Nevada Mining Taxes - Killing the Golden Goose

"Killing the Golden Goose" - a short-sighted action that destroys the profitability of an asset


Wōdnesdæg
Morning Miners!

It is 5:50 AM. Have a hot cup of hump day magic. Old Miner Woden is by the fire reading his favorite Aesop's Fable, "Killing The Goose That Laid the Golden Eggs." He started the fire this morning with a copy of Nevada Senate Joint Resolution 15...

Nevada Mining Taxes - Killing the Golden Goose


A faithful reader of the Report sent the ole Colonel a Las Vegas Sun link on the latest brouhaha over the future of Nevada mining taxes. Mining Editor Adella Harding wrote a good article on the same subject last night in the Elko Daily Free Press. Here are both links:

Democrats seek to repeal mining tax from the constitution (Anjeanette Damon, Las Vegas Sun, Monday, March 28, 2011, 6:35 p.m. PT)

Rhoads, Ellison oppose repeal of net proceeds tax (ADELLA HARDING Mining Editor, Elko Daily Free Press, March 29, 2011 4:55 pm PT)

The latest mining tax booger bear is Senate Joint Resolution 15 dreamed up by the prodigiously creative Senate Revenue Committee. It would essentially begin the process of repealing the constitutional protection the mining industry enjoys on its net proceeds tax.

Currently, the mining industry pays a 5 percent property tax on its mineral resources, but is allowed to deduct the cost of extracting and processing the minerals. Because the tax is protected by the state constitution, lawmakers are unable to fool with the the rate and they can't assess any other tax on minerals.

What's a poor legislator to do? How about removing the mining tax from the state constitution - that would allow them to impose a completely different tax or change the rate - Senate Joint Resolution 15 in a nutshell. Fortunately, it is hard to amend the constitution; the Legislature must pass it twice before it would go to voters for a final ratification.

If measure 15 weren't enough, the undaunted Revenue Committee introduced a second measure that would create a new Mining Oversight and Accountability Commission. These guys would write new tax legislation taking that duty away from the Nevada Tax Commission. Senate Majority Leader Steven Horsford, D-North Las Vegas, believes the tax commission has unfairly expanded the mining industry’s deductions. The new commission would also oversee environmental and safety regulations - maybe they can extend the General Moly Mt. Hope permitting process even longer!

The Harding article quotes a good summary of the situation by Elko County Commissioner Jeff Williams. He says legislative efforts to increase taxes from mining are "ruining the security of mining in all the rural counties. You can only go so far."

Talk about trying to kill the Silver State's golden goose! Oh, and that other goose that is expecting to lay a few molybdenum eggs on top of our Mt. Hope. Stay tuned, pardner.


Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is above-par at 451.92, up from yesterday's 390.26 and above the 1-month moving average of 379.53. The EMI continues to be down from the high set on January 4th and up from the March 15th low of 262.02 - a trend reversal may again be in the works.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record high for the EMI is 816.78 set 01/04/2011; the low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 70.15, up from yesterday's 70.04. The 1-month moving average is 71.15. Today's Value Adjusted Gold Price (VAGP) is $1,701.7/oz.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. Although gold prices have been on the rise, the GVI has been trending down since 6/7/2010 when it had a value of 100. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has been a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

Daily Oil Watch

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa. It is still above $100/bbl with a large but narrowing spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $104.40
ICE North Sea Brent crude $115.10
Spread (ICE- NYMEX) = $10.70 (Yesterday $10.86)

Here are the July contracts* with a narrower spread:

NYMEX light sweet crude $105.45
ICE North Sea Brent crude $114.90
Spread (ICE- NYMEX) = $9.45 (Yesterday $9.35)

*(the most active front-month contracts are now May so we moved from June to July contracts for a 2-month look-ahead).

Although prices are off their crisis highs, we have $100+ Brent and NYMEX in July favoring higher oil prices through the summer. My December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

Eureka Outlook Dashboard

4-WD is ON - The miners are still in a real rough patch but Freeport may pull us out of the mud hole yet; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) moved above its 50-day and 100-day moving average today and is comfortably above its 200-day average of $44.85 (our new warning level, 03/04 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The GREEN light is turned back on for Commodity Reflation with copper trading comfortably above $3.50/lb

The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)

The YELLOW light is turned on for Inflation Watch as the Federal Reserve resumes buying Treasurys (aka QE2)

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets

The RED light is turned on our Fuel Gauge with oil above $100

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions , General Moly Mt. Hope Water Rights, U.S. House committee debates miner workplace safety bill, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $0.39 in early trading at $104.40 (May contract, most active); Gold is up $11.2 to $1428.70 (June contract, most active); Silver is up $0.643 to $37.630 (May contract, most active); Copper is down $0.0280 to $4.3185 (May contract, most active)

Western Molybdenum Oxide is $17.00; European Molybdenum Oxide is $16.72; LME cash seller is $17.26, LME moly 3-month seller's contract is $17.46

Stock Market Morning Update

The DOW is up 58.74 points to 12,337.90; the S&P 500 is up 5.85 at 1325.29

Miners are up:

Barrick (ABX) $51.25 up 1.10%
Newmont (NEM) $53.76 up 0.50%
US Gold (UXG) $8.88 up 3.62%
General Moly (Eureka Moly, LLC) (GMO) $5.41 up 0.56%
Thompson Creek (TC) $12.57 up 1.13%
Freeport-McMoRan (FCX) $54.96 up 1.22% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are up (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $36.79 up 1.18% - global steel producer
POSCO (PKX) $117.32 up 0.92% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.34% at $1,913,485.17 (what's this?).

Cheers,

Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (Wiki).

Headline photograph by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market