'Finders, keepers' mining law makes everyone richer
In her address to the Minerals Council, Prime Minister Julia Gillard said: "You don't own the minerals. I don't own the minerals. Governments only sell you the right to mine the resource. A resource we hold in trust for a sovereign people. They own it and they deserve their share."
There are two issues here. The first is legal. The ownership of minerals is vested in state governments, not the Commonwealth. And all state governments' mining laws say words like the "lessee of a mining lease owns all minerals lawfully mined from the land under the mining lease".
Even more important than the property rights enshrined in our state laws and states rights enshrined in our Constitution is that our existing mining laws have been developed to enable the nation as a whole to obtain the maximum benefit from its mineral endowment.
This means first discovering the minerals we have. Minerals, until they are discovered, represent wealth that does not yet exist, rather like an uninvented iPad or other item of high technology.
Unless someone has an incentive to discover them, income-enhancing hidden mineral deposits, like new technologies, will remain dormant, or at least be developed much more slowly and at higher cost than would occur if the ownership is vested in the discoverer or inventor.
And, if having discovered something, a firm then has to negotiate a royalty or some other special payment with the government, it would be doing so at a severe disadvantage. The government would cherry-pick the successes and extract punitive payments from them, leaving a pungent message to all explorers and severely reducing the amount of exploration activity.
If we tell explorers that they don't automatically own the wealth they have discovered on exploration leases they have been granted, ownership becomes conditional on what the sovereign people's representatives decide.
This introduces a massive disincentive to search and would severely reduce, if not destroy, most mining activity over time.
It could be that the government decides it will itself take on this entrepreneurial exploration role. But if it does so it will not be as efficient as private-sector explorers or developers. We will have less mining activity and reduced wealth.
The basic understanding under which mineral extraction law operates is therefore "finders, keepers". An explorer obtains a licence to discover minerals and in return has to make regular reports on the findings which then become publicly available. Subsequent searchers can build on this information. The exploration lease holder has to progressively surrender parts of the lease to forestall "real-estating", ie, waiting for someone else to discover something and thereby reveal undiscovered wealth on his or her own lease. Part of the deal with the government as lease granter is that development of a valuable resource can't be deferred indefinitely.
If a valuable mineral deposit is discovered it becomes the property of the finder subject to, theoretically, known and fixed royalties to the state (and of course, income tax). Some miners are skilled or lucky and make a considerable profit from their finds. But it is an open-access industry and over time the average profitability of mining is much the same as industry in general.
Search activity is further encouraged by the absence of mineral rights by the surface owner. If the surface owner has the mineral rights, as is the case in many countries, the landowner becomes a beneficiary from successful search activity to which he may have contributed nothing. This would create windfall gains at the expense of the searcher. It must result in diminished search activity because the landowner's good fortune is at the expense of the parties undertaking the expense of search activity.
Mining law has evolved for conditions under which there is little publicly known about the area being searched. Once an area's mineral wealth is well known, as is the case with coal reserves in the eastern states, a different approach recommends itself.
If proving up valuable deposits and subsequently extracting them is relatively straightforward, there may well be a scramble for exploration leases. In that case, efficiency suggests that the best approach is to auction the right to search and benefit from any findings. In most of Australia, an auction for mineral leases would not bring a positive bid.
But these are subtleties to the rules required for an efficient mining industry. Those rules involve secure property rights following on a discovery and no additional taxation once a valued deposit is found. If the government decides it will require higher shares for the "community" it needs to do so in a non-retrospective manner.
And it needs to do so in recognition that this will result in lower exploration activity and lower future income levels.
Unfortunately, not only does the Prime Minister appear to have been badly advised on mining law but in her taxation and regulatory approaches to business she seldom seems to recognise that imposing increased costs adversely affects profitability and future levels of activity and income.