SENATE RESOURCES COMMITTEE April 19, 1995 3:38 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Robin Taylor Senator Georgianna Lincoln Senator Lyman Hoffman COMMITTEE MEMBERS ABSENT Senator Steve Frank Senator Rick Halford COMMITTEE CALENDAR Mining Overview and Alaska Minerals Commission Report with Dr. Earl Beistline SENATE RESOLUTION NO. 2 Opposing a proposed international convention classifying coal as a hazardous and noxious material. SENATE BILL NO. 130 "An Act relating to marine pilots and the Board of Marine Pilots; extending the termination date of the Board of Marine Pilots; and providing for an effective date." CS FOR HOUSE BILL NO. 197(RES) "An Act providing for exploration incentive credits for activities involving locatable and leasable mineral and coal deposits on certain land in the state; and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION SR 2 - See Resources minutes dated 4/12/95. SB 130 - See Resources minutes dated 3/20/95 and 4/12/95. See Resources Subcommittee minutes dated 3/23/95 and 4/6/95. HB 197 - No previous action to record. WITNESS REGISTER Earl Beistline Alaska Minerals Commission P.O. Box 80148 Fairbanks, AK 99708 Eric Neal MacKinnon Alaska Minerals Commission 1114 Glacier Ave. Juneau, AK 99801 POSITION STATEMENT: Supported HB 197. Karl Hanneman Alaska Minerals Commission P.O. Box 10664 Fairbanks, AK 99710 POSITION STATEMENT: Supported HB 197. Charles Boddy Alaska Coal Association Usibelli Coal Mine 122 First Ave., #302 Fairbanks, AK 99701 POSITION STATEMENT: Supported SR 2. Tom Crafford, Manager Minerals and Coal Cook Inlet Region, Inc. 2525 C St. #500 Anchorage, AK 99503 POSITION STATEMENT: Supported SR 2. Paul Valenti, Vice President Operations USMX 141 Union Blvd., Suite 100 Lakewood, CO 80228 POSITION STATEMENT: Commented on the mining industry. Doug Horswill, Vice President Environment and Public Affairs Cominco 5430 Cliff Ridge N. Vancouver, B.C. POSITION STATEMENT: Commented on the mining industry. George Cole, Vice President Exploration Cominco Spokane, WA POSITION STATEMENT: Commented on the mining industry. Bill Jeffress Fairbanks Gold Mining P.O. Box 73726 Fairbanks, AK 99707-3725 POSITION STATEMENT: Commented on the mining industry. Steven Borrel Alaska Miners Association 501 West Northern Lights Blvd. Anchorage, AK POSITION STATEMENT: Commented on the mining industry. John Walsh, Legislative Aide Representative Richard Foster State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Sponsor of HB 197. Deborah Vogt, Deputy Commissioner Department of Revenue P.O. Box 110400 Juneau, AK 99811-0400 POSITION STATEMENT: Commented on HB 197. Jules Tileston, Director Mining and Water Management 3601 C Street, Ste. 800 Anchorage, AK 99503-5935 POSITION STATEMENT: Commented on HB 197. Mike Spence Paul Fuhs Southwest Alaska Pilots Association 10652 Parker Lane Juneau, AK 99801 POSITION STATEMENT: Supported SB 130. ACTION NARRATIVE TAPE 95-45, SIDE A Number 001 CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 3:38 p.m. and said they would first take up the Mining Overview and the Alaska Minerals Commission Report. DR. EARL BEISTLINE, Alaska Minerals Commission, said they appreciated being able to meet with the committee. He said the Alaska Minerals Commission Report is required by state law and is submitted to the governor and the legislature within 10 days of the beginning of each year. That has been done, he said. The report has several recommendations directed toward what would stimulate the mining industry, removing any restraints along the way. The members of the Minerals Commission with him were Del Ackels, Eric Neal MacKinnon, Joe Fisher and Karl Hanneman. Also present was staff support through the Department of Commerce and Economic Development, Dick Swainbank, Development Specialist. HB 197 MINERAL EXPLORATION INCENTIVE CREDITS  NEAL MACKINNON, Minerals Commissioner, said he supported HB 197. He said his company makes its living by exploring for properties and then finding another company to come in with the big money it takes to drill and carry it beyond the basic exploration part. Not only do they deal with properties in Alaska, they compete in a world market. They are finding that big companies who have a lot of capital to expend in exploration are going to see more fertile fields in South America. There is some perception that Alaska is not "open for business" and not friendly to mining. HB 197 would have a good psychological affect. This is the critical money, because it is high risk. Another advantage the state would get in return for the credit is data that is developed from the exploration projects, MR. MACKINNON said. KARL HANNEMAN testified on geophysical, geological, aerial mapping recommendations. He said the 1991 Alaska Minerals Commission Report recommended for the first time that the state undertake this geological and geophysical mapping program, because Alaska was recognized as being the least geologically mapped of the 50 states. To market Alaska as an exciting frontier for mineral exploration, a complete and accurate geologic and geophysical data base would send a positive signal to the mining industry that Alaska favors mineral development. Two objectives were outlined, then, he said. The first short-term objective was to attract exploration dollars that would result in private sector economic activity in Alaska - often in rural Alaska. The second objective was to find mines. He said the state has developed a competent staff and a critical amount of work needs to be done