Despite rising costs, mining's contribution, mainly gold, to Nevada economy at all-time high

In spite of rising mining costs, a Nevada Mining Association report found Nevada’s gold miners “experienced a significant increase in taxes paid to the state’s economy and wages paid per mining employee in 2007.”

RENO, NV - 

A Nevada Mining Association report says the Silver State remain a player in the world gold industry, but "faces numerous technical, environmental, regulatory and legislative challenges in the years ahead."

In the report, Economic Overview of the Nevada Mining Industry 2007, Economist John L. Dobra, director of the Natural Resource Industry Institute at the University of Nevada, said the weighted average total cash cost for Nevada producers to mine an ounce of gold rose substantially in 2007 with an average cost of $408 per ounce, up from $365/oz in 2006.

However, Dobra noted that the 11.8% increase "is less than half the percentage increases in the past few years, indicating that the industry is making significant progress in controlling costs."

"Even with these cost issues, Net Proceed of Minerals in the state and Net Proceeds of Minerals Taxes have increased fairly dramatically. 2006 Net Proceeds were $1/27 billion and climbed to $1.53 billion in 2007," Dobra wrote. "Taxes paid on those Net Proceeds increased about 23 percent, from just over $61 million in 2006 to over $75 million in 2007."

Dobra said, "Total taxes, which include sales and use taxes on purchases and property taxes on property, plant and equipment by primarily gold producers, also increased in 2007 from over an estimated $192 million in 2006 to $199.5 million in 2007."

Meanwhile, Nevada mining generated more than 102,000 jobs in Nevada and in states supplying good and services to the industry in 2007, compared to 75,000 total jobs in 2006. Dobra estimated that the industry contributed $3 billion to Nevadans' personal incomes in 2007 compared to $2.8 billion in 2007.

Nevada mining employed 14,470 jobs in 2007 and generated an average income of $80,236 per year for metal miners and $67,392 annually for all miners.  Dobra said there are 18 active gold and silver operations in the state. In 2007 active Nevada mines produced 6.037 million ounces of gold, 8.4 million ounces of silver, and 142.8 million pounds of copper.

The state's lowest cost mine produced 155,000 ounces of gold at total cash cost of $195 per ounce. Dobra found the mine with the second lowest production costs "was a much larger mine with 1.63 million ounces of production at a total cash cost of $373 per ounce."

PRECIOUS METALS INDUSTRY PROFITABILITY

In his report, Dobra said a common misconception of precious metals mining in particular "is that it is an enormously profitable venture. ...Precious metals mining can be very profitable and producers invest in production capacity in hopes of earning profits, but industry profits are highly leveraged by metals prices and operating costs."

He noted that "when one looks at industry average profitability over the long run rather than focus on an individual mine or mining company in a short period of time, what they will find is that the precious metals mining industry is, in fact, not particularly profitable."

For instance, "in most other industries, if prices fall they would cut output in an attempt to lower their costs," Dobra said.

"In the precious metals mining industry, operators will raise their cut-off grades to lower their costs with the result that their output typically goes up, at least initially. They will also attempt to lower costs by reducing exploration, deferring purchases of new equipment, new construction, and other action," he explained.

Dobra also noted that "long lead times to get approval for expansions and new projects reduce operators' ability to respond to price increases by increasing capacity."

Underground mining is also driving up Nevada's production costs. "This development will also tend to drive up production costs even more than we have seen in the past few years. Increasing underground production also increases concerns about miner safety," he said.

Increases in energy production "have hit operators particularly hard," Dobra said. ‘The industry also must deal with rising costs and limited availability of equipment and labor."

"Another challenge is the prospect of mining law reform in Congress," he added.

"It seems counterintuitive that industry profitability could fall in a year when prices have increased significantly but the operational factors mentioned above play a significant role in the industry cost structure," he said. "Another important factor is corporate activities such as mergers and acquisitions. These kinds of activities tend to involve prospects and development properties and add little to current earnings. At the same time they tend not to add much to shareholder equity in the short term and may add to long term debt."

"While the past few years have been challenging for the Nevada mining industry and challenges lie ahead, the state continue to offer a number of positive characteristics which should bode well for mining, especially gold mining," Dobra asserted.

"Nevada has geological conditions that are favorable for the occurrence of outstanding mineral deposits; the industry has developed a skilled workforce; infrastructure and support services are in place, and; the state has maintained a reasonable business environment in which responsible mining can take place," he concluded.

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