July Oil Breaks $110; Gold $1,464; Exclusive SJR15 Notes

*** BREAKING NEWS *** Assembly Taxation is hearing AB428 this morning which proposes to reduce the amount of deductions taken on the net proceeds tax by 60%. There is no question that mining is “under fire” in this legislative session (see SJR 15 discussion below)


Þūnresdæg
Morning Miners!

It is 5:53 AM. Have a cup of Thor's Day Thunderbolt. Our favorite Norseman is sharpening up his battle axe and he's not fixin' to kill the goose that lays the golden eggs. Now, there are some scalawags in Carson City that he wouldn't mind paying a visit...

July Oil Breaks $110, Gold $1,464

Another wild ride in our commodity record rocket ship. NYMEX oil broke $110/bbl for its July contract and the most active June contract set a new oil crisis high this morning at $109.37/bbl. The July number is important because this Report has identified that sustained prices in the $110-$120/bbl range could be damaging to the global growth and domestic recovery stories. Brent crude stayed above $120/bbl and is presently trading at $121.91/bbl (see Daily Oil Watch below).

Today's oil surge came on news that trouble resurfacing in Nigeria could add to the uncertainty in the Middle East and North Africa (MENA). Kitco News quoted Morgan Stanley's view on the situation in one of their morning market nuggets:

“Oil infrastructure could be targeted by militants during the election period [in Nigeria],” Morgan Stanley says. Right now, the availability of Nigeria’s light sweet crude is mitigating some of the impact of lost Libyan production, Morgan Stanley says. If Libyan production is “entirely unavailable to the market,” then OPEC’s spare capacity is 3.3 million barrels a day. “Should production in Nigeria be curtailed, we fear that prices could move materially higher,” Morgan Stanley says. (Kitco News, 4/7/2011)

COMEX gold made a new high today too hitting $1,464.0/oz at 9:35 a.m. (ET) before falling back a tad to $1462.6/oz. COMEX silver is at $39.610/oz after setting its new 31-year record yesterday at $39.785/oz. Ironically, gold value as measured by this Report's Gold Value Index (GVI) hit a new low for the year when compared to an oil, copper and silver composite price (see Gold Value Index discussion below).

Here is a growing list of factors considered bullish for precious metals; items 1 and 5 are primary drivers for oil:

1) Continued turmoil in the oil-rich Arab world (MENA) and now possibly Nigeria
2) Inflation concerns, ECB raises interest rate from 1% to 1.25%
3) The threat of a U.S. government shutdown tomorrow
4) Portugal's request for a bailout and continued worry about debt problems in the euro zone
5) Euro rise to a new high since January 2010 at 1.4326 (i.e. weaker U.S. dollar lifts dollarized commodity prices although the U.S. dollar index is getting a little bounce today)

Base metals are sustaining advances at the London Metal Exchange with investment flows adding to demand hopes. COMEX copper is trading up again presently at $4.4295/lb.

Here's an update for our record book for the big three metals together with NYMEX and ICE Brent crude:

COMEX Gold $1,464.0/oz 09:35 ET 04/07/2011, June contract most active (new)
COMEX Silver $39.785/oz 10:00 ET 04/06/2011, May contract most active
COMEX Copper $4.6375/lb 06:15 ET 02/04/2011, March contract most active
NYMEX WTI Crude $109.37/bbl 09:00 ET, 04/06/2011, May contract most active (new)
ICE Brent crude $123.37/bbl 09:50 ET 04/06/2011, May contract most active

Mining Tax Exclusive - SJR 15 Notes


This report has been following the latest Nevada mining tax brouhaha since last week and the contributions have been terrific. Yesterday, a faithful reader sent me detailed notes taken by a trusted attendee of the Tuesday Senate Revenue committee meeting on Senate Joint Resolution (SJR) 15. This is the resolution proposing to change the Nevada Constitution related to the net proceeds of mines tax structure. These notes are particularly useful since the website that was to carry streaming video of the hearing crashed during the meeting.

Here are the notes in their unedited entirety:

Report on Hearing before Senate Committee on Revenue held on Tuesday April 5, 2011
SJR15

Senator Leslie called the meeting to order at a little after the 1:00 PM appointed time. She began by convening a hearing on SB386, Making various changes concerning the taxation on certain tobacco products.

Following that hearing, Senator Leslie convened the hearing on SJR 15, proposing to amend the Nevada Constitution to remove the separate tax rate and manner of assessing and distributing the tax on mines and the proceeds of mines.

