4.2 Royalties and Fees in the Mining Sector

Gold and diamond mining provide greater revenue for the government and require greater capital and labor investments than timber extraction. The Venezuelan government applies a 34 percent income tax rate to net income from mining companies and a 1 percent royalty on unrefined gold and diamonds. Venezuela's income tax, which was recently lowered from 60 percent, is similar to that charged by other mineral-rich countries.²⁰⁶

Mining companies are charged a $0.002 per hectare area fee. During the exploration phase, mining companies are exempt from paying value-added taxes on imported equipment and are granted duty-free imports of specialized equipment during the life of the project. The government has also sought to attract mining investments by allowing mining companies to sell up to 85 percent of their gold freely, as opposed to selling exclusively to the Central Bank with payment in local currency. Companies are allowed a tax credit of 15 percent of profits to account for depreciation in the early years of a mine's operation. The Las Cristinas concession, 70 percent of which is owned by Placer Dome, will earn an average of $84 million per year before income taxes. From a large mine like Las Cristinas, the government will earn approximately $29 million each year (see Table 7). Revenue from these taxes goes directly to the national treasury, although the regional Corporación Venezolana de Guayana will earn approximately $17 million after taxes from the Las Cristinas concession. Placer Dome will take home approximately $38 million per year.

Mining is the main base for employment in the Guayana region, and the benefits accrued locally from the work in the forest sector are minimal.

Mining operations are generally more labor-intensive than forestry; the construction phase at Placer Dome's Las Cristinas mine will employ 3,500 people. Thereafter, a maximum of 900 people will be required to operate the mine.²⁰⁷ Currently, very few people are employed in the formal mining sector, since there are few operating mines. At least 30,000 additional miners are operating illegally as garimpeiros, although these operations are not regulated or taxed. Generally, small-scale miners do not own exploration and processing equipment, such as milling equipment.

Even if multinational companies increase employment in industrial mines, they are unlikely to absorb the large contingency of local miners who risk being displaced by their arrival.

After gathering gold-bearing material, the small-scale miner takes it to a mill for processing and is charged 17-20 percent of the gold. Another 25 percent is paid to the owner of equipment used in operations, with the remaining portion accruing to the miner. On average, small-scale miners can obtain 3.5 grams of gold (worth approximately $43.75) for every 50 kilograms of material excavated.²⁰⁸ Still, at this rate, small-scale miners can greatly exceed the minimum salary of approximately $150 per month for unskilled wage labor. Small-scale gold production, all of which is illegal, reaches between 5 and 10 tons per year.²⁰⁹ At current international prices, the value of production by small-scale gold miners is between $50 million and $100 million annually None of that amount goes to the national treasury.

FIGURE 9 - Average Royalties for Logging in Forest Countries

Note: Average fees for Venezuela are based on actual cubic meters rather than official cubic meters Source: N. Sizer, Profit Without Plunder, 1996

TABLE 7 - What will the Government Earn from Mining in the Guayana Region?¹

	LAS CRISTINAS GOLD MINE2
Length of concession contract	20 years
Size of concession	4,000 hectares
Capital investment	$600 million
Average total production	118 million ounces of gold
	720 million pounds of copper
Average yearly production	450,000 ounces of gold
	36 million pounds of copper
Yearly revenue (value of production)	$191.7 million
Yearly operating costs	$92.3 million
Royalties	$1.9 million
Depreciation	$15 million
Average yearly net income before taxes	$84.4 million
Income tax	$28.7 million
Taxes and royalties as a percentage of yearly revenue	16%

1. The following assumptions were included in this analysis: a. Exchange rate; 1 US$ = 500 bolivares b. Average market price of gold: $350 per ounce c. Average market price of copper: $.95 per pound d. Production (operating) costs were $205/ounce (includes royalties) e. In Venezuela, mining companies are allowed to deduct 15% of income before taxes to allow for depreciation. This deduction is calculated for the early years of the mine. Depreciation was estimated using the following formula: Depreciation-.15 x (income - operating costs) f. Net income = total yearly production value - depreciation - operating costs - royalties

2. Joint Venture: Placer Dome =70%; CVG = 30%

Source: Placer Dome, 1997

Even if multinational companies increase employment in industrial mines, they are unlikely to absorb the large contingency of local miners who risk being displaced by their arrival. Indeed, preliminary estimates in the region suggest that industrial mining employs fewer people per hectare than small-scale mining.²¹⁰ In addition, these independent miners may not be open to working for multinational companies at all, considering recent conflicts between the two parties in the region.²¹¹ Assuming a generous multiplier effect of 5 indirect jobs per mining job created, nearly 7 new mines on the scale of Las Cristinas would have to be developed to absorb the region's small-scale mining population.²¹² Such extensive development is not likely, given that deposits on the order of Las Cristinas are thought to be rare.²¹³