Revenues from Phases of a Mining Project
In terms of government revenue, there are significant differences between the pre-production (exploration and feasibility; planning and development), operations, and closure (or decommissioning) phases.
The Pre-production Phases
Revenues from the pre-production phases come from the lease and licensing fees paid by mining companies for the right to conduct exploration and development activities in specific areas. These revenues vary by jurisdiction based on how licences are allocated (whether through auctions or an application process), the resource potential of each region, and general economic circumstances.
Revenues may also be derived from penalties (or “cash in lieu”) imposed on leaseholders when they fail to comply with regulations that require them to carry a minimum amount of exploration work every year on their allocated lands. These penalties are relatively small for each hectare or acre of land, but can add up if the lease covers large territories.
The Operations Phase
It is during the operations (or production) phase that leaseholders finally realize a profit on their investment. It is also during this phase that governments can receive substantial royalty payments and other production taxes. The general trend in government revenues over the life cycle of a typical mining project is presented in Figure 5.
Operations can last several decades, but can be paused for long periods when low market prices make extraction unprofitable.
Profile of Government Revenues Over the Life Cycle of a Typical Mining Project
Source: International Council on Mining and Metals (2016). Role of Mining in National Economies – 3rd Edition
The Decommissioning Phase
When a mining deposit is exhausted or when operations are deemed to be no longer profitable, a mining site needs to be decommissioned. Closing a mining site involves removing all structures and equipment, and returning the site to its original condition or to an agreed-upon condition that will serve future community needs. It may be necessary to decontaminate the soil and, in some circumstances, provide ongoing monitoring and site maintenance over many years or in perpetuity.
Decommissioning a mine can take from one to five years (sometimes longer) and represents a significant expenditure for leaseholders (often over $150 million). It also represents a significant risk for governments. If a company does not meet its obligation to remediate a site, government could inherit responsibility for new, unfunded liabilities arising from the abandoned site. This has happened in the past and there are now thousands of abandoned mines littered across Canada, the United States, and many other countries. To prevent this situation from happening again, many governments have put laws and regulations in place to mandate mechanisms, such as financial assurances and remediation funds, that are expected to minimize the risk that taxpayers will become liable for the remediation of more abandoned sites.
The decommissioning phase is therefore not a revenue-generating phase for governments, but rather a liability-management phase. As such, it differs from the pre-production and operations phases. For this reason, the Audit Methodology part in this Practice Guide is divided in two main areas. The first area concerns revenues from the pre-production phases and operations phases, while the second is focused on the systems and processes that governments have put in place to manage financial liabilities for remediating mining sites.