The resolution proposing a Constitutional amendment seeks to remove mining from the special treatment set aside in Section 5. In so doing, it would leave the Legislature free to tax mining in any manner it chooses.

The Joint Resolution would have to be adopted by two consecutive legislative sessions and then submitted to a vote of the people before it would become effective. Following that process, NRS 362 would be amended during the 2015 Session at the earliest.

Proponents of the proposal included Guy Rocha, retired Nevada State Historian; Jan Gilbert, PLAN; and a Mr. Hulse (sp?), a recognized author (he’s unknown to me).

Mr. Rocha led-off the presentation noting that he had been the State Historian for 28-years and now, in his retirement, calls himself a Nevada Historian. He indicated that aside from Alaska, Nevada is the only state in the Union that has a NPM tax. Alaska’s NPM provisions are contained in State Law unlike Nevada, where NPM is part of the Constitution.

Rocha went on to give some of the history behind the adoption of the NPM taxes in 1862. He also noted that it is ironic that at the time of the adoption of the Nevada Constitution, the State was experiencing a depression and that today mining is enjoying unprecedented revenues in juxtaposition to 150 years ago.

Jan Gilbert with the Progressive Leadership Alliance of Nevada (PLAN) expressed her opinion that mining should be taxed on gross revenues as is gaming. She indicated that no other industry enjoys the same level of benefits. She also indicated that the Governor has spoken of shared adversity and feels that it should include mining. She also feels that the voters should have an opportunity to have a say in how mining is taxed. Mining deductions to gross revenues go way beyond what the cost of extraction should include she said; items such as advertising, retirement buyouts, travel and numerous others.

Senator Hulseth asked what will happen to Eureka County. They are exclusively funded on mining revenues, she said. They haven’t used State revenues for quite some time she noted. “Eureka has done very well; I hope they have been planning ahead.”

Brenda Erdoes, Attorney with LCB Bill Drafting, indicated that nothing will change until at least the Session following the final adoption of the proposed constitutional amendment.

Hulseth expressed her desire to get a grasp on what or how the change will negatively affect northern Nevada.

Gilbert responded that the Legislature will decide on how the revenues are to be distributed.

The hearing changed to testimony from Clark County where the first witness stated that mining as a world class industry has paid a pittance (In taxes). He indicated he felt that mining should be stripped of its special status. He then went on to cite Wyoming’s treatment of coal mining that results in over twenty-four times the revenues to the state than NPM does for Nevada. In another comparison, he noted that although Wyoming coal mining has over seven-times the value of Nevada gold mining, it generates revenues in excess of sixteen-times the revenues of Nevada.

Another Clark County resident, Erin Neff, indicated that mining is a historical relic and that there should be a vote on the question. In response to what will happen to “little Eureka” he said, “they’re sitting on a gold mine. They won’t go anywhere.”

Michael Flores, a University of Nevada student testified that in this era of budget shortages, the issue should be addressed.

Tm Crowley, President of the Nevada Mining Association rose to indicate that his organization was neutral on the issue. He qualified the statement by stating that he felt there was a significant misconception about NPM.

Senator Horsford questioned “why can’t we adjust the taxes on mines?”
Crowley explained that changes have occurred including the changes occurring in the mid 1980’s that split the revenues from NPM between counties and the State. Prior to that time, the full $5 rate went to counties. Upon adoption of the $3.64 maximum combined local tax rate. Any amount greater than the local total combined rate goes to the State he said.

Crowley feels that broad based business taxes would be supported by the industry (mining), i.e., modified business taxes, sales and use taxes, payroll taxes, property taxes, etc.

Horsford wondered how a conservative state such as Wyoming could adopt such significant taxes on their mining industry.

Crowley responded that in the instance of coal, taxes are passed on to the utilities and ultimately to the rate payer.

Horsford then questioned the provision in Section 5 subsection 1 (of the Constitution) that states in part “until identity of the proceeds as such is lost.”
Jim Wadhams, Attorney for the Mining Association, indicated that the language is there to prevent double taxation on the proceeds as the gold is converted to cash. He also expressed his opinion that there isn’t as much difference in taxation between Nevada and Wyoming as represented.

We are limited on how mining contributions can be changed except for a constitutional change or a broadly based (all inclusive) change he said.

