Hardrock Mining: Information on Types of State Royalties, Number of Abandoned Mines, and Financial Assurances on BLM Land
Published: 2009-02-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The General Mining Act of 1872 helped open the West by allowing individuals to obtain exclusive rights to mine billions of dollars worth of gold, silver, and other hardrock (locatable) minerals from federal lands without having to pay a federal royalty. However, western states charge royalties so that they share in the proceeds from various hardrock minerals extracted from their lands. For years, some mining operators did not reclaim land used in their mining operations, creating environmental and physical safety hazards. To curb further growth in the number of abandoned hardrock mines on federal lands, in 1981, the Department of the Interior's Bureau of Land Management (BLM) began requiring mining operators to reclaim BLM land disturbed by these operations, and in 2001 began requiring operators to provide financial assurances to cover reclamation costs before they began exploration or mining operations. This testimony focuses on the (1) royalties states charge, (2) number of abandoned hardrock mine sites and hazards, and (3) value and coverage of financial assurances operators use to guarantee reclamation costs. It is based on two GAO reports: Hardrock Mining: Information on Abandoned Mines and Value and Coverage of Financial Assurances on BLM Land, GAO-08-574T (Mar. 12, 2008) and Hardrock Mining: Information on State Royalties and Trends in Imports and Exports, GAO-08-849R (July 21, 2008).
section_title: What GAO Found
paragraphs: Twelve western states, including Alaska, that GAO reviewed assess royalties on hardrock mining operations on state lands. In addition, each of these states, except Oregon, assesses taxes that function like a royalty, which GAO refers to as functional royalties, on the hardrock mining operations on private, state, and federal lands. The royalties the states assess often differ depending on land ownership and the mineral being extracted. For example, for private mining operations conducted on federal, state, or private land, Arizona assesses a functional royalty of 1.25 percent of net revenue on gold mining operations, and an additional royalty of at least 2 percent of gross value for gold mining operations on state lands. The actual amount assessed for a particular mine may depend not only on the type of royalty, its rate, and exclusions, but also on other factors, such as the mine's location relative to markets. Over the past 10 years, estimates of the number of abandoned hardrock mine sites in the 12 western states reviewed, as well as South Dakota, have varied widely, in part because there is no generally accepted definition for a hardrock mine site. Using a consistent definition that GAO provided, these states reported the number of abandoned sites in their states. On the basis of these data, GAO estimated that there are at least 161,000 abandoned hardrock mine sites in these states, and these sites have at least 332,000 features that may pose physical safety hazards and at least 33,000 sites that have degraded the environment. According to BLM data, as of November 2007, hardrock mining operators had provided financial assurances worth approximately $982 million to guarantee reclamation costs for 1,463 hardrock mining operations on BLM land and 52 of these operations had financial assurances valued at about $28 million less than needed to fully cover estimated reclamation costs. However, GAO determined that the assurances for these 52 operations should be more accurately reported as about $61 million less than needed for full coverage. The $33 million difference between GAO's and BLM's estimated shortfalls occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This approach effectively offsets the shortfalls in some operations with the higher than needed financial assurances of others. However, the financial assurances that are greater than the amount required for an operation cannot be transferred to an operation with inadequate financial assurances. In contrast, GAO totaled the difference between the financial assurances in place for an operation and the financial assurances needed for that operation to determine the actual shortfall for each of the 52 operations for which BLM had determined that financial assurances were inadequate. BLM has taken steps to correct the reporting problem GAO identified.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our 2008 work on several  hardrock mining issues that are central to the debate on reforming the  General Mining Act of 1872: royalties, abandoned mines, and financial  assurances.
As you know, since the passage of the General Mining Act of 1872, mine  operators have extracted billions of dollars worth of silver, gold, copper,  and other hardrock (locatable) minerals from federal lands without having  to pay a royalty. Most of these lands are managed by the Department of  the Interior’s Bureau of Land Management (BLM) and the U.S. Department  of Agriculture’s Forest Service. Assessing a royalty on hardrock minerals  would ensure that the public is compensated for hardrock minerals  extracted from federal lands, as more recently enacted laws require for oil,  gas, and other minerals.
