Legislature(2007 - 2008)SENATE FINANCE 532
02/28/2007 12:00 PM Senate RESOURCES
| Audio | Topic |
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| Start | |
| Presentation: Alaska Mining Industry: Major Mine Projects; Taxation; and Donlin Creek Workforce Development | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
February 28, 2007
12:09 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
HOUSE RESOURCES
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative Scott Kawasaki
MEMBERS ABSENT
SENATE RESOURCES
Senator Lyda Green
HOUSE RESOURCES
Representative Vic Kohring
Representative David Guttenberg
COMMITTEE CALENDAR
Presentation: Alaska Mining Industry: Major Mine Projects;
Taxation; and Donlin Creek Workforce Development
PREVIOUS COMMITTEE ACTION
No action to report.
WITNESS REGISTER
STEVE BORELL, Executive Director
Alaska Miners Association
Anchorage, Alaska
POSITION STATEMENT: Spoke of large mines in Alaska
KARL HANNEMAN, President
Council of Alaska Producers
Resource Development Council
Anchorage, Alaska
POSITION STATEMENT: Spoke of mining taxation.
STAN FOO, Alaska Manager
Barrick Gold Corporation
Anchorage, Alaska
POSITION STATEMENT: Introduced Donlin Creek staff.
BILL BIEBER, Operations Manager
Donlin Creek Project/Barrick Gold Corporation
POSITION STATEMENT: Spoke of local-hire initiatives.
GEORGE GARDNER, President (retired)
Chiulista Camp Services
Anchorage, Alaska
POSITION STATEMENT: Spoke of local-hire initiatives.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the joint meeting of the Senate and
House Resources Standing Committees to order at 12:09:26 PM.
Senators Huggins, McGuire, Wielechowski, Wagoner, Stevens, and
Stedman, and Representatives Edgmon, Kawasaki, Wilson, Seaton,
Roses, Gatto and Johnson were present at the call to order.
^Presentation: Alaska Mining Industry: Major Mine Projects;
Taxation; and Donlin Creek Workforce Development
STEVE BORELL, Executive Director, Alaska Miners Association,
said there are 70 placer operations in the state, but others are
permitted. Production averages about 25,000 ounces per year
around the state. He showed an image of a reclaimed project at
Valdez Creek, which provided a new fishery in the area.
12:11:57 PM
MR. BORELL provided a list of mines in Alaska, including
Usibelli coal, Greens Creek, Red Dog, Fort Knox, Pogo, and Nixon
Fork. The projects under development include Kensington, Rock
Creek, Chulitna coal, Donlin Creek and the Pebble project. The
Usibelli coal mine has been operating for 64 years and has 95
employees and produces about 1.5 million tons of coal per year.
CHAIR HUGGINS noted that Agrium wants to use Usibelli coal.
MR. BORELL showed a photo of Greens Creek, which is now attached
to the Juneau intertie system. The added demand will allow
Alaska Electric Light and Power to build a plant at Dorothy
Lake. It has 294 employees, and 63 live in Juneau. He said a
dormitory was constructed to allow some people to live on site.
He showed a photo of the Red Dog zinc and lead mine, and it has
a newly-paved runway. It has 450 employees and 56 percent are
NANA shareholders. He said they will be drilling for natural
gas, because energy is a major cost for them.
12:18:36 PM
MR. BORELL showed a picture of the area prior to mining.
Sometimes acid rock drainage would kill fish for several miles,
he said. He showed the Fort Knox open pit mine. It employees 440
people and has $39 million in annual wages and benefits. There
have been no lost-time accidents in four years. He showed the
Pogo surface facilities near the Goodpasture River. It expects
full production in May, and it is a computerized modern mill.
The Nixon Fork mine has 86 employees, 90 percent are Alaskans,
and the annual payroll is $5.9 million. There have been no lost-
time injuries in the past four years. He spoke of the Kensington
project north of Juneau. Crews will be brought across Berners
Bay by boat and taken up to the worksite by bus. It expects to
join two sides of an 800-foot tunnel in July. The mine has 60
permits in hand, and 416 employees are on site. During
operations it will employ 200 workers, he explained.