each year in order to make an efficient program. SENATOR TAYLOR said he thought if we could increase funding to attract tourists to Alaska by $1 million this year, we should be able to increase the funding by which we determine what mineralization we have here to attract anyone to look at. SR 2 OPPOSE COAL AS HAZARDOUS/NOXIOUS SUBSTNCE  SENATOR LEMAN announced SR 2 to be up for consideration. CHARLES BODDY, Alaska Coal Association and Usibelli Coal Mine, said other coal producing states are doing the same thing in their state legislatures to get a message clearly sent to the U.S. Congress and the administration of the significance of the international maritime organizations seeking to include coal as a hazardous and noxious material. This issue is of importance to the board rooms of every coal producer in the U.S.. That the proposed tariff would be $4 per ton every time it's loaded or unloaded, which happens at least three times, is a lot considering they are fighting over pennies to stay in the marketplace. Every person dealing with coal as a bulk commodity for shipment has come out against it. The International Convention on Pollution From Ships has never classified coal as a hazardous material. All of the treaties and conventions that deal with coal being shipped or transported as a bulk commodity have always excluded coal as a dangerous, hazardous, or noxious material, MR. BODDY said. There have been no spills of record that have ever seen any problems caused in either the marine environment or along any coastline ecosystems. MR. BODDY said the Clinton administration is divided on the issue. The Department of Justice and the U.S. Coast Guard are inclined to favor coal as a noxious and hazardous substance, although in a different classification within the treaty system with more concerns revolving around the safety and health issues and spontaneous combustion. The maritime administration for the U.S. Department of Transportation, the Department of Commerce and the Department of Energy all favor the exclusion. SENATOR LEMAN said they would set SR 2 aside until a quorum was present and announced the committee would continue with the mining overview. Number 408 JERRY BOOTH, Producers Council of Alaska, said they would have five speakers today on a number of issues. TOM CRAFFORD, Manager, Minerals and Coal, Cook Inlet Region Incorporated (CIRI), said through its mineral subsidiary, North Pacific Mining Corporation, CIRI is active in a variety of minerals and mining exploration projects in the state. It holds the Illinois Creek Gold/Silver project near Galena, the Johnson River Gold/Copper/Zinc deposit near the base of Iliamna Volcano, the Red Mountain Chrome property near Seldovia, and is a 10% owner in the Beluga Coal Company. Recently, CIRI has been the owner of some of the lands involved in the Wishbone Hill Project. These lands have been under lease to Idemitsu, Inc. and on April 3 a letter of intent was signed for CIRI to acquire the Wishbone Hill coal project from Idemitsu. In general most of the coal community is anticipating a $3 - $4 per ton rise in the price of coal this year with possible increases to come in the future. With this type of indicator, the project could soon achieve economic viability. CIRI hopes to preserve the work that has been done by Idemitsu by concluding the sales agreement on the property by June. Had Idemitsu "walked" from this project, all the major permits it has would expire and throw the project back to square one. He echoed Mr. Boddy's comments regarding SR 2 and the classification of coal. It would severely impact the marketability of Wishbone Hill coal on the international scene. SENATOR LEMAN asked if CIRI needed to share the mineral resources with the other corporations or was that only on native lands. MR. CRAFFORD replied that 7(i) profit-sharing only applies to ANCSA lands and for the small portion of the project that is CIRI-owned land which is ANCSA land there would be profit sharing. Number 518 PAUL VALENTI, Vice President, Operations, USMX, Inc., a Denver based public company, explained that its two parcels, about 62,000 acres, are wholly owned by North Pacific Mining Company with USMX, Inc. being the operator. He said Anaconda first discovered the property and explored it for five years. They built quite a bit of infrastructure and developed a 4500 ft. airstrip at the sight. Based upon drilling and recent engineering studies, they have developed a minable reserve of approximately four and a half million tons of ore containing roughly 300,000 oz. of gold and 8 million oz. of silver. The ore would be mined with conventional open-pit methods. It would be mined six months a year, ore would be trucked from the pit to a heap leach pad for processing. The ore would be stacked behind an engineered dam on a double synthetic-lined compacted sub- base. Gold and silver will be recovered from the ore by using dilute cyanide solution which would be pumped to a process plant to recover. The cyanide solution is recirculated and stays within a contained system. All of the mine and process facilities will emphasize protection of ground and surface water quality. They will employ 100 people and during the mine life will employ a small work force of 40 - 50 people. Reclamation will start as soon as the mining. The company received an award in Nevada in 1992 for reclamation efforts at its Green Springs Mine. This week they have received an award from the state of Utah for reclamation efforts at the Gold Strike Mine. Project