The vast majority of the federal lands where hardrock mining operations  occur are in 12 western states, including Alaska (hereafter referred to as  the 12 western states). These western states have statutes governing  hardrock mining operations on lands in their state. However, unlike the  federal government, these states charge royalties that allow them to share  in the proceeds from hardrock minerals extracted from state-owned lands.  In addition, most of these states charge taxes, such as severance taxes,  mine license taxes, or resource excise taxes, on hardrock mining  operations that occur on private, state, and federal lands. For the purposes  of this report, we use the term “functional royalty” to refer to taxes that  function like a royalty in that they permit the state to share in the value of  the mine’s production. Although states may use similar names for  functional royalties they assess, there can be wide variations in their forms  and rates.
In addition to not requiring hardrock mining operators to pay royalties,  prior to 1981, BLM did not require them to reclaim the federal land they  used. Consequently, hardrock mining operators have left thousands of  acres of federal land disturbed through mineral exploration, mining, and  mineral processing. Some of these disturbed abandoned mine lands pose  serious environmental and physical safety hazards. These hazards include  environmental hazards such as toxic or acidic water that contaminates soil  and groundwater or physical safety hazards such as open or concealed  shafts, unstable or decayed mine structures, or explosives. Cleanup costs  for these abandoned mines vary by type and size of the operation.
To curb further growth in the number of abandoned hardrock mines, BLM  issued regulations, effective in 1981, that required all mining operators to  reclaim BLM land disturbed by hardrock mining. In 2001, BLM began  requiring all mining operators to provide financial assurances before  beginning exploration or mining operations on BLM land. These financial  assurances must cover all of the estimated reclamation costs for a given  hardrock operation. Having adequate financial assurances to pay  reclamation costs for BLM land disturbed by hardrock operations is  critical to ensuring that the land is reclaimed if the mining operators fail to  do so. In June 2005, we reported that some current hardrock operations on  BLM land do not have financial assurances, and some have no or outdated  reclamation plans and/or cost estimates on which the financial assurances  should be based.
My testimony today focuses on the (1) royalties states currently charge on  hardrock mining operations, (2) the number of abandoned hardrock mine  sites and number of associated hazards, and (3) value and coverage of the  financial assurances operators use to guarantee reclamation costs on  lands managed by BLM.
To address these objectives, we interviewed staff at BLM and the Forest  Service; examined agency documents and data; and reviewed relevant  legislation and regulations. To identify the types of royalties, including  functional royalties that the 12 western states assess on hardrock mining  operations, we reviewed state statutes and regulations pertaining to  royalties on hardrock mining operations. To aid in understanding general  patterns in state royalties, we consulted academic and industry sources  and then we categorized each royalty according to how it is assessed. To  assess the number of abandoned hardrock mine sites, we asked the 12  western states and South Dakota—which have significant numbers of  abandoned hardrock mining operations—to determine the number of  these mine sites in their states. We asked the states to use a consistent  definition, which we provided, in estimating the number of abandoned  mine sites and associated features that pose a significant hazard to public  health and safety and the number of sites that cause environmental  degradation. We specified that states should only include hardrock (also  known as locatable), non-coal sites in this estimate. From these data, we  estimated the number of features that pose physical safety hazards and the  number of sites with environmental hazards in the 12 western states. We  also summarized six selected studies by federal agencies and  organizations to document differences in estimates, definitions, and  methodologies. To assess the value and coverage of financial assurances  in place to guarantee reclamation, we reviewed BLM’s Bond Review  Report. This report provides information on financial assurances for 11  western states. This Bond Review Report is generated from BLM’s  automated information system—LR 2000. Although the LR2000 data are of  undetermined reliability, our limited assessment of these data indicates  that they are appropriate as used and presented in this testimony, and we  do not base any conclusions or recommendations on them. This testimony  is based on prior GAO reports whose work was conducted in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: The 12 Western States Assess Multiple Types of Royalties, Including Functional Royalties, on Mining Operations
paragraphs: Twelve western states assess royalties on the hardrock mining operations  on state lands. In addition, each of these states, except Oregon, assesses  taxes that function like a royalty, which we refer to as functional royalties,  on the hardrock mining operations on private, state, and federal lands. To  aid in the understanding of royalties, including functional royalties, the  royalties are grouped as follows:    Unit-based is typically assessed as a dollar rate per quantity or weight of  mineral produced or extracted, and does not allow for deductions of  mining costs.
Gross revenue is typically assessed as a percentage of the value of the  mineral extracted and does not allow for deductions of mining costs.
Net smelter returns is assessed as a percentage of the value of the mineral,  but with deductions allowed for costs associated with transporting and  processing the mineral (typically referred to as mill, smelter, or treatment  costs); however, costs associated with extraction of the mineral are not  deductible.