12:24:19 PM
MR. BORELL said the Rock Creek Mine is in construction and has
spent $66.4 million to date. It will employ 135 people with an
annual payroll of $10.4 million. Chuitna coal will have a
supplemental environmental impact statement by the fall of 2007.
An EIS was completed many years ago, but the coal prices fell
and it halted operations. It has a 12 million-ton per year
capacity. The coal will be loaded in Cook Inlet into vessels
with a draw of up to 60 feet. The Donlin Creek project has eight
drills operating, and it is completing its feasibility study.
12:27:34 PM
MR. BORELL said the Donlin Creek project has employees from 23
villages in the region. He said the Pebble project has invested
$128 million to date. In 2006 they had four deep drills. Over
700 people worked on the project last year, and 70 percent were
Alaskans. In 2007 there will be eight deep drills operating and
it will continue with its engineering studies.
12:29:39 PM
KARL HANNEMAN, President, Council of Alaska Producers, said the
president of Alaskan Minerals and Energy Resource Education Fund
provided materials for the committee. He said Legislative
support for the industry is important and he expressed
appreciation for support of that program. His council represents
a consortium of the major mining operations in Alaska. He said
there is a state mining license tax, which was a significant
component of the resource policy at statehood, and it has been
amended twice since statehood. It provides for 7 percent net
profits tax on major operations payable from all operations
regardless of land status or mineral ownership.
CHAIR HUGGINS said there is an ongoing debate about net versus
gross tax, and he asked how long it has been a net tax.
MR. HANNEMAN said since 1913.
SENATOR STEDMAN asked for the definition of net and all the
deductions.
12:32:47 PM
MR. HANNEMAN said the state mining license allows a depreciation
schedule that is consistent with the federal schedule. It
provides for deduction of operating expenses and cost or
percentage depletion, and it is a one-year look at the operating
cash flow of the operations. There are no carry forward losses
or carry back. It is transparent and simple from an accounting
standpoint.
SENATOR STEDMAN said it is different from the net oil tax.
CO-CHAIR GATTO asked what the tax would be if it was on gross
income.
12:34:11 PM
MR. HANNEMAN said the objective of a net profits tax is to
provide for a tax that responds to the health of the industry
based on world market prices, so you would have to pick a point
in time to calculate what a gross tax would be.
CHAIR HUGGINS asked if profits in mining are relatively small.
12:35:26 PM
MR. HANNEMAN said the profit margin is low as compared to oil or
telecommunications. Commodity prices have increased a lot in the
past few years, so mining operations are doing very well.
12:36:19 PM
MR. HANNEMAN said another tax component is rents on mining
claims and royalties on state leases, which came about when the
state attorney general questioned whether the state was getting
adequate return from its resources. The legislature worked with
the industry in 1982 and tried a tax policy modification that
ended with years of litigation. The Alaska Supreme Court said
the state must charge rents or royalties on top of the mining
license tax from production on state land. In 1989 a consensus
was reached that imposed both rents and royalties-"kind of a
belts and suspenders approach, but one that was developed in a
consensus-building process that ultimately went through the
legislature." It provides for rents of up to $3.30 per acre per
year in addition to a royalty of 3 percent of net profits. It
applies only to state land, he noted. He said it is important to
note that this occurred prior to a "major industry expansion."
It set the groundwork to allow that expansion, he opined, and
provided sound fiscal policies that the industry could
understand prior to investing.
12:39:33 PM
MR. HANNEMAN showed the total value of mineral production in
Alaska and the production from state land. The increases over
the past years have been from federal or Native lands. He said
that zinc has the highest value, and it is produced at Greens
Creek and Red Dog. Gold is also a major driver of Alaska's
mineral industry, he added. The price of zinc was depressed for
many years and the mines were only hanging on. Fort Knox had a
tough time with several capital write-downs when gold prices
were low. It takes a long-term perspective, he stated.
