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The prices—right

The toughest problem in metal mining's future will be making prices reflect all the costs

November 1, 2002


Douglas Clement Senior Writer

The technical challenge of cleaning up existing hardrock mine problems is daunting. Finding money for the job will be harder still. But the most critical question is how to ensure that the future pursuit of hardrock metals won't generate toxic burdens like those that have been left behind by the past century of metal mining. To a large degree, the answer lies in getting the prices right. And doing so will require a careful look at state and federal policies related to metal mining. If the new economics of mining don't force a fuller accounting of costs and a closer scrutiny of subsidies, hidden toxic legacies will haunt our children just as they do us.

Many observers say that environmental damage has been encouraged by one of the mining industry's oldest regulations, the General Mining Law of 1872, a federal policy designed to promote settlement of Western territories and to develop the nation's mineral resources, much as the better-known Homestead Act encouraged agricultural development.

The Mining Law grants free access to individuals and corporations to prospect for minerals on public lands and it allows them, once they make a discovery, to stake a claim that prohibits others from using the land. Obtaining permanent title to surface and mineral rights—through a "patent"—costs just $2.50 to $5 an acre, a price that hasn't changed in the 130 years since the Law was enacted. Regardless of whether the claim holder purchases a patent, she can extract minerals from public lands without paying a cent in royalties or rents to the U.S. Treasury.

The mining industry strongly defends the Law, particularly its creation of free access and secure title to public land claims. The high costs and uncertain outcomes of mineral exploration make mining an extremely risky industry; without secure land tenure and the right to prospect in federal lands, contends the industry, investment in mining would dry up. Without the Mining Law, the incentive to develop would be significantly reduced, production costs would rise, and the nation would suffer through diminished production of essential minerals and growing dependence on imports, a risky proposition if the nation were at war.

But others say the Law essentially amounts to a giveaway of publicly owned resources. "This policy ... bestows a large subsidy on private mining companies," said the Council of Economic Advisers in its 1997 Economic Report of the President. "Between May 1994 and September 1996, the Federal Government was forced by the General Mining Law to give away over $15.3 billion worth of minerals in return for which taxpayers received only $19,190."

The Report also noted that by establishing mining as the highest use of public lands, the Law's claims and patents prevent other criteria from being considered in determining the most beneficial use of lands. "Current ... policies are thus characterized by subsidized extraction and use restrictions that limit the transferability of extraction rights," concluded the Report. "These policies have resulted in overextraction and significant environmental damage."

Most observers agree that fair market values would set far higher prices for most public lands than the $5 an acre fee charged to mining companies and note that coal, gas and oil miners all pay royalties, rents or leasing fees for resource extraction on both public and private lands.

Other incentives

Organizations like the Mineral Policy Center, a staunch critic of the Mining Law, also point out that tax incentives like the percentage depletion allowance (a tax deduction for depletion of a mineral resource) and the "expensing" (writing off in the year of expenditure) of exploration and development costs also subsidize the hardrock mining industry. In President Bush's 2003 budget report, those two items amount to a "tax expenditure" (or industry tax deduction) of over $1.5 billion during the 2003-2007 period.

While the mining industry argues that such incentives are necessary to encourage mineral exploration in a high-risk industry, it's unclear how much influence they have on mineral production levels. "Imposing royalties, increasing holding fees, and repealing the percentage depletion allowance would have some impact on domestic hardrock mineral production," concludes a June 2002 Congressional Research Service report, "but the level of any production decline attributable solely to new fees is difficult to estimate."

The 1872 Mining Law has been the focus of reform attempts virtually since the day Ulysses Grant signed it, and the mining industry has successfully fended them off. The most recent reform effort is a U.S. House bill introduced in May 2002 that would, among other things, require an 8 percent royalty fee for minerals mined from public lands and establish environmental performance standards for mining operations. Other recent bills call for a permanent moratorium on patenting and a repeal of the percentage depletion allowance.