permiting is under way and they hope to get them in early 1996, producing their first gold and silver in late 1996. SENATOR LEMAN said this was encouraging to him and probably rural Alaska in terms of job opportunities. He asked if they were getting offers from people who were interested in working. MR. VALENTI replied that last week a group representing USMX toured six villages and there was a lot of interest in the villages about the employment opportunities for which his company would provide a considerable amount of training. DOUG HORSWILL, Vice President, Environment and Public Affairs, Cominco Alaska, Unlimited, said he was here on behalf of Sharla McKay, their environmental supervisor at the Red Dog Mine. The efforts at the operation over the last year and a half are very intensive to bring the operation up to planned production levels. It is now capable of producing 2,000 tons per day concentrate which is somewhat over the design capacity. TAPE 95-45, SIDE B Number 563 Right now the zinc market is at 45 - 50 cents and they go between making some money and losing money. They need to bring their break-even costs down even further to make sure they and their shareholders (and Nana shareholders) gain the benefits they all expected originally from the project. At the present time they have a work force of about 350, 51% are Nana shareholders. They have a plan in place to try to increase that number over time. They have a very positive relationship with state agencies. Particularly important to them is the relationship with the northern region habitat branch of ADF&G which has been extremely helpful in solving problems in helping them define areas of joint interest. They are in the last stages of a five-year process of permit renewal of a water permit. There are some EPA issues they still have to deal with in the next few weeks. They need to be able to discharge water, ultimately at the rate of intake for rainfall in the area. Over the time since start-up, they have spent $40 million on environmental enhancements. Number 563 SENATOR TAYLOR asked him if the water permit was still in review if they started five years ago. MR. HORSWILL explained that the initial permit expired in 1991 and the effort to renew it has been under way since then. He said they would like to have the permit within two weeks, although he didn't think it was possible. GEORGE COLE, Vice President, Exploration, Cominco American, said they have had an exploration presence in Alaska since the late 1970's. In 1995 they will put approximately one third of their U.S. exploration dollars into Alaska on 10 projects - three gold, six zinc, and one copper project. Approximately 20 people, including contractors, will be employed by the exploration group in Alaska during 1995. None of the exploration programs are in the advanced stage of exploration, but they hope by the end of next year or this time next year they will be in a more advanced state. BILL JEFFRESS, Chief, Environmental Services, Fairbanks Gold Mining, said they are wholly-owned by AMEX Gold and are developing the Fort Knox project. He said they have all of their permits after a three-year process. Currently, they have about 150 employees on-site. By the middle of the summer that number will increase to 500. They will be in production by 1996 and will have a permanent work force of 250 people. He said this is a long-term operation with a mine life of 12 - 16 years with a potential for additional reserves that could extend the mine life. The project, itself, is entirely on state and private land. They will be processing 36,000 tons of ore a day. This will be the largest gold milling project in North America. They will be mining an equal amount of waste material. Number 496 STEVEN BORREL, Executive Director, Alaska Miners Association, said he thought this was probably the most exciting time for the mineral industry in the state since the early part of the century. Twenty people are being brought here from the mine in McGrath to attend the training program at Greens Creek and Echo Bay. So the Juneau area can benefit other areas of the state. Last year a major company was exploring in the middle of winter and MR. BORREL was optimistic that others would realize they didn't have to shut down exploration in the middle of winter as they have done in the past. He pointed out that another drilling program at Nome started, partially based on some data from the airborne-geophysical program. Alaska still has the perception for many companies, though, of being a bad place to do business. Several things happening in the legislature are a positive signal to change that, like the incidental discharges bill. He said that the airborne-geophysical survey has resulted in the staking of over 81 square miles of claims in the Fairbanks district. More money has already been spent in the Fairbanks district by private industry than the cost of the entire program and the serious exploration work hasn't even started, yet. He was grateful that the Mental Health Trust dispute was settled, because that was the reason the Wishbone Coal project stopped for so long. HB 197 MINERAL EXPLORATION INCENTIVE CREDITS SENATOR LEMAN announced HB 197 to be up for consideration. JOHN WALSH, Legislative Aide to Representative Richard Foster, said HB 197 helps make Alaska as attractive as possible for investment dollars to come in and help us develop our resource potential. Native corporations are going to need to partner-in with professional mining companies and