Submitted by Norm Robins
“The power to tax is the power to destroy“–John Marshall, 4th Chief Justice of the Supreme Court
On Friday, July 10, 2020 the Nevada Legislature killed a bill, AB4, that sought to tax mining companies…again. They say they need more money for public (read: government) schools. More efficient private schools and charter schools funded by vouchers are anathema to them. But taxing mining companies, thinking they are flush with money, is foolish on the face of it—naïve too.
Mining is a tough business and an even tougher one in which to make a profit.
Let’s look at Newmont Mining to see what I mean. Their recent trailing 12-month earnings per share (EPS) was $4.41. Their stock price has been going up nicely since our mid-March 2020 meltdown. On July 28, 2020, the date I’m writing this essay, it stands at $68.66 a share. This is an EPS of
$4.41/$68.66 = 6.4%.
This can hardly be called knocking the ball out of the park. Okay, so gold prices are going up. With gold mining a very risky business this is a modest return and not worth the risk to many more conservative investors.
Newmont operates in Nevada in the Carlin Trend between Winnemucca and Elko. They also mine gold in Colorado, Canada, Ghana, Peru, Argentina, Suriname, Dominican Republic, and Mexico. The Carlin Trend is what’s called a sediment-hosted disseminated deposit. This gold doesn’t come in rich veins that makes everyone’s jaw drop. The gold is called invisible gold because it must be discovered by chemical analysis. The gold is invisible to the naked eye. Grades run from 71 grams/ton (g./t.) to 15 g./t. to 1.7 g./t. Of course, miners want to mine the higher grades so they mine these first. They have worked the Carlin Trend for a long time.
Let’s look at a grade of 15 g./t. The overburden must be removed to get at this deposit, and that can vary widely. 15 grams equal 0.48 troy oz. That is, it takes roughly 30 grams to equal 1 oz. of gold. At 15 g./t. grade, roughly 2 tons of ore must be mined, transported to mills, and ground down to the consistency of a fine powder to yield an ounce of gold. Then it has to be chemically extracted. Diesel fuel by the tank car load and lots of them have to be brought in from California to run their giant earth moving equipment and their generators when local power isn’t available.
When I say mining is a tough business, that’s only part of what I mean.
Let’s say the taxers among us want to tap into the “gold mine” that is Nevada gold mining. Let’s say they tap into Newmont for a big chunk of change. Gold prices are rising. Newmont’s stock (NEM) is going up. Times are good for gold miners. Let’s say Newmont with some new money in their pockets buys a used behemoth mining truck, the kind that carries a payload of 300-400 tons, for roughly $1 million. Even used with 10,000 hours behind them, they go for that much.
Newmont would want to put it where their return on investment is greatest. Why would Newmont want to put it in Nevada with its (defeated) new taxes when they can just as well put it in Canada or Peru or Suriname or Australia, all mining friendly jurisdictions? Would it earn a higher rate of return somewhere else? Of course. Businesspeople think in those terms, but the taxers don’t. They are lock stepped into a ceteris paribus (other things remaining equal) fantasy mindset. In a free market, worldwide economy things never remain equal. Actions have consequences. New taxes have consequences. Always. Period.
Want a real-life example? Look no further than Fremont, California, a few miles and a few hours’ drive downhill from Reno. Elon Musk plans to dismantle his Tesla auto production facility there and move it to the more friendly clime in Austin, Texas. It will be an expensive move, not like moving a mining truck, but he apparently thinks it’s worth it. California has simply gotten overbearing in its taxation and unbearable in its regulation. Tesla plans to open a battery manufacturing and research facility there. It’s a consolation prize, not a blue ribbon one. Let’s not imitate California’s foolishness here in Nevada.
Norm Robins is a retired entrepreneur and ex-engineer whose first love is economics and who has lived and worked all over the world. He has a B.S. in Civil Engineering from the University of Illinois, Champaign-Urbana, and an MBA in International Business from the University of California, Berkeley. He and his wife and one of his three children live in Reno, Nevada.
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