Net proceeds is assessed as a percentage of the net proceeds (or net profit)  of the sale of the mineral with deductions for a broad set of mining costs.  The particular deductions allowed vary widely from state to state, but may  include extraction costs, processing costs, transportation costs, and  administrative costs, such as for capital, marketing, and insurance.
Royalties, including functional royalties, often differ depending on land  ownership and the mineral being extracted, as the following illustrates:    For private mining operations conducted on federal, state, or private  lands, Arizona assesses a net proceeds functional royalty of 1.25 percent  on gold mining operations, and an additional gross revenue royalty of at  least 2 percent for gold mining operations on state lands.
Nine of the 12 states assess different types of royalties for different types  of minerals. For example, Wyoming employs three different functional  royalties for all lands: (1) net smelter returns for uranium, (2) a different  net smelter returns for trona—a mineral used in the production of glass,  and (3) gross revenue for all other minerals.
Furthermore, the royalties the states assess often differ in the allowable  exclusions, deductions, and limitations. For example, in Colorado, a  functional royalty on metallic mining excludes gross incomes below $19  million, whereas in Montana a functional royalty on metallic mining is  applied on all mining operations after the first $250,000 of revenue.
Finally, the actual amount assessed for a particular mine may depend not  only on the type of royalty, its rate, and exclusions, but also on such  factors as the mineral’s processing requirements, mineral markets, mine  efficiency, and mine location relative to markets, among other factors.
Table 1 shows the types of royalties, including functional royalties, that  the 12 western states assess on all lands, including federal, state, and  private lands, as well as the royalties assessed only on state lands.
section_title: Prior State Estimates of the Number of Abandoned Hardrock Mine Sites Vary Widely, but Our Data Show at Least 161,000 Sites, with Many Posing Hazards
paragraphs: It has been difficult to determine the number of abandoned hardrock mine  sites in the 12 western states, and South Dakota, in part because there is  no generally accepted definition for a hardrock mine site. The six studies  we reviewed relied on the different definitions that the states used, and  estimates varied widely from study to study.
Furthermore, BLM and the Forest Service have had difficulty determining  the number of abandoned hardrock mines on their lands. In September  2007, the agencies reported an estimated 100,000 abandoned mine sites,  but we found problems with this estimate. For example, the Forest Service  had reported that it had approximately 39,000 abandoned hardrock mine  sites on its lands. However, this estimate includes a substantial number of  non-hardrock mines, such as coal mines, and sites that are not on Forest  Service land. At our request, the Forest Service provided a revised  estimate of the number of abandoned hardrock mine sites on its lands,  excluding coal or other non-hardrock sites. According to this estimate, the  Forest Service may have about 29,000 abandoned hardrock mine sites on  its lands. That said, we still have concerns about the accuracy of the  Forest Service’s recent estimate because it identified a large number of  sites with “undetermined” ownership, and therefore these sites may not all  be on Forest Service lands.
BLM has also acknowledged that its estimate of abandoned hardrock mine  sites on its lands may not be accurate because it includes sites on its lands  that are of unknown or mixed ownership (state, private, and federal) and a  few coal sites. In addition, BLM officials said that the agency’s field offices  used a variety of methods to identify sites in the early 1980s, and the  extent and quality of these efforts varied greatly. For example, they  estimated that only about 20 percent of BLM land has been surveyed in  Arizona. Furthermore, BLM officials said that the agency focuses more on  identifying sites closer to human habitation and recreational areas than on  identifying more remote sites, such as in the desert. Table 2 shows the  Forest Service’s and BLM’s most recent available estimates of abandoned  mine sites on their lands.
To estimate abandoned hardrock mine sites in the 12 western states and  South Dakota, we developed a standard definition for these mine sites. In  developing this definition, we consulted with mining experts at the  National Association of Abandoned Mine Land Programs; the Interstate  Mining Compact Commission; and the Colorado Department of Natural  Resources, Division of Reclamation, Mining and Safety, Office of Active  and Inactive Mines. We defined an abandoned hardrock mine site as a site  that includes all associated facilities, structures, improvements, and  disturbances at a distinct location associated with activities to support a  past operation, including prospecting, exploration, uncovering, drilling,  discovery, mine development, excavation, extraction, or processing of  mineral deposits locatable under the general mining laws. We also asked  the states to estimate the number of features at these sites that pose  physical safety hazards and the number of sites with environmental  degradation.
