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Mexico To Join Countries Levying Royalties on Mining

By Charles Kubach, Mine-Engineer.Com
February 24, 2013

Greed has always loomed large in Mexico, and now the politicians are looking to the mining industry to replenish their coffers. It appears income tax, the sundry of excise taxes, the government owned oil industry and government owned silver mines are not enough. To politicians, it is never a spending problem, because like drug addicts, they only see spending more money as the solution to everything. Tax and revenues are their drug, and they can never get enough. Denial is what the quacks of the psychology "profession" would call it. Stupidity is what it is. They always fail to solve any problem. This is because to solve any problem, first one has to define it, and second, one must come up with a workable solution to it. The solution is never "throw more money at the problem and it will go away". The only thing that goes away is the money. They need look no further than North, to the Obama Administration and California to see the folly of these actions. Both have been throwing money at problems for years and both still have the same problems, and in many cases they are worse today than before they tossed a few trillion dollars down the drain. That is shear stupidity.

Politicians generally fail on both, defining a problem and proposing a workable solution, because to do either, one must be objective. Politicians are always looking out for their benefactors, which is never the people they are meant to serve. This appears to be true world wide, and has more to say about human nature and morality than anything else. Now for the issue at hand, Should Countries Impose Royalties On Mining Government Owned Ores?

First lets examine the subject. The government does own the ore and the right to mine it. The ore has value, which changes with economic cycles. Companies mining and processing or refining the ore do gain a financial benefit from the ore. The government does have a right to expect some benefit and/or financial gain in return for mining their property.

The problem is greed. A mine is a long term investment, ranging from 10 to 20 or 30 years. Economies are cyclical, prices and costs rise and fall, although costs seldom fall. A high demand for a product today may turn into little demand for the product a few years in the future. A high price today may result in a very low price in the future. Mines typically adjust to these conditions, by reducing production in bad years, until it is no longer economically feasible to operate, then they suspend operations until the market improves.

By simply investing hundreds of millions of dollars or billions of dollars in opening and operating a mine provides immense financial benefits to a government and more to the citizens of the mining area. The first benefit is a lot of good paying jobs for the citizens of the mining area. The second benefit is a increase in business for local merchants and suppliers. And a third benefit is the increased income generates increased tax revenue for the local and national government.

Mining is a risky business, and not all mines are successful, without any government interference. The more costs a government adds to mining in a area, the less attractive it becomes for mining companies to invest in that area. Since mines, unlike other industries, must operate where the ore is, they have fewer choices, but still there are many countries which have undeveloped potential mining properties in the world. In other words, they have many choices of where to operate.

So, if a government decides it needs to receive a "royalty" for mining their properties, they should take into consideration all of the other benefits the mining would provide, such as good jobs for their citizens, increased business for the supply chain, and increased tax revenue from all of the increased employment and commerce. Then, they must consider that for the mine to survive they must be profitable, that economic cycles go up and down, unpredictably, and that the greater they increase the cost on mining, the less attractive it will be for investing companies to do so.

When the above is considered, any royalty would have to be tied to production and profits of a mining company, and be based on the life of the mine, realizing they need to operate in a cyclical world economy, with respect to price and demand for commodities. And the fundamental of economic wisdom "the lower the tax (royalty), the greater the economic benefit will be" should hold court in the negotiations with mining companies. If punitive royalties are imposed, to "spread the wealth", companies will go elsewhere, and the treasury will not fill. That is economic reality, something the Obama administration does not and never will comprehend, hopefully Mexico will get the message, and be better off for it.

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