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

Letter

The 12 Western States Assess Multiple Types of Royalties, Including Functional Royalties, on Mining Operations

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.

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

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.

BLM Estimates That Operators Have Provided About $982 Million in Financial Assurances—About $61 Million Less Than Needed to Cover Estimated Reclamation Costs

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.

Contact and Staff Acknowledgments

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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