Attorney Wadhams pointed out that Section 2 par. 1 of the Nevada Constitution subjects all property to a 5% cap on property taxes. Mining taxes are essentially “maxed-out” under this provision he said.

When gold prices are high, how come we can’t gain was asked by Senator Leslie.

Senator McGinness expressed his opinion that some of the same political issues are going on today as they were in the 1860’s.

Wadhams cited Article 10, subsection 2 of the Constitution that exempts shares of mining stock from property taxes.

Horsford expressed his frustration at what he called a “split” in revenues in the Nevada Constitution.

Brenda Erdoes stated that the tax policy is set out in Section 5 par. 2 of the constitution (the section identified for change in SJR 15).

Horsford asked “why aren’t the revenues of rural governments taken in the same measure as proposals to take revenues from Clark and Washoe Counties?”

Senator Leslie feels that locking taxes into the constitution is not good policy. We need flexibility she said.

I have a couple of observations that become immediately apparent with this proposal. All NPM revenues would be affected by this change in the Constitution. That means gold and other precious metals; molybdenum, lithium, salt, vanadium, sand and gravel, geothermal steam and many other “minerals” would be subject to the vagaries of the Legislature. This would occur at a time (by 2015) when the rural influence at the legislature would have diminished to nothing. All revenues taken by the State would likely only be returned to local government in some measure based on a formula driven by population, assessed valuation plus a growth factor such as that used by DTAX to return sales taxes or school enrollment (population) such as used by the State Department of Education to return rents and royalties under the DSA formula to local governments.

I’m not sure that the Nevada Mining Association would have enough “juice” to dissuade the legislators from their obsession with net proceeds of mines. Whatever turns out; northern Nevada and more specifically the rural mining counties would be subject to significant reductions in revenues as a result of a change to the Constitution. Given the huge population disparity between the north and the south, we are unlikely to prevail at the polls. Our hope at this time would be that the State enjoys a rapid increase in our economy that will diminish the issue in the minds of the voters.

(notes from a trusted meeting attendee)

The Elko Daily Free Press carried a good Associated Press article Tuesday night on this same meeting:

Proposal could change net proceeds tax (By MICHELLE RINDELS Associated Press, Elko Daily Free Press, April 5, 2011 7:50 pm)

Stay tuned, pardner. We've only just begun...


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 573.87, up from yesterday's 571.93 and above the 1-month moving average of 394.66. The EMI continues to be down from the high set on January 4th and is up from the March 15th low of 262.02. This is the fourth day the EMI is above its descending upper trend line which breaks the downtrend from my view.

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 69.13, down from yesterday's 69.61 and setting a new 2011 low. The 1-month moving average is 70.74. Today's Value Adjusted Gold Price (VAGP) is $1,767.9/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

Nevada Fuel Prices

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 $109.00
ICE North Sea Brent crude $121.91
Spread (ICE- NYMEX) = $12.91 (Yesterday $14.76)

Here are the July contracts with a narrower spread:

NYMEX light sweet crude $110.16
ICE North Sea Brent crude $121.17
Spread (ICE- NYMEX) = $11.01 (Yesterday $12.83)

Although prices are off their crisis highs, we have $120+ Brent and $110+ 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 heading for firmer ground; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains above its 50-day and 100-day moving averages 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, Proposal could change 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 up $0.17 in early trading at $109.00 (May contract, most active); Gold is up $4.1 to $1462.6 (June contract, most active); Silver is up $0.223 to $39.610 (May contract, most active); Copper is up $0.0595 to $4.4295 (May contract, most active)

Western Molybdenum Oxide is $16.62; European Molybdenum Oxide is $17.00; LME cash seller is $17.30, LME moly 3-month seller's contract is $17.46

Stock Market Morning Update

The DOW is up 10.56 points to 12,437.31; the S&P 500 is up 2.77 at 1338.31

Miners are mixed:

Barrick (ABX) $53.94 down 0.44%
Newmont (NEM) $58.19 up 3.08%
US Gold (UXG) $9.53 up 1.49%
General Moly (Eureka Moly, LLC) (GMO) $5.77 up 2.12%
Thompson Creek (TC) $13.51 up 0.37%
Freeport-McMoRan (FCX) $57.45 up 2.13% (a bellwether mining stock spanning copper, gold & molybdenum)

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

ArcelorMittal (MT) $37.22 down 0.69% - global steel producer
POSCO (PKX) $112.53 down 0.64% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.64% at $1,982,139.29 (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 (source: Wikipedia)

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