ANZSEE 2012 Boyd Blackwell & Brian Dollery: Income Factor Shares

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Presented at ANZSEE 2012 Conference 'Green Growth or De-growth?', 12-15 November, Bond University, Gold Coast.

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ANZSEE 2012 Boyd Blackwell & Brian Dollery: Income Factor Shares

  1. 1. Factor Shares from Mining: Remote NT Case Studies Dr Boyd D Blackwell*, Prof. Brian Dollery***Post-doctorial Research Fellow, UNE Business School and CRC REP **UNE Business School and Director, Centre for Local Government boydb@une.edu.au Presentation made to the 2012 ANZSEE Conference, Green growth or de-growth? 12 – 15 November, 2012, Bond University, Gold Coast
  2. 2. Outline • Introduction • Mining’s factors of production • Case studies • Methods of calculations (RIEM, PTRIEM) • Results • Assessment • DiscussionRanger Uranium Mine, NT (AFP Herald Sun, 2007) Jeffery Matthews from Lajamanu at Tanami Gold Mine, Yapa Employment Plan (Alice Springs News Online, 2012). 2
  3. 3. Introduction • Research Question: a) What is the disbursement of mining revenue to the factors of production and b) how does this affect the well-being of remote Australian communities? • Smith (1904 [1776], I.6.17): “Wages, profit, and rent, are the three original sources of all revenue”. Labour, stock (‘capital’), land – factors of production • Goal: disbursement of mining revenue to the factors of production • Approach: factor share / factor proportion • Political economy questions (Atkinson, 2009): 1. Incomes at national and local levels 2. Inequality in personal distribution of income 3. Social justice, fairness of sources of income 3
  4. 4. Mining’s factors of production Miskelly’s (2004) 5 ‘m’ factors of production: debt interest, dividends, •Mineralization, manpower, materials, management and money retained earningsFactor Definition Owner Return/price Further disbursement / typeLand Earth’s surface Business Rent Profit: Other parties e.g. Rent Lease payments, rent, government land taxes Mineral resources Crown: State Resource rent Royalties, license fees Land, water, ATSI Compensation for Royalties and other minerals use paymentsLabour Human work individuals Wage/salary + super, shares etc.Capital Equipment & Business Rent Profit: structures Other parties e.g. private Rent Lease payment sector E.g. financial debt interest, dividends, contribution retained earnings 4
  5. 5. Case studies: NT Context • NT is special • Examples • Institutionally • Institutionally • Economically • Territory • Historically • Commonwealth’s role (Guj 2012) • Socially • Uranium • Culturally • ATSI land • Politically • Industrial relations • Ecologically, environmentally • Economically (NT Gov’t 2012b, pp. 1-2) • Small open economy, GSP $16B* • Highly sensitive to shocks* • High output/income per capita* • Natural resources • Mining • Cultural and natural heritage 5
  6. 6. NT Economy and Mining’s Role Table 1: Industry sector value added Industry Value, GDP% Position Mining $2.8B, 17% Largest Construction $1.8B, 11% 2nd Public admin & safety $1.5B, 9% 3rd Source: Northern Territory Government 2012b, p. 3. Table 2: Industry employment Industry Employment Position Mining 4,561, 4% 9th Construction* 13,427, 11% 3rd Public admin & safety* 17,987, 15% 1st Source: Northern Territory Government 2012b, p. 5. 6
  7. 7. Case studies: Locations Newmont Tanami Mine N 1km Sources: Manipulation of NT Government 2012, p. 118; Wikimapia 2012 7
  8. 8. Newmont’s Tanami Gold Mine, 2011 Includes: • Granites treatment plant, 550k NW Alice • Dead Bullocks soak mining operations - 40km W Granites Table 3: Key characteristics Mine Output Reserves New Capital Increase in (ounces) (ounces) project exp. output Tanami 221k 2.5m* Shaft $450m 60-90k/yr expansion 2015 - 2012 Source: Newmont 2012a, pp. 29; 2012b. Shaft - additional mine expansion 8
  9. 9. Case studies: Locations ERA Ranger Mine Sources: Manipulation of NT Government 2012, p. 118; ACIL Tasman 2011, p. 5 9