12:42:03 PM
MR. HANNEMAN said the Red Dog, for the first time in 21 years,
has announced "a full capital recovery including interest factor
as of the end of 2006." He showed a graph of the cumulative net
investment in the Pogo project, which is now transitioning to
production after more than a decade since its substantive
investment began. The increased commodity prices show increasing
profitability and payments. He showed the payments to
municipalities, which are generally stable and not based on
commodity prices. A smaller increment is state rents and
royalties, but the mining license and income taxes increase
rapidly with commodity prices.
12:44:32 PM
MR. HANNEMAN said Fort Knox mine is on Alaska Mental Health
Trust land, and he showed the payment to the trust. He spoke of
a Department of Commerce report and the net return to Alaska
from timber, tourism, minerals, and commercial fisheries. Mining
provides smaller revenue, but there is less cost to the state
regulators.
12:46:20 PM
MR. HANNEMAN said he has been asked if mineral payments to
municipalities are relevant or significant. He showed a graph of
"the state sharing of the fish tax that goes back to the
municipalities, and when that sharing does occur, the mineral
industry is paying a reasonable share compared to other
industries." He showed the gross value of the industries and the
net returns. He pointed out the data for FY05, but he believes
it missed the rentals paid by the mining industry. He then
showed the same chart with the same gross value of the
industries and the net return to the state as a percent of that
gross value.
12:49:05 PM
MR. HANNEMAN said the Red Dog mine has paid NANA Regional Native
Corporation $185 million since 1989, and payments are increasing
substantially. He showed a chart of distributions to other
Native corporations through the 7(i) sharing. He believes the
mining industry can support economic development in diverse
areas of Alaska. He summarized that mining can provide
regionally significant private-sector economic opportunity, "but
we'll never compare to the magnitude of oil and gas." He said
mining pays its fair share to the state, compared to other
industries. It pays taxes on profits whether it is extracted
from state, federal or private land. Tax payments are rising
commensurate with commodity prices. The tax regime is working,
and stable fiscal and regulator policy is needed to attract the
capital to allow the industry to reach its potential, he
concluded.
12:51:40 PM
SENATOR WAGONER asked when the tax structure was last changed.
MR. HANNEMAN said it was when the rent and royalty issue was
resolved in 1989, other than regulatory adjustments.
SENATOR WAGONER asked why Mr. Hanneman made taxation comparisons
to fishing and tourism, and but not to oil and gas.
MR. HANNEMAN said he was relying on a state report, but there
are more similarities with timber, tourism and fishing because
of the scope and worldwide capital recovery rates in the oil
industry.
12:53:35 PM
SENATOR WIELECHOWSKI asked the net profits of the mining
industry last year and the percentage of revenue.
MR. HANNEMAN said he doesn't have the 2006 return yet.
CHAIR HUGGINS asked for that information at the end of April.
12:54:30 PM
STAN FU, Alaska Manager, Barrick Gold Corporation and project
manager for the Donlin Creek project said the project is in the
Yukon-Kuskokwim region near the village of Crooked Creek. He
said Placer Dome began the project and was taken over by
Barrick, which has continued the local hiring efforts. The
feasibility study will be complete by November, he said.
BILL BIEBER, Operations Manager, Donlin Creek Project/Barrick
Gold Corporation, said work force development has been a lot of
trial and error, but "it's a story that we're certainly proud to
talk about."
GEORGE GARDNER, President (retired), Chiulista Camp Services,
said Chiulista's parent corporation is Calista Regional Native
Corporation. Donlin Creek has a five percent bidder preference
built into the lease agreement for any subsidiary or joint
venture of Calista. Maximum shareholder hire is required too.