The subsidies that the Law and the current tax code provide likely lead to a less than societally optimal allocation of resources. Through their reduction of production costs, they shift resources toward mining on public lands that might be better spent otherwise, and they thereby increase environmental damages beyond what might be necessary to meet society's needs. "By encouraging overinvestment and overproduction," noted the Council of Economic Advisers, "subsidies attract resources away from other, more productive sectors of the economy and reduce overall economic well-being. Reducing subsidies can improve economic performance by giving producers better information about the true cost of using public land."

Clean up or go broke?

But perhaps more significant both economically and environmentally than these subsidies is the historically common pattern of mines closing down, with the companies that had run them declaring bankruptcy and thereby escaping the costs of cleaning up the environmental damages their activities had created. The practice shifts private costs to the public, which either pays frequently large sums for mine reclamation or suffers diminished ecological or human health as mine wastes degrade the local environment. Either way, the public pays.

South Dakota's Gilt Edge Mine, owned by Dakota Mining, is an obvious case, with environmental remediation costs well over $30 million and only $6 million provided by the company's bonds. Designated as a Superfund site in December 2000, Gilt Edge's cleanup became a federal and state responsibility: 90 percent of the cost will be paid by the EPA and 10 percent by South Dakota taxpayers.

Critics of Dakota Mining, including Richard Fort, president of Action for the Environment, based in Lead, S.D., are now concerned that former Dakota Mining chair Alan Bell is developing a metal mine in northeastern Minnesota. "I wouldn't trust him," said Fort. "If I were you there in Minnesota, I'd look askance at them very much."

South Dakota Department of Environment and Natural Resources engineer Mike Cepak is less critical of Bell. "In our relationship with him, he tried to do the right thing," said Cepak. "When the company failed, he had no problem signing over the bond to us. ... But it still leaves us frustrated that a company that came in with a lot of financial resources in the late '80s ends up with nothing a few years later, and we're left holding the bag."

In Montana, the Department of Environmental Quality (DEQ) and the EPA currently suggest that remediation of the Zortman-Landusky mines near Hays will cost about $67 million, though local American Indian tribes and environmental groups say that understates the true cost. But the January 1998 bankruptcy of the mine's operator, Pegasus, left insufficient funding to cover reclamation costs and a May 2002 DEQ decision estimates that an additional $33.5 million will be needed from state and federal coffers.

Of course, not all mining companies leave their sites in poor shape after the mines have closed. The McLaughlin Mine in California's Napa Valley is often cited as a responsible mining operation. The Flambeau Mine in Ladysmith, Wis., went to substantial lengths to run a clean mine and reclaim the site after the mine shut down in 1997. (Its critics still have doubts.) But the frequency and expense of environmental disasters left behind after mine operators go broke have severely tainted the industry as a whole.

Tighter bonds

Most states—including all Ninth District states—have required that mining companies purchase bonds to ensure that they'll be able to cover the costs of reclamation, but as the scale of environmental damage has become clearer, analysts have begun to realize that many of the bonding requirements set by states are inadequate. In fact, in the face of numerous instances like the Zortman-Landusky bonding shortfall, Montana has launched efforts to reevaluate reclamation costs and increase required bond levels.

In April 2002, for example, the DEQ announced it was raising the reclamation bond for the Black Pine Mine near Philipsburg from $70,000 to $8.1 million because of anticipated acid mine drainage problems. The mine's owner, Asarco, a subsidiary of Grupo Mexico, asked for an extended deadline to find sufficient bonding; state officials said Asarco was being "responsive and cooperative."

In August, however, Asarco was sued by the U.S. Justice Department to stop it from selling off profitable assets which "could lead to Asarco's failure and will certainly guarantee Asarco's inability to fully perform its environmental remediation obligations." The EPA and Justice Department hold that Asarco owes about $1 billion for cleaning up toxic mine wastes in 12 states. In Montana, Asarco's liabilities (in addition to the Black Pine liability) include roughly $51 million for cleaning up arsenic, lead and cadmium pollution near an East Helena smelter and up to $11 million for contaminated groundwater in Butte.