Using this definition, states reported to us the number of abandoned sites in  their states, and we calculated that there are at least 161,000 abandoned  hardrock mine sites in their states. At these sites, on the basis of state data,  we estimated that at least 332,000 features may pose physical safety hazards,  such as open shafts or unstable or decayed mine structures. Furthermore, we  estimated that at least 33,000 sites have degraded the environment, by, for  example, contaminating surface and ground water or leaving arsenic- contaminated tailings piles. Table 3 shows our estimate of the number of  abandoned hardrock mine sites in the 12 western states and South Dakota,  the number of features that pose significant public health and safety hazards,  and the number of sites with environmental degradation.
section_title: BLM Estimates That Operators Have Provided About $982 Million in Financial Assurances—About $61 Million Less Than Needed to Cover Estimated Reclamation Costs
paragraphs: As of November 2007, hardrock mining operators had provided financial  assurances valued at approximately $982 million to guarantee the  reclamation cost for 1,463 hardrock mining operations on BLM land in 11  western states, according to BLM’s Bond Review Report. The report also  indicates that 52 of the 1,463 hardrock mining operations had inadequate  financial assurances—about $28 million less than needed to fully cover  estimated reclamation costs. We determined, however, that the financial  assurances for these 52 operations should be more accurately reported as  about $61 million less than needed to fully cover estimated reclamation  costs. Table 4 shows total operations by state, the number of operations  with inadequate financial assurances, the financial assurances required,  BLM’s calculation of the shortfall in assurances, and our estimate of the  shortfall, as of November 2007.
The $33 million difference between our estimated shortfall of nearly $61  million and BLM’s estimated shortfall of nearly $28 million occurs because  BLM calculated its shortfall by comparing the total value of financial  assurances in place with the total estimated reclamation costs. This  calculation approach has the effect of offsetting the shortfalls in some  operations with the greater than required financial assurances of other  operations. However, the financial assurances that are greater than the  amount required for an operation cannot be transferred to an operation  with inadequate financial assurances. In contrast, we totaled the  difference between the financial assurance in place for an operation and  the financial assurances needed for that operation to determine the actual  shortfall for each of the 52 operations for which BLM had determined that  financial assurances were inadequate.
BLM’s approach to determining the adequacy of financial assurances is not  useful because it does not clearly lay out the extent to which financial  assurances are inadequate. For example, in California, BLM reported that,  statewide, the financial assurances in place were $1.5 million greater than  required as of November 2007, suggesting reclamation costs are being  more than fully covered. However, according to our analysis of only those  California operations with inadequate financial assurances, the financial  assurances in place were nearly $440,000 less than needed to fully cover  reclamations costs. BLM officials agreed that it would be valuable for the  Bond Review Report to report the dollar value of the difference between  financial assurances in place and required for those operations where  financial assurances are inadequate and have taken steps to modify  LR2000.
BLM officials said that financial assurances may appear inadequate in the  Bond Review Report when    expansions or other changes in the operation have occurred, thus  requiring an increase in the amount of the financial assurance;    BLM’s estimate of reclamation costs has increased and there is a delay  between when BLM enters the new estimate into LR2000 and when the  operator provides the additional bond amount; and    BLM has delayed updating its case records in LR2000.
Conversely, hardrock mining operators may have financial assurances  greater than required for a number of reasons; for example, they may  increase their financial assurances because they anticipate expanding  their hardrock operations.
In addition, according to the Bond Review Report, there are about 2.4  times as many notice-level operations—generally, operations that cause  surface disturbance on 5 acres or less—as there are plan-level operations  on BLM land—generally operations that disturb more than 5 acres (1,033  notice-level operations and 430 plan-level operations). However, about 99  percent of the value of financial assurances is for plan-level operations,  while 1 percent of the value is for notice-level operations. While financial  assurances were inadequate for both notice- and plan-level operations, a  greater percentage of plan-level operations had inadequate financial  assurances than did notice-level operations—6.7 percent and 2.2 percent,  respectively. Finally, over one-third of the number of all hardrock  operations and about 84 percent of the value of all financial assurances are  for hardrock mining operations located in Nevada.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions that you or Members of the Committee may  have.
section_title: Contact and Staff Acknowledgments
paragraphs: Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this testimony. For further  information about this testimony, please contact Robin M. Nazzaro,  Director, Natural Resources and Environment (202) 512-3841 or  Nazzaror@gao.gov. Key contributors to this testimony were Andrea  Wamstad Brown (Assistant Director); Elizabeth Beardsley; Casey L.  Brown; Kristen Sullivan Massey; Rebecca Shea; and Carol Herrnstadt  Shulman.
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