this is a positive way to keep them going. SENATOR LEMAN asked if HB 197 was fairly consistent with the credits. MR. WALSH said that was correct and added that these are the same credits that were in the bill last year, although there is another provision for corporate income tax in the current bill. DEBRA VOGT, Deputy Commissioner, Department of Revenue, said they do have some concerns with HB 197, primarily in the income tax area. She explained that regarding mining, there are two taxes - corporate income tax and the mining license tax. Both taxes are net income taxes, neither tax will tax an activity until it shows a profit. Additionally, the natural resource extraction calculation accounts for exploration costs by bringing those costs forward until the beginning of production and allowing them to be amortized and depleted against income. So every expense that is addressed by this legislation is already deductible under both the mining license tax and the corporate income tax. She agreed with Mr. Walsh that the mining license tax has a three and one-half year tax exemption. The Department of Revenue believes the tax structure for the mining industry in Alaska is pretty fair. Number 260 Any perception that Alaska is not welcoming to the mining industry is just that - a perception. Mining taxes and corporate income tax paid by mining companies in this past year totaled about $300,000. The state is not collecting a lot of money from the mining industry, she said. One of the largest problems the department has with the legislation is with the way it works vis-a-vis the income tax. We have an income tax system that a lot of states use that does not tax based on what you might consider to be your own business sense of profit and loss in this state. When a corporation does business in more than one state, a method has to be found for determining how much of that income was earned in Alaska and how much was earned someplace else. The mining license tax does look only at Alaska activities. The corporate income tax taxes a part of income based on a formula looking at your nationwide activities. It's called the water's edge reporting method which looks at the percentage of sales in Alaska and compares it to the sales everywhere else in the states that you do business. That fraction is then added to the percentage of your property that's in Alaska vs. the property in other states and your payroll in Alaska vs. your payroll everywhere. Those three fractions are added and divided by three; that answer is averaged to come up with one fraction that is applied against your overall United States income to determine the amount of income we say you earned in Alaska for tax purposes. This is not a method used by taxpayers to look at themselves; it is used by taxing authorities and almost every state uses it, because it's a lot simpler than trying to untangle intercorporate affairs of multi-state taxpayers and using separate accounting (which is used with only oil companies). This technique bears no relationship to the concepts presented in HB 197. The bill twice asks the department to relate the income generated by the mining activity to the site of the mine and the idea is that incentives are accumulated for a particular site. Formula apportionment isn't going to tell you how much money the site made. The Knowles Administration is opposed to the legislation, primarily because of the inclusion of AS 43.20 at all and basically the double deduction of being able to deduct the exploration expenses and then later getting a credit for the same expense. The taxpayer will make money from the state for each dollar. SENATOR LEMAN asked her if she had any suggestions that might help accomplish what the prime sponsor wants accomplished. MS. VOGT said she hadn't discussed specific amendments, but certainly taking AS 43.20 out of the legislation would be a great improvement. She said it would also be simple to draft an amendment that would not permit a deduction for the same expenses that were used for a credit. The difficulty is that the deduction part applies to the taxes, not to the royalty and rent parts. The legislation lumps together all the taxes and allows you to take half of the amount against any of liabilities. Number 160 SENATOR LEMAN asked if any mining companies in Alaska were paying corporate income taxes. MS. VOGT said she thought so. She added that the mining definition includes sand and gravel. SENATOR LEMAN asked how Alaska compared with other states for the mining business. MS. VOGT said she didn't know that and offered to bring that information back to him. SENATOR TAYLOR said there are other factors at play, not just tax issues, to make a reputation. He said incentives were given years and years ago. MR. BORREL strongly supported HB 197 as it reads. He thought it would encourage international mining companies. He said they have been working hard to change the perception that Alaska is a difficult place to do business and he thought this would go a long way toward that. He noted that only exploration expenses were addressed in this bill and that there are many other costs involved. Also, he noted that these credits could not be used unless the project goes into production. Part of the reason the State of Alaska has such little income from the mining industry is because there's effectively no mining in the state. The credits are applied against new revenue streams and don't touch existing production. Another aspect is that by far most projects will never become