Mining News

High Permit Costs Reducing Value at US Mines

Posted by Cheryl Rutledge on 8/6/2015 9:36:04 AM

Alexander Collen, Taylor Jackson, and Kenneth P. Green

The impact of unnecessary delays in obtaining mining permits affects the United States’ mining industry the most severely out of all developed nations. It is estimated that as a result of the inefficient permitting system, it takes on average between seven to 10 years to secure all of the permits required to begin mining in the US; similar to Papua New Guinea. This is in contrast to countries such as Canada and Australia, where the average permit times lie between two-to-three years.

SNL Metals & Mining’s report on Permitting, Economic Value and Mining in the United States attempts to quantify the extent to which permitting delays impair and discourage investment in US mineral projects. The calculations are based on simulations made against a hypothetical mid-sized gold mine operating in the US.

The model mine was given fixed internal characteristics and subject to three ‘external’ changes. The internal characteristics were based on medium-sized gold deposits and metals production but lower than average construction, operating and sustaining costs, specifically so as not to overestimate the project’s vulnerability to simulated changes in external factors.

The external factors first involved simulating costs incurred by unexpected permitting requirements that do not cause delays, such as water treatment charges. The second and third simulations involved creating production lags due to unexpected permitting delays and additional risk scenarios created by events such as protests. The simulated cash flows were discounted at eight percent; typical to what is normally used in the industry.

The costs in each scenario were estimated individually before a cumulative cost was calculated. As a basis for comparison, the report estimated the individual scenario costs for three real mines; the Rosemont Copper project in Arizona, the Kensington gold mine in Alaska and the Twin Metals Minnesota project.

The findings suggested that delays in the permitting process alone can reduce the value of a project by up to one-third. The higher costs and increased risk associated with a prolonged permitting process (for example, compliance costs and increased exposure to macroeconomic risk) can reduce the value of a mine by up to half, and the combined effect of all three simulations can render otherwise profitable projects unviable.

The real costs incurred by permit delays make projects less viable to begin with, but they may also contribute to increased investor uncertainty that deters investment in the industry. SNL’s report found that despite the vast mineral resources available within the US, the nation receives only seven percent of worldwide spending on mineral exploration and current domestic production is predominantly from mature deposits. The disproportionately low funding may be a result of these uncertainties.

According to the Fraser Institute’s 2014 Annual Survey of Mining Companies, uncertainty regarding the administration, interpretation, and enforcement of existing regulations strongly deterred 11 percent of respondents from investing in the US, while seven percent would not invest in the US at all for this reason. Uncertainty regarding environmental regulations strongly deterred 18 percent of respondents while seven percent would not invest as a result. With regards to regulatory duplication and inconsistencies, 15 percent of respondents said they were strongly deterred to invest in the US, and eight percent said they would not invest at all on this basis.

Therefore despite the vast quantity of resources in the US, it seems that the permitting processes may be increasing the costs, delays and uncertainties of future projects. The rising costs can make certain projects economically less viable and the uncertainty could be deterring potential investors. Reducing the time and costs associated with obtaining mining permits might go a long way to motivating investment in the US mining sector.

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