they have undertaken little or no investment spending on their projects.<sup>14</sup> The first three are the world’s largest market capitalization exploration companies. The fourth is a more typical exploration company. Project rents remaining after anticipated taxation and royalty charges against the project, shown in the rightmost column, are not large.

_Table 1: Market Capitalizations of Selected Pure Exploration Companies (values in US$ million)_

|Company Name|Market<br>Capitalization|Country Listing|Number of<br>Projects|Location of<br>Projects|Value per<br>Project|
|---|---|---|---|---|---|
|Trillium Gold Mines|12.5|Canada|9|Canada|1.1|
|Austin Gold|11.4|United States|5|United States|2.3|
|Orosur Mining|10.3|Canada|3|Latin America|3.4|
|Newrange Gold|2.6|Canada|2|Canada|1.3|

_Source:_ _<u>https://resourcestrategy.ca/f/what-can-we-learn-from-mining-company-returns.</u>_ This is the case because, first, the pre-tax resource rents in mining are not large. Given a level playing field for profits taxation, mining does not come to mind when one thinks of sectors that over time have provided investors with extraordinary after-tax returns. A second point, related to the first, is that there is little remaining resource rent attached to the project after governments and others have taken their share. Governments are not alone in wanting to appropriate resource rents. Various actors, including royalty holders, managers, laborers, and community members, have bargained for, and are already expecting payments from the project surplus. We call this rent leakage. Governments are then left to tax any remaining surplus. To the extent that future resource rents at a project have already been appropriated by others, including host country governments, they are not attached to the project and not available for additional taxation.<sup>15</sup> Every large mining project in the world started out as an exploration property, and there is no reason to believe that they were any different from the projects listed in Table 1.

# F. Government Taxation of Mining Projects Is Highly Inefficient

Tax inefficiency is a measure of how much taxation distorts private sector decisions. There are resource rent tax mechanisms that are non-distortionary; other taxes, like income taxes, that are somewhat distortionary; and taxes, like royalties, that are more distortionary.

Distortionary taxes do two things. First, they decrease the rewards to investment, causing investment to drop. Investment is usually efficiency-enhancing at mining projects, and so less of it reduces efficiency and lowers the project’s overall rent. Second, distortionary taxes cause marginal projects to become uneconomic, which suppresses activity in the mining sector (Davis and Smith, 2020).

The use of royalties could make mining taxation inefficient, and there is a push to move to less distortionary taxation mechanisms, such as a resource rent tax. However, the study of taxation in Latin American mining projects found that each dollar of mining project taxation cost an average of only 7 cents in lost development-stage project value, or deadweight loss. By comparison, 38 cents were lost for each

> 14 These market capitalizations do include some quasi-rents because these companies have spent some investment funds. As such, market capitalization is an upper bound on project rents.

> 15 We suspect that in countries where mineral leases are owned by private parties, most of the rent is taken out of the project via royalties due to the original lease holder: “If the owner is fully awake to market conditions and to the superiority of his land, he will secure the entire surplus” (Orchard, 1922).

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