Bonding requirements in many other cases are likely inadequate. In testimony late this July before the U.S. House Subcommittee on Energy and Mineral Resources, Jim Kuipers, a Boulder, Mont., mineral engineer, warned of "the significant underestimation of the actual cost of modern hardrock mine reclamation and closure, and the lack of financial guarantees to ensure that taxpayers will not foot the bill." The total cost of cleanup, he testified, could be "as high as $10 billion or more." The chairman of the London-based mining giant Rio Tinto, Robert Wilson, reported at a Global Mining Initiative conference in May that the costs would be even higher—nearly $35 billion—if the cleanup costs for tens of thousands of abandoned mines in the western United States were included. Others say the costs could be higher still, closer to $70 billion.

Or looser bonds?

At the same time that states are beginning to reevaluate the cleanup costs of hardrock mining, the industry itself is seeking relief from bonding requirements. It complains that a shortage of capital in the insurance industry due to major corporate bankruptcies and to the Sept. 11 terrorist attacks has dried up the surety bond market. The industry asked Department of Interior Secretary Gale Norton to allow a return to the earlier practice of permitting "corporate guarantees"—essentially promises to pay—rather than surety bonds, and Norton convened a staff task force to look into the alleged "crisis" in reclamation bonding.

Critics say the crisis is of the industry's own making since it has a poor track record in mine reclamation; surety companies are simply recognizing that high-risk profile. Corporate guarantees have proven inadequate in the past, contend critics, and won't work in the future. Moreover, they point out, large mining corporations have little trouble securing surety bonds. As Dale Alberts, president of Nicolet Minerals in Crandon, Wis., said, "we're a subsidiary of BHP Billiton, the largest diversified mining company in the world and when you've got that size of a balance sheet, people are more than willing to write bonds for you."

Observers predict that Norton may well relax bonding requirements, but economists suggest that not requiring mining companies to provide solid assurance for reclamation costs may be counterproductive. "Adequate bonds or other guarantees that ensure mining companies will pay for proper closure are simply the cost of doing business in this industry," said John Tilton, professor of mineral economics at the Colorado School of Mines. "There is no reason in my opinion—though I realize others may disagree—to ask society to subsidize mining so that small miners can compete."

Getting prices right

Insisting that the mining industry pay its full costs of production—including the cost of cleaning up its waste—is not a self-righteous moral imperative or the far-fetched plea of misty-eyed tree huggers. It's a simple matter of economic efficiency. If a producer can shift some portion of its costs—whether by strategy or neglect—to another unwilling party, it will naturally tend to produce more of that product than is economically optimal for society as a whole. For an economist, efficiency is served when prices charged and quantities produced reflect the full cost to society. In the case of mining, when the production process creates a waste byproduct like acid drainage that requires water treatment in perpetuity, prices charged need to reflect the cost of treating the water.

Would paying full costs shut down mines? Yes, it seems likely that some—perhaps many—ore deposits can't be mined in an efficient full-cost manner, given current technology. And though our economy may produce less metal, we'll also create less pollution and fewer expensive cleanups. The economics will ultimately dictate the efficient quantities of both metal and waste.

According to economist Tilton, paying the full environmental costs of their operations—rather than shifting them to the taxpayer—will indeed increase costs for mining companies in the coming years. But other forces, particularly new technology, will be pushing costs down. "On balance," said Tilton, "I expect the costs of mining and processing most mineral commodities to continue their long-run decline, at least over the next decade or two." Having to pay for its environmental costs, he added, "will also greatly increase the incentives for the industry to reduce the pollution and other previously external costs associated with mining, and through new technologies I expect this to happen."

Whether Tilton's optimism is well-founded remains to be seen, and ours may not be the generation to see it. The U.S. Geological Survey (USGS) organized a conference this October where scientists and economists discussed more environmentally benign methods of mining—seeking deposits that aren't located in acid-generating sulfides, for example, or reprocessing waste piles that are already sitting above ground.

