Mining in the UP, what does the state get in return?

Nov 29, 2011

Drilling continues in Michigan's Upper Peninsula for potentially valuable ore deposits after a judge turned down a request from environmental groups to stop the mine's development.

Kennecott Eagle Minerals is drilling 25 miles northwest of Marquette primarily for nickel and copper, but palladium, gold, and silver could also turn up in the deposit.

Kennecott, a subsidiary of the London-based Rio Tinto Group, began drilling in September.

The ore deposit the company is after is about a mile away from the mine's opening (and about 1,000 to 1,500 feet underground). They're not expected to reach the deposit until sometime in 2013.

Around 50 percent of the deposit is under state-owned land, so it belongs to the collective "we" - the citizens of Michigan.

So what are we getting in return?

I called up Tim Hoane, a state geologist for the Michigan Department of Natural Resources to find some answers.

It's Hoane's job to assess the value of the minerals under state-owned land.

He's primarily an oil and gas geologist, but with renewed interest in Michigan's precious metals, Hoane is evaluating these types of deposits as well.

Hoane says, for metallic minerals under state land (such as nickel, gold and copper) the state currently makes money from companies interested in mining four ways:

  1. A one-time "bonus payment" of $3 per acre for leasing land for exploration and mining;
  2. Annual land leasing rates ($3 per acre in years 1-5, and $6 per acre in years 6-10);
  3. A "minimum royalty payment" that starts in year 11 if valuable metals are being pulled up. This payment starts at $10 per acre and increases $5 per acre each subsequent year;
  4. And royalty payments once metals are pulled from the ground. The state gets a percentage (from 2 percent to 10.5 percent) based on the amount of metal removed, how it was removed, and the value of that metal.

As an example, Kenecott Eagle Minerals is in its 18th year of leasing 3,800 acres of state land in the UP. They're paying $45 per acre in minimum royalty payments today.

That works out to be more than $1 million paid to the state of Michigan in bonus payments, land leases, and minimum royalty payments.

These payments have been made before any metals have been pulled out of the ground, and as Tom Hoane points out, "I am sure they have spent a whole lot more than that in drilling and geology & geophysical costs."

They wouldn't be investing so much if they weren't sure of the payoff.

Kennecott estimates there are 300 million pounds of nickel and 250 million pounds of copper in the deposit - along with smaller amounts of other potentially valuable metals (such as palladium, gold, and silver). That could turn into billions of dollars in profits for the company.

Once the metals are removed (starting sometime in 2013), the state will get royalty payments on a quarterly basis.

Tom Hoane said the deposit that Kennecott is going after is worth about $15 to $50 million to the state. The value is based on core samples taken by the company.

"It's really a rough estimate because until they actually start pulling it out...you really don't have a firm idea of what its value is," said Hoane.

Not enough? Is a "severance tax" needed?

Critics say Michigan doesn't collect enough in taxes from metallic mineral development.

Tina Lam wrote about this question for the Detroit Free Press in her story "Will mines get state's riches for a paltry sum?"

Lam wrote about low application fees for mining companies (Kennecott paid a $5,000 application fee for a permit that ended up costing the state $800,000 to review and evaluate), criticisms over financial bonds companies must pay in case of environmental damage, and the absence of a state "severance tax" on these precious metals.

A "severance tax" is paid when resources are "severed" from the ground or land. For oil, gas and iron ore development in Michigan, the tax is used to help the state pay for environmental monitoring and evaluation.

But there is no severance tax for non-ferrous metals mined under state-owned land.

Tom Hoane says the severance tax doesn't exist because there hasn't been a precious metal mine operating in Michigan in more than 100 years. It just hasn't been needed yet.

In his article for Bridge Magazine, Jeff Alexander wrote severance taxes on deposits like the Eagle Kennecott deposit could bring in more revenue for the state—revenue that would help cash-strapped state agencies in Michigan do their job. Alexander compared Michigan's policy with Florida's:

Those deposits could be worth billions of dollars, but the companies that extract them from the ground won’t pay a penny in severance taxes. By comparison, if Michigan treated the Kennecott mine the way Florida would, the state’s take could reach an additional $400 million.

The Detroit Free Press reports that Representative Matt Huuki (R-Atlantic Mine) is working on severance tax legislation for these metals. Hal Fitch, from the Michigan Department of Environmental Quality, said the tax makes sense. From the Free Press:

Fitch said the concept for that legislation, which the DEQ supports, would be to replace existing property taxes for the mine with a flat severance tax. That money would be divided among state and local governments. It would be simpler for the companies and more transparent for the public, Fitch said.

How best to monitor and bring in the state's share of revenue from these mines will be important questions to tackle. More companies are interested in digging for a big payday in the Upper Peninsula.

There's a proposed "open pit" mine in the southern part of the UP (Menominee County) called "The Back Forty Project." The Back Forty Project is joint venture between HudBay Minerals and Aquila Resources Inc. The companies are looking for gold, silver, and zinc, and the state has rights to 40 to 50 percent of those ore deposits.

And Orvana Minerals Corp. is looking for copper in Gogebic County in the western UP. There is no state ownership stake in that mine, but the company still has to seek approval for the mine from the Michigan Department of Environmental Quality.