MR. BIEBER said in 1995 Placer Dome entered an agreement with
Calista for an exploration program. Any shareholder, descendent,
or spouse will have hiring preference at the site. Problems
developed early; the turnover rate was 318 percent. It would
have been easy to modify the programs, but instead the company
went to the villages and asked people why they quit. The program
was retooled, he said.
MR. GARDNER said the villages were kept updated on what was
happening, whether it was good news or bad news. It started an
open dialogue. The village tours emphasized the zero tolerance
of drugs or alcohol for employees. Once that was known, it
contributed to an overall sobering of the villages, he said.
MR. BIEBER said the mine provided an opportunity to learn and
fostered job advancement. The success of the program depended on
how quickly the general workforce could advance to supervisory
positions. Discussions included the cultural differences between
eastern and western cultures. He said it was important to create
an environment where people could be successful. It is an
exploration program, so the jobs are not routine. There are
different challenges each day, he explained. In 2005 the work at
Donlin Creek expanded and the work force escalated.
1:05:34 PM
MR. BIEBER said there were almost 45 percent more employees, and
at the end of 2005 there was over 92 percent shareholder hire;
pre-employment fail rate dropped to virtually nothing; random
screen fail rate was 5 percent; and turnover went down to 10
percent. In 2006 the program became bigger than could have been
imagined: 275,000 feet of core were drilled and the camp was
expanded to 150 people. The workforce was doubled in two and a
half months. He said he expected higher rates of turnover and
drug and alcohol failure rates, but an initial core group of
employees mentored the new employees.
1:07:19 PM
MR. GARDNER said Chiulista Camp Services employed over 200
shareholders in 2006 with over $6 million in wages. He saw
improvement in all skill levels. Even if the mine doesn't
operate there will be a great prospect for career-type
employment for the people in the region. They developed a strong
sense of pride, commitment, and community. It has become a model
for indigenous entities in rural Alaska, he opined.
1:08:18 PM
MR. GARDNER listed villages that had employees at Donlin Creek.
Chiulista Camp Services is a wholly-owned subsidiary of the
Calista Corporation. It was incorporated in 1996 because of the
Donlin Creek project and provides the remote-site catering camp
management services. It now has an SBA 8(a) contract with the
federal government to provide personnel outside of Alaska, he
said. It can cater up to a 150-person remote site camp. It is
developing shareholder cooks and housekeepers.
1:10:07 PM
MR. GARDNER said the company provided drilling assistants, but
now there are 10 shareholders trained as drillers, and there are
more on the way. It also caters other remote projects from
Petersburg to Prudhoe Bay. In 2004 it purchased Mayflower
Catering in Anchorage with a commercial kitchen. Mr. Gardner
said there is a silent partnership with Barrick Gold, and "by
working together on this over such a period of time, we've been
able to have that mutual trust and respect, and we hope to go on
and do bigger and better things."
1:12:23 PM
MR. BIEBER showed photos of workers and introduced two in the
audience who deserve much credit for the program's success.
1:14:10 PM
MR. BIEBER listed other employees, including those in
purchasing; paramedic and safety; laboratory work; geo-technical
work; administration; electrical work; human resources;
environmental geology; core cutting; field supervision;
equipment maintenance; catering; and camp counseling. Control of
alcohol has been a problem, so the project has its own counselor
who has meetings on site and with the spouses in the village.
The project is sponsoring a five-day session in Kako, and twelve
employees and spouses will attend. He said there are many tours
for elders in the region in order to listen to their concerns.
1:19:17 PM
MR. BIEBER said the project is trying to gear up to become a
mine so there will be more growth. There are 214 regional
employees on the payroll, and that is a good start, he said. "We
do the impossible on a daily basis, and miracles, well, they
take a little longer," he stated.
1:19:59 PM
CHAIR HUGGINS thanked the presenters. He said, "If you are going
to have a job in some of the more remote areas, it is probably
resource-related." He surmised that some of the best therapy for
people is a job, which provides hope for peoples and their
children. He adjourned the meeting at 1:22:10 PM.
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