an operating mine, and therefore, most of those expenditures that have been certified will never actually appear as a credit against a project. Another measure of how few projects would have already benefited from this is that there are only three mines in the state that are year-round operating mines that could have qualified for this had it been in place at the time of exploration. MR. BORREL said he thought it was correct that the oil exploration incentives bill that was passed last year has exactly the same language regarding state income tax as this bill has. TAPE 95-46, SIDE A Number 001 MS. VOGT responded that the tax in Title 41 is a tax credit for oil exploration activities and is applicable against AS 43.20, the income tax, but it is not related to the site. It is simply a tax credit up to a cap which is a very specific dollar amount - a total of $5 million per project and a total of $30 million per company taken anywhere. Jules Tileston, Director, Mining and Water Management, said there are two distinct elements of the bill, one dealing with the income tax and the other dealing with rents and royalties. His comments deal only with the rents and royalties. He said the bill has addressed most of his areas of concern on its way through the legislature. The coal industry now pays a 5% adjusted gross value royalty and a $3 per acre rental. Cost for transportation from the mine mouth to the point of sale and for benefication costs are already deductible from the contract sales prices. A mechanism for royalty reduction is available if the coal operation is unprofitable. For that reason, they believe coal should not be included. MR. TILESTON said clarification was needed on page 3, line 9 which addresses a series of things you must do. One of the items is a definite advantage to industry and the public when the credit is actually applied for and implemented that the data used for credit be made available. He recommended after the word, "consultant" on line 9 add "and exploration activity data that will in the future be made available under Section 2(a)" so there is a clear linkage between the provision of the data and the application of the credit. There were additions in the bill that have already been made that provide for identifying the data on an annual basis so there is no confusion of what is available. Their second concern is that the Division operates largely on program receipts from rentals. They are concerned that as the present levels of funding go down, particularly from oil and gas, that deductions may affect their ability to provide continued service at the level they are providing now to the industry. Therefore, they propose that the rental offset not apply for those elements only. Their last concern was with the definition of a site. Most mining companies hold numerous 40-acre mining claims. Some mining leases are also 40-acres in size, but may range up to several thousand acres in size. The rentals change according to whether the claim has been located for five or ten years. The bill should make it clear that it's the area of operation which is only defined at the permit time and that only those exploration credits which have previously been approved that go to that site are the ones that can be used. MR. TILESTON said there was definitely a glimmer of hope from DNR's perspective on this legislation. SENATOR LEMAN asked MS. VOGT if there might be some hope from the Department of Revenue if they put in a cap and deal with the income taxes. MS. VOGT answered there would be from DOR, but she couldn't say about Governor Knowles. SENATOR LEMAN said they would set HB 197 aside for now. SENATOR LEMAN announced an at ease from 5:25 p.m. - 5:30 p.m. SB 130 MARINE PILOTS  SENATOR LEMAN announced SB 130 to be up for consideration, noting there was a subcommittee report. SENATOR PEARCE moved to adopt the subcommittee's CS to SB 130. There were no objections and it was so ordered. Number 245 SENATOR PEARCE moved to adopt amendment #1 which reinstates the maximum tariff procedure. SENATORS TAYLOR and LINCOLN objected. SENATORS TAYLOR, PEARCE, LINCOLN and HOFFMAN voted no; SENATOR LEMAN voted yes; and the amendment failed. Number 277 SENATOR PEARCE offered amendment #3. SENATOR LINCOLN objected. SENATOR PEARCE said that there was a tremendous amount of testimony on cross-regionalization in 1991 when they first worked on this issue. Present law says it leaves that question up to the Board, and the Board has that authority under the language that's being deleted in this amendment. She did not support the amendment, but did support the language in the present bill that does change and give the Board a different kind of latitude that will allow continued safety aspects. SENATOR LEMAN said he disagreed, because the Board would still have the ability to establish the procedures by which somebody would get qualified. SENATORS PEARCE, TAYLOR, LINCOLN, and HOFFMAN voted no; SENATOR LEMAN voted yes; and the amendment failed to pass. MIKE SPENCE and PAUL FUHS, Southwest Alaska Pilots Association, indicated their support of SB 130. SENATOR TAYLOR moved to pass CSSB 130(RES) from committee with individual recommendations. There were no objections and it was so ordered. Number 333 SENATOR TAYLOR moved to adopt the CSSR 2(RES). There were no objections and it was so ordered. SENATOR TAYLOR moved to pass CSSR 2 (RES) from committee with individual recommendations. There were no objections and it was so ordered. SENATOR LEMAN adjourned the meeting at 5:50 p.m.