	The 12 Western States Assess Multiple Types of Royalties, Including Functional Royalties, on Mining Operations

Twelve western states assess royalties on the hardrock mining operations  on state lands. In addition, each of these states, except Oregon, assesses  taxes that function like a royalty, which we refer to as functional royalties,  on the hardrock mining operations on private, state, and federal lands. Royalties, including functional royalties, often differ depending on land  ownership and the mineral being extracted, as the following illustrates:    For private mining operations conducted on federal, state, or private  lands, Arizona assesses a net proceeds functional royalty of 1.25 percent  on gold mining operations, and an additional gross revenue royalty of at  least 2 percent for gold mining operations on state lands. Finally, the actual amount assessed for a particular mine may depend not  only on the type of royalty, its rate, and exclusions, but also on such  factors as the mineral’s processing requirements, mineral markets, mine  efficiency, and mine location relative to markets, among other factors. Prior State Estimates of the Number of Abandoned Hardrock Mine Sites Vary Widely, but Our Data Show at Least 161,000 Sites, with Many Posing Hazards

It has been difficult to determine the number of abandoned hardrock mine  sites in the 12 western states, and South Dakota, in part because there is  no generally accepted definition for a hardrock mine site. Furthermore, BLM and the Forest Service have had difficulty determining  the number of abandoned hardrock mines on their lands. Using this definition, states reported to us the number of abandoned sites in  their states, and we calculated that there are at least 161,000 abandoned  hardrock mine sites in their states. At these sites, on the basis of state data,  we estimated that at least 332,000 features may pose physical safety hazards,  such as open shafts or unstable or decayed mine structures. BLM Estimates That Operators Have Provided About $982 Million in Financial Assurances—About $61 Million Less Than Needed to Cover Estimated Reclamation Costs

As of November 2007, hardrock mining operators had provided financial  assurances valued at approximately $982 million to guarantee the  reclamation cost for 1,463 hardrock mining operations on BLM land in 11  western states, according to BLM’s Bond Review Report. The report also  indicates that 52 of the 1,463 hardrock mining operations had inadequate  financial assurances—about $28 million less than needed to fully cover  estimated reclamation costs. We determined, however, that the financial  assurances for these 52 operations should be more accurately reported as  about $61 million less than needed to fully cover estimated reclamation  costs. The $33 million difference between our estimated shortfall of nearly $61  million and BLM’s estimated shortfall of nearly $28 million occurs because  BLM calculated its shortfall by comparing the total value of financial  assurances in place with the total estimated reclamation costs. This  calculation approach has the effect of offsetting the shortfalls in some  operations with the greater than required financial assurances of other  operations. However, the financial assurances that are greater than the  amount required for an operation cannot be transferred to an operation  with inadequate financial assurances. In contrast, we totaled the  difference between the financial assurance in place for an operation and  the financial assurances needed for that operation to determine the actual  shortfall for each of the 52 operations for which BLM had determined that  financial assurances were inadequate. Finally, over one-third of the number of all hardrock  operations and about 84 percent of the value of all financial assurances are  for hardrock mining operations located in Nevada.
Why GAO Did This Study

The General Mining Act of 1872 helped open the West by allowing individuals to obtain exclusive rights to mine billions of dollars worth of gold, silver, and other hardrock (locatable) minerals from federal lands without having to pay a federal royalty. However, western states charge royalties so that they share in the proceeds from various hardrock minerals extracted from their lands. For years, some mining operators did not reclaim land used in their mining operations, creating environmental and physical safety hazards. To curb further growth in the number of abandoned hardrock mines on federal lands, in 1981, the Department of the Interior's Bureau of Land Management (BLM) began requiring mining operators to reclaim BLM land disturbed by these operations, and in 2001 began requiring operators to provide financial assurances to cover reclamation costs before they began exploration or mining operations. This testimony focuses on the (1) royalties states charge, (2) number of abandoned hardrock mine sites and hazards, and (3) value and coverage of financial assurances operators use to guarantee reclamation costs. It is based on two GAO reports: Hardrock Mining: Information on Abandoned Mines and Value and Coverage of Financial Assurances on BLM Land, GAO-08-574T (Mar. 12, 2008) and Hardrock Mining: Information on State Royalties and Trends in Imports and Exports, GAO-08-849R (July 21, 2008).

What GAO Found

Twelve western states, including Alaska, that GAO reviewed assess royalties on hardrock mining operations on state lands. In addition, each of these states, except Oregon, assesses taxes that function like a royalty, which GAO refers to as functional royalties, on the hardrock mining operations on private, state, and federal lands. The royalties the states assess often differ depending on land ownership and the mineral being extracted. For example, for private mining operations conducted on federal, state, or private land, Arizona assesses a functional royalty of 1.25 percent of net revenue on gold mining operations, and an additional royalty of at least 2 percent of gross value for gold mining operations on state lands. The actual amount assessed for a particular mine may depend not only on the type of royalty, its rate, and exclusions, but also on other factors, such as the mine's location relative to markets. Over the past 10 years, estimates of the number of abandoned hardrock mine sites in the 12 western states reviewed, as well as South Dakota, have varied widely, in part because there is no generally accepted definition for a hardrock mine site. Using a consistent definition that GAO provided, these states reported the number of abandoned sites in their states. On the basis of these data, GAO estimated that there are at least 161,000 abandoned hardrock mine sites in these states, and these sites have at least 332,000 features that may pose physical safety hazards and at least 33,000 sites that have degraded the environment. According to BLM data, as of November 2007, hardrock mining operators had provided financial assurances worth approximately $982 million to guarantee reclamation costs for 1,463 hardrock mining operations on BLM land and 52 of these operations had financial assurances valued at about $28 million less than needed to fully cover estimated reclamation costs. However, GAO determined that the assurances for these 52 operations should be more accurately reported as about $61 million less than needed for full coverage. The $33 million difference between GAO's and BLM's estimated shortfalls occurs because BLM calculated its shortfall by comparing the total value of financial assurances in place with the total estimated reclamation costs. This approach effectively offsets the shortfalls in some operations with the higher than needed financial assurances of others. However, the financial assurances that are greater than the amount required for an operation cannot be transferred to an operation with inadequate financial assurances. In contrast, GAO totaled the difference between the financial assurances in place for an operation and the financial assurances needed for that operation to determine the actual shortfall for each of the 52 operations for which BLM had determined that financial assurances were inadequate. BLM has taken steps to correct the reporting problem GAO identified.