The question of what the province will receive in royalties is a prominent unknown among those weighing the pros and cons of the proposed mine. In addition to the potential to create local jobs and business spin offs; some of the proponents (YEP) for the mine point out that the province is broke and we could use the money to pay for programs, debt, and operation of the government; including pensions and health care for an aging population. Note this blog refers to royalties not taxes.
There are two types of on-going royalties that Atlantic Gold/Atlantic Mining NS Corp. will have to pay out based upon the production volumes of gold from the Cochrane Hill Gold Mine. Until the relationship between the two entities is made clear i.e. Atlantic Gold is the parent company apparently is responsible to the shareholders and for financing, PR and project lead/manager for the Touquoy Mine and future satellite String of Pearls mines. Atlantic Mining NS Corp. appears to be the operator, this entity is the applicant for environmental and industrial permits and holds/will hold the liability both at the processing facility and all satellite mines.
Atlantic Mining NS Corp. owns 100% of the mineral claims associated with the proposed Cochrane Hill Gold Mine. This is not the case in the other satellite mines in “The String of Pearls”.
The first royalty payment on the Property is subject to a 3% Net Smelter Return (NSR) on all metals produced payable to a Nova Scotian prospector. The prospector had the mineral rights to the Cochrane Hill Gold Mine and optioned these claims to the proponent, Atlantic Gold. Atlantic Gold’s financial statements indicate that the option agreement was for 3% (NSR) of which up to 2% of this NSR is available for purchase for $1.5 million, reducing the continued NSR to 1%.
What is a NSR? It is a royalty that is revenue-based net smelter return. Mining output generally requires further processing by smelters to produce a marketable metal. Net smelter return refers to the gross revenue an operator receives from the sale of the mine’s products to the smelter, less any transportation, insurance, marketing and refining costs. Therefore, NSR royalties are based on net proceeds received by the operator from a smelter or refinery.
I am not privy to the deal the prospector made with the company but typically option agreements could include an up front cash payment, shares in the company and possibly a schedule for further cash payments.
Royalties to the Municipality of the District of St. Mary’s?: Zilch, the municipalities are not entitled to any royalty payments.
Provincial Royalties: So what will the province receive in royalties from the operation of the Cochrane Hill Gold Mine for the period of 6 years? The royalties owed the province of Nova Scotia are governed by the Mineral Resources Act Section 107 and sections 80-89 and the Mineral Resources Regulations made under Section 156 of the Mineral Resources Act. An Act is legislation passed by the government, whereas the Regulations are Subsidary legislation, and are published in the Royal Gazette for becoming legal. … Act is Parent law whereas regulation is a supplement.
The royalty payable for output is the rate of the net value received by the producer,
in the case of gold it is 1%. Net value royalty payments allow for certain expenses to be subtracted from the final royalty payment due the province. In contrast, the 3% NSR owed the prospector is the production volume(output) less the costs of producing the gold bars so to speak.
What expenses are allowed to be deducted from the royalty payment?
The Mineral Resources Act Section 107 allows for deductions on the royalty fee due the province, including: (a) “allowances for processing” and deductions for (b) “depreciable assets”=an asset in use in the Province by the operator, see section 107 for details.
How is the Royalty Calculated?
Governed by Mineral Resource Regulations Sections 80-89
By generally accepted accounting principles
80 (1) Royalties must be calculated in accordance with generally accepted accounting principles and the calculations must be certified by a public accountant licensed under the Public Accountants Act.
(2) Operators reporting gross income, net revenues and net income must use generally accepted accounting principles.
Royalty = Gross Income-Net Income-Net Revenue. Simply put = gross income minus allowable deductions.
The rules for calculating Gross Income and the allowable deductions for Net Income and Net Revenue are found in the Mineral Resource Regulations Subsections 83-86 and are available at this link for those that wish to delve deeper.
Net Income = Gross Income – allowable deductions(Subsection 84) Net Revenue = Net Income – allowable deductions (Subsection 85)
Net Revenue = Net Value
Reasonable operating expenses from the mining operation are allowed to be deducted from Net Income. One of these eligible costs include:
The actual costs of restoration, reclamation or rehabilitation of the mine incurred during the year, and for this purpose costs of reclamation completed after a mining operation has ceased may be considered as prior years[’] operating expenses and applied in reverse order to prior fiscal years’ royalty returns to reduce royalties payable to not less than 2% of net revenue for each fiscal year applied; What? The cost of reclamation (cleaning up the mess) can come off the royalty thereby reducing the payment to the province! Is this an incentive or disincentive from the provincial perspective in relation to reclamation?
The Gold Mine Conversation blog is a reference site for the public and a site to provide greater insight into various aspects of the proposed project. To this end, the following comment on net value production has been referenced from the work of Joan Baxter as she has taken the time to do just this in her updated investigative journal piece which contains some interesting points on royalties. Like Blood From A Stone.”
“Net” value (Net Revenue)production royalty rate applied in Canada opens large loopholes for companies to slip through. There are more ways that companies can get around paying taxes, even if a mine has been in production and has recovered some costs. Financial tools can include tax credits, cost allowances, development expenses, loss carryovers and flow-through shares.
“By world standards, not only is this a very low royalty, (the 1% provincial royalty for gold) but it also allows producers a great deal of wiggle room to reduce what they pay to governments. According to journalist James Wilt writing in The Narwhal, “companies in Canada pay a tiny fraction of what they pay other countries to extract gold.” … most governments around the world calculate royalties based on production volume and the cost of the mineral. However, royalties in Canada are generally calculated after costs have been subtracted, a practice which is exceedingly rare globally”.
… companies can open a mine near existing operations and call it an “expansion” even though it’s a sizable distance away — meaning a company can continue in the initial “cost allowance” phase. That allows a mine that has been open for many years to continue paying very little in revenue to government
Following from this last statement the Mineral Resources Act does allow for this situation, as prescribed below.
Section 108 (1) of the Act: Where mining is conducted in more than one location, the locations are deemed to be one mine for the purpose of determining whether a person pays a royalty if
(a) the mining is conducted in the locations
(i) by the same person,
(ii) under the same general management or control, or
(iii) under joint control by persons not dealing at arm’s length; or
(b) the net income of the mining accrues to the same person.
Subsection 110 (2) Where
(a) mining is carried on by two or more affiliated or associated corporations under the same general control; or
(b) the net income of mining being carried on as more than one operation accrues for the benefit of the same shareholders, the income from the various operations must be combined and dealt with as the net income of one and the same operator.!!!!!!!!!
Significance of this subsection:.. companies can open a mine near existing operations and call it an “expansion” even though it’s a sizable distance away — meaning a company can continue in the initial “cost allowance” phase. That allows a mine that has been open for many years to continue paying very little in revenue to governments. This could foresee-ably be the operating scenario of Atlantic Gold/Atlantic Mining NS. Corp. for the String of Pearls – Fifteen Mile Gold Stream, Beaver Dam and Cochrane Hill.
In conclusion, will the net royalties that accrue to the province justify the risks associated with the 6-year operation of the facility as designed? You do the math.
Review of ESTMA indicates that as of 2017 no royalties had been paid to the province by Atlantic Gold for the Touquoy Mine. This might be different for 2018, as the ESTMA report is not posted online until first week in June. The government did indicate to Joan Baxter that Atlantic Gold is paying royalties.