Mining Company Risk

By: David Morgan | Thu, May 8, 2008
Print Email

In last weeks column we discussed some risks associated with the junior mining sector. In this week's article it is important to recognize what has just been reported about mining operations in Venezuela, an article posted on International Business Times yesterday stated, "Hecla Mining's Isidora gold mine is the third operation in just one week in Venezuela's mineral rich Bolivar State to suffer a roadblock. Venezuelan workers have stalled operations of the country's largest gold miner, citing poor working conditions and demanding that President Hugo Chavez nationalize the mine."

In the March issue of The Morgan Report (TMR) we interviewed Laura Skaer of the Northwest Mining Association to look at some potential mining law changes that are proposed in the United States. But we went on to state that we forecast more difficulty in the mining sector on a worldwide basis. The Hecla situation will most likely be resolved and we are not out to make more of it than is evident, but we consider it our duty to give you the big picture and the long-term perspective. Most people do not follow the mining industry closely but some proposed changes have potential long-range effects.

The U.S. House of Representatives passed House Resolution 2262, "The Hard Rock Mining and Reclamation Act of 2007," on November 1, 2007. This bill is a disaster for the United States mining industry and potentially other jurisdictions as well. This bill will create serious problems for the mining industry in the United States if it becomes law.

There are many significant changes in HR 2262, but some of the high points are that it imposes a 4% gross royalty on existing operations with commercial production and an 8% gross royalty on all other claims, subjecting the Unites States to significant takings litigation. Why? Because the United States Supreme Court has ruled that valid, unpatented mining claims are exclusive possessor interests in federal land for mining purposes, which entitle claim holders to extract and sell minerals "without paying any royalty to the United States as owner." Union Oil Co. v Smith, 249 U.S. 337, 348-349 (1919). So as this proposed change moves through the Senate, we expect to see several modifications made. However, this does not mean that the compromises made will be beneficial to mining in general.

Our thinking is that the royalty will be knocked down for existing miners and perhaps made into a net royalty rather than a gross royalty. This still would put many projects into jeopardy and it could hurt the mining industry. Additionally, our guess is that new mines or start-ups would be charged at a higher proportion. If our guess were correct, this would make it even more difficult for a new project based in the U.S. to be built. It could put further pressure on new projects, and we think, possibly, that companies that already are mining might be at an advantage over those that need to be developed.

Our concern went beyond the United States when in our report we asked, "What is to prevent Mexico, South America, Canada or Australia from looking at the U.S. as a guideline for them to impose new mining legislation that profits government and hinders the mining industry?"

So, we strongly appeal to our readers to take action, get on the North West Mining Association Web site and send letters to those who represent you if you live in the U.S. We also suggest that those in the industry take our lead and get this message out to the press, radio, and even the business television audience. This, in our view, is the most important issue in the mining industry today, and hardly anyone is talking about it. It might just be one of the reasons the junior miners are doing so poorly. Perhaps the market senses some very detrimental legislation over the next few years.



David Morgan

Author: David Morgan

David Morgan

David Morgan

David Morgan ( is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

Copyright © Silver Investor 2006-2016 All rights are reserved.

All Images, XHTML Renderings, and Source Code Copyright ©