What are mining royalties and how do they work?

Our modern world is built with minerals sourced from mines. From smartphones to solar panels, laptops to electric cars, demand for minerals like copper, gold, silver, lithium and rare earths is soaring but production isn’t keeping up. Right now, U.S. policymakers should be doing everything in their power to encourage the production of these minerals here under world-class environmental standards, but just the opposite is happening. Congress is considering proposals that would limit access to America’s minerals supply by imposing excessive new fees and royalties on the mining industry.

What is a royalty?

A royalty is a fee that is imposed by local, state or federal governments on either the amount of minerals produced at a mine or the revenue or profit generated by the minerals sold from a mine. A royalty can be imposed as either a “net” or “gross” royalty. A net royalty allows for deductions of costs a company incurs to produce a marketable product whereas a gross royalty assesses the fee based on the total value of the minerals produced at a mine, without any deductions for costs. Due to the significant upfront cost of producing a marketable mineral, a net royalty better incentivizes investment. A royalty should not be paid on value added to the raw minerals by a mining company spending hundreds of millions, if not billions of dollars to find, process, refine and sell the mineral products.

Hardrock mining or minerals mining is the production of metal and mineral deposits such as copper, gold and silver. The industry currently pays extensive local, state and federal taxes that account for between 40 and 50 percent of a mine’s profits. Some lawmakers are proposing to add additional fees in the form of a gross royalty.

Studies suggest that even a small federal gross royalty could make new and existing U.S. mines unprofitable – forcing future investment and jobs overseas. The National Mining Association’s Executive Vice President and General Counsel Katie Sweeney recently testified before the U.S. Senate, saying:

“For existing operations, a new gross royalty that was never accounted for in the mine plan of operation would erase profitability, potentially leading to an early mine closure. If the new, punitive gross royalty and dirt tax proposals… are allowed to continue, no amount of permitting reforms will make the U.S. an attractive investment jurisdiction.”

Why minerals mining is different from the oil and gas industries

Mineral exploration and extraction is dramatically different from any other natural resource. For starters, compared to fluid minerals like oil and gas, hardrock minerals are more geologically complex and are often dispersed, requiring extensive exploration to define a producible deposit. Once a producible deposit of minerals is located, a huge investment is required to build the mine and process the mineral. Unlike oil and gas, the amount of processable material produced is often a small fraction of the material moved. As Sweeney explained in her testimony to Congress:

“The amount of processable material produced can be less than a percent or ounces of a ton of displaced material. That processable material must then go through many steps of being beneficiated, treated and smelted. …A tiny fraction of millions of tons of displaced material and rock, in addition to costly processing, ultimately produces a salable product.”

For these reasons, a new federal gross royalty could crush the U.S. mining industry, stifling the domestic production of minerals deemed critical to our national security, energy transition and economic stability. NMA President and CEO Rich Nolan has said, “The race for electric vehicles and electrification of the economy requires metals and mining, and that needs to be incentivized, not stalled.”

Minerals mining is a capital-intensive industry, with high financial risk and requires companies to navigate a complex and duplicative U.S. permitting process. For instance, it takes seven to 10 years to permit a mine in the U.S. compared to just two or three years in countries like Canada or Australia. Over the past two decades, inefficient and costly permitting timeframes have deterred investments, causing the U.S. to become 100 percent import-reliant on other countries for 17 key minerals and more than 50 percent for an additional 29 minerals.

According to Katie Sweeney, “Nearly two decades ago, the U.S. attracted almost 20 percent of the world’s total mining investment. Unfortunately, in the time since, there has been a sharp decline in U.S. exploration investment. This is not due to lack of resources, but rather a lack of confidence in the U.S. as a viable mining jurisdiction…”

Simply put, new punitive royalties and fees on minerals mining are counterproductive for achieving the goals set forth by the Biden administration to achieve net-zero emissions, scale electric vehicle production and deploy sustainable forms of energy. We must bolster U.S. mining as our economic future depends on it.

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