM
REPRESENTATIVE SEATON sought confirmation of his understanding
that an NSR is applied to minerals after they have been
processed and are ready for shipment.
MR. HEIG said he does not understand the use of the term "net
smelter return" as it's described in the bill. He clarified
that the NSR with which he is familiar begins at the point at
which the product is ready for transportation.
REPRESENTATIVE SEATON referred to mine mouth value addressed in
HB 418, which allows a company to subtract ball mills and other
on-site processing costs in addition to the deductions allowed
under an NSR. He then asked if the mine mouth value were to
include the deduction of costs for the preparation of ore for
shipment, would it be perceived as advantageous [by investors]
or less attractive than an NSR.
MR. HEIG expressed his belief that it would be more attractive
and "more advantageous from the standpoint of a net smelter
return that starts at transportation, but it's still a pre-tax
versus post-tax calculation." In response to questions by
Representative Rokeberg, Mr. Heig explained that "net island
return" is the term used between Greens Creek Mining Company and
the U.S. Forest Service. As far as there being any parameters
determined by federal law or regulation to guide the negotiation
process, he said he was not involved when the net island return
was negotiated between the company and the U.S. Forest Service.
He clarified that his company is currently negotiating other
projects on federal lands in other states and said he perceives
it to be a "negotiating item that benefits both parties as best
as possible."
REPRESENTATIVE ROKEBERG asked if it would be fair to say that
there is some flexibility in a private company's dealings with
the federal government.
MR. HEIG said he believed this to be correct.
REPRESENTATIVE SEATON asked whether there is "a federal royalty
paid on the main portion of Greens Creek."
MR. HEIG said there was not.
[HB 418 was held over.]
10:05:01 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:05 a.m.
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