Guatemalan Nickel Royalties – If Only The Guardian Understood Basic Economics

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The Guardian’s telling us all how horrible it is that a nickel mining company pays very little in royalties at its mine in Guatemala. This is, obviously, white man’s exploitation of the indigenous and all that. A claim that would bear greater scrutiny if they had even the slightest idea of how mining works, how royalties do and should work, in fact, if they knew anything at all of the subject under discussion.

European-owned mine paid Guatemala just £1.4m in compulsory royalty taxes
Swiss-based Solway group that runs Fenix nickel mine paid 1% on revenues from unrefined ore

I’m not defending a 1% royalty rate. Rather, I’m trying to insist on the underlying reality of what a royalty rate actually is.

Guatemala’s largest nickel mine paid just £1.4m in compulsory royalty taxes during its first four years of production, according to its latest filings. The opencast Fenix mine belongs to the Bronstein family and is run by their Swiss-based Solway group. Solway benefits from Guatemala’s low nickel royalty rate, which is calculated at just 1% of all the revenues made from selling the unrefined ore it digs out of the ground. Recent proposals to increase rates to 15% were not implemented. An analysis of Solway’s filings with the country’s mining ministry helps to explain why its contribution is so low.

Solway’s extraction business, Compañía Guatemalteca de Níquel (CGN), digs the ore out of the ground. Its sister company, Pronico, also owned by Solway, operates a refinery at the Fenix site, and after buying the ore from CGN, turns it into ferronickel. CGN is the company that pays the compulsory royalty tax. The price at which it sells to Pronico determines its revenues, and therefore how much the Guatemalan treasury receives. In 2017, the most recent year on record, filings show Pronico paid an average of just 36 quetzals (£3.70) per metric tonne of untreated ore. At its lowest, the price paid by Pronico has been less than the cost of digging the mineral out of the ground, Solway concedes.

We derive our thinking about royalties from David Ricardo. Resource rents should be taxed ’till the pips squeak. This is just and righteous.

The logic being that no one did put that nickel ore there. There was no human effort in its creation – therefore by taxing that simple resource value we don’t change the amount of the resource that’s extant. We’ve an entirely non-distortionary tax, a rare and lovely thing. Great, let’s go get our tax revenue there. We can even add morality – the miners didn’t make the ore so why the hell should they get the money from the ore’s existence?

This all being entirely different from the miners gaining a return upon their effort, capital, expertise and so on. It is equally pragmatic – even just and righteous – that they should be taxed as any other on their deployment of those assets. It’s the resource value, the simple existence of the stuff in the ground in the first place, which should righteously be taxed away.

Great, so much for scene setting. But we can see the obvious next step, can’t we? If it’s only the resource value that should be taxed then what is the resource value?

LME nickel price over time

Well, actually, in the time period under discussion, the correct market price for raw nickel ore is probably zero, if not negative. The refining cost from ore to metal being of the order of $8,000 to $10,000 a tonne Ni.

Note that’s not an accurate number but it is of the right sort of range. There’s a cost to the process of getting the ore out of the ground and into a form someone wants to pay for. That resource value, the price of the ore sitting in the ground that we should be taxing heavily, is the residual between the extraction cost and the market price. The extraction cost will remain pretty much stable for any particular operation. The market price dances as they do. The correct resource rent taxation thus fluctuates. And when global nickel prices are low the correct taxation of the resource value is low – because the resource value is low.

Sure and all, could be these particular miners are taking the micturation. But the above is all still true. It is righteous and just that when the finished metal price is low the royalty rate is a low part of a small number.

And if The Guardian wants to write about mining then it would be a really good idea for The Guardian to know this sorta stuff. But then, you know, The Guardian.

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Perhaps Owen Jones could give the economics stuff a bash on the assumption he couldn’t be worse at it than the opinion pieces he currently writes.