How Much Does a Mine Cost?

Australia’s 40% mining tax could discourage the establishment of new mines.

Mines vary in size and complexity, but here are a few numbers to give you an idea of the scale of costs pre-tax.

For giant-scale mining projects…

Clearly, mining is no popsicle stand. And those are just capital costs. Infomine offers a glimpse into operating costs – themselves big chunks of change.

Capital costs are typically a mining company’s biggest expense – and an eye-watering one. On top of that, companies must pay labor costs, interest payments and environmental cleanup (assuming the country has and enforces environmental regulations).

Mining is not a small business and can’t ever be. Large miners can still afford a new mine even with 40% lopped off their “excess” profits. But less well-endowed companies may find themselves short of funds for a major expansion (i.e. a new mine):

Example large company: BHP Billiton – Iron ore business segment

US$6,229,000,000 profit in FY2008

US$8,735,000,000 fixed assets

Threshold (assets x 10-year government bond yield, or 5.42% as of May 28, 2010): US$473,437,000

Taxable profit: US$6,229,000,000 – US$473,437,000 = US$5,755,563,000

Profit after 40% mining tax = US$3,453,337,800

Example small company: Whitehaven Coal

A$166,856,000 profit in FY2008

A$508,838,000 fixed assets

Threshold (assets x 10-year government bond yield, or 5.42% as of May 28, 2010): A$27,579,020

Taxable profit: A$166,856,000 – A$27,579,020 =A$139,276,980

Profit after 40% mining tax: A$83,566,188 (US$70,700,000)

For further analysis of Australia’s mining tax, see RGE’s Australia’s Big, Bad Mining Tax: What’s at Stake?

All rights reserved, RoubiniGlobalEconomics, LLC

8 Responses to "How Much Does a Mine Cost?"

  1. Guest   June 1, 2010 at 3:09 pm

    Will this new tax affect any companies listed on the LSE or NYSE?

    • brody   June 2, 2010 at 9:24 pm

      Most of the affected companies are listed on the ASX but some companies, such as BHP Billiton and Vale, are cross-listed on the LSE and NYSE as well.

  2. Guest   June 1, 2010 at 3:13 pm

    These are interesting calculations. Are the costs for mining for mineral resources the same as mining for energy resources?

    • Leila Ward   June 1, 2010 at 6:09 pm

      Some of the costs are the same, such as the rock breaker, ripper and drill, but I think mining for liquid or gaseous substances, such as oil and natural gas, may require different equipment. Australia has a separate tax for energy mining already – it’s called the Petroleum Resource Rent Tax and is also 40% of profits.

  3. Edgar Ferguson   June 1, 2010 at 3:17 pm

    What would be the lag on this showing up in starts for new mines? How far ahead are permits, equipment orders, planning generally done? Will the effects appear quickly or take a few years to really be felt?

    • micmac   June 1, 2010 at 5:59 pm

      New mines take years of pre-construction work. Permitting takes 1-2 years; Equipment orders up to 5 years to fulfill; And before you even get to the permitting and equipment ordering state, the planning process can take 3-4 years of feasibility studies (estimating size of mineral reserve, profit potential, “bankability” or ease of financing). So there may be a few years before we see a decline in new mine starts as there are many mining projects still in the process of completion. There may have been a large buildup of new mine starts during the peak of the commodity boom in 2007-2008. Those mine starts may not be done and ready to produce until 2012. However, the mining majors (i.e. BHP Billiton, Alcoa, Rio Tinto, etc.) are considering halting those existing projects in addition to canceling plans for any new mines in Australia.

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