But at this point the industry resists such technologies, said Craig Johnson, a USGS geologist who helped organize the conference. The industry, he noted, argues that these cleaner mining techniques are far more expensive than cyanide heap leaching and strip mining in sulfide ores. And that's true, since the environmental costs often aren't part of the equation. Only if the financial and regulatory framework forces the industry to face those costs will mining get the prices right. It won't happen soon, believes Johnson. "But maybe our children or our grandchildren will be sitting in that kind of environment."

How much for a grizzly?

Estimating environmental values is difficult but essential

If the mining industry were forced to pay its true costs, we as consumers would also feel the effects. The price of the gold in our jewelry and the copper in our computers would more accurately reflect its actual cost of production, including the costs imposed on the environment. That's the theoretical ideal pursued by economists.

But determining environmental costs is difficult because clean air, water and land—not to mention mountain views and grizzly bears—are public goods, the kind of "products" that typically are hard to price. In the absence of clear market values, economists use a variety of techniques—surveying people about what they'd be willing to pay for such goods, comparing properties with and without natural amenities—to estimate environmental values. The techniques aren't perfect, but they're the best available.

Some environmentalists would say that nature has infinite value, but trade-offs are inevitable. Mining companies shouldn't be expected to spend unbounded amounts of money purifying water, for example, because while it's always possible to spend more money to extract another part per million or trillion of a contaminant, at some point it becomes more beneficial to spend the next dollar on something else of value—like saving whales. And a mining company committed to sustainable, environmentally responsible development won't be sustainable itself if it goes broke trying not to pollute.

Most economists would say that cost-benefit analysis, a technique of comparing the values established for environmental goods and the value of the minerals pulled from the earth, is the best means for setting a cleanup standard, even if the environmental values aren't absolutely accurate. "Society has to trade off how much cyanide it wants in water and how much copper it wants," observed Robert Cairns, a natural resource economist at McGill University in Montreal. "Cost-benefit analysis, with all its warts, is the only professional tool we have for giving an idea of how to improve policy." The technique has been valuable in evaluating mine reclamation options in New Mexico, for example.

Other economists say that cost-benefit analysis, while theoretically ideal, is too cumbersome to be useful in most cases. It's more pragmatic to estimate a health-based standard and then let industry figure out how best to meet it. "This is a sophisticated, knowledge-based industry that clearly hasn't run out of technological miracles," said Thomas Powers, professor of economics at the University of Montana-Missoula. "What we need to do is simply lay down what expectations are in terms of behavior, in terms of what environmental damage we'll accept, in terms of a permanent commitment to clean up, and then let [the mining industry] choose the right site, the right method. Let them find ways of providing the financial security for reclamation."

If the industry is pushed to pay the full costs of environmental compliance, their supply curves will shift to reflect the elimination of the implicit public subsidy they've received in the past. And well-designed, strictly enforced standards will help establish more accurate prices. "If that's a standard that everybody faces," said Powers, "it may be that we have to pay more for gold, silver, copper or platinum, but indirectly what will be happening is exactly what economists want to happen: The costs associated with what otherwise would be environmental damage get embedded in the prices."

Some mining industry officials complain that adhering to tough regulations in the United States puts them at a competitive disadvantage with corporations operating in countries with less stringent standards. But most analysts say that environmental compliance, while costly, is much less of a factor in corporate decision-making about where to mine than ore quality and labor costs.

And environmental standards are also going global. "The World Bank and most worldwide financing institutions that finance large-scale mining projects are requiring basically North American standards to be applied to the design, construction and operation of mining projects around the world," noted Dale Alberts, president of Nicolet Minerals, a subsidiary of BHP Billiton. "So it's slowly becoming a worldwide performance standard."

Related stories:
Digging in or digging out? [July 2002 fedgazette]
Despite new exploration, mining's future in a deep hole.