  10. 10. ERA’s Ranger Uranium Mine • world’s largest producers, mined 100,000t over 30 yrs (ERA 2012a;b) • 70% Rio Tinto; 30% publically listed ASX (ERA 2012c) • 2011 had extreme wet, 2,427mm (ERA 2012b) • Closed plant for 6 months, drew on stockpiles (ERA, 2012d; Fitzgerald, 2012) • $154m loss 2011 (ERA 2012b) • Production returned by 2nd Qtr 2012 (ERA 2012d) Table 3: Key characteristics, 2011Mine Output Sales Reserves (stk, New project Capital exp. Reserves (U3O8) (U3O8) proved, prob.)Ranger 2,641t 5,167t 13,484t* Deeps decline $120m 34,000t* Source: ERA 2012, various 10
  11. 11. USA Industry Compensation share of value addCalculation of factor shares Agriculture 21% Mining 36% Manufacturing 73% A. National accounts Services 75% B. Company reports Source: Gollin 2002, p. 464 • National accounts most common (Gollin 2002) • Focus on labour share (Kaldor (1956), Solow (1958), Kuznets (1959), Prescott (1986), Poterba (1998), and Gomme and Rupert (2004)) • Overcomes ‘commercial in confidence’ • Generalized • Company accounts • More than just labour share • Provides nuisance and peculiarity (see Blackwell, 2012) • Percentages • Our approach: company accounts + national accounts for context • Employee compensation factor shares -v- labour shares • Entrepreneurs and self employed (Gollin 2002) • Developing countries: lower labour shares assumed (Gollin 2002) • Informal economy 11
  12. 12. Methods • Company reports while preferred have problems: 1. Newmont annual reports – consolidated global operations 2. Reports under USA law 3. No distinction made for employee benefits • Some subsidiary reporting: sales, cost of sales and amortisation; Newmont AP, Tanami (Newmont 2012a) 12
  13. 13. Methods continued…• ERA: 1. Reports under AUS law 2. Categorizes employee benefits 3. Represents Ranger (no other operations) 4. BUT: 2011/12 very wet – used 2010 instead• Approach to Newmont: 1. 36% cut of labour from total cost of ‘material’ related expenses • Based on 37% found for ERA; and 36% from USA Nat Acts 2. Requested an internal Tanami report (K Ellington 2012 pers. comm. Aug, Sep.) • % provided against total expenses not revenues • No % of expenses for taxes or royalties 13
  14. 14. Royalty Indirect Estimation Method (RIEM) • Individual company/mineral royalties not reported by NT Gov’t • Protect confidentiality, commercial interests (s. 50, Mineral Royalty Act 1982 (NT)) • RIEM (Blackwell 2012b) • NT profit based royalty system (roughly 20% of profit) (Guj 2012) • NT Govt reports total royalties paid (RTM) by all minerals and total amount of minerals produced (OTM) • Can therefore estimate royalty’s as % of output (rather than profit) • Newmont Tanami (G) – only major gold producer in NT (ACIL Tasman 2009) RG = RTM ÷ OTM × OG (1) • Where: R = royalty, O = output, TM = total minerals, and G = Newmont Tanami Gold • In this Presentation: given as % of income rather than absolute amount 14
  15. 15. Profit, Corporate Tax, CLC Royalties Indirect EstimationMethod (PTRIEM) • All expenses provided except CLC royalties (provided as definition): • CLC (Central Land Council) royalties (RL) = 2.5% of revenue (Y) • Assumed: • Corporate tax (T) = 30% of profit (π) (assumed from ATO) • NT royalty (RG) = as defined previously (used to calculate T) • Royalties assumed as an expense of business • Tanami net sales ARE reported in consolidated accounts (Newmont 2012a) • Revenue assumed (Y) = net sales • All expenses in factor categories (E) recalculated as % of revenue (see 4) π = Y - E - RG - RL (2) T = 0.3π (3) Factor Shares: Ei /Y, RG /Y, RL /Y, T/Y (4) 15
  16. 16. Results FACTOR SHARES, NEWMONT 2011Factor Sub factor Share of sub- Share of total factor factorsaLand Mining tax (net of fed benefit) and other 7% 1% Income tax (net) 93% A 7% Total 100% 7%Labour Total 100% 36%bCapital Advanced projects R&D 4% 2% Reclamation and remediation 1% 1% Exploration 4% 2% Cost applicable to sales B 42% 21% Amortisation 21% 11% General and administrative, write-down and 28% 14% other Total 100% B 50%Money Interest on debt (net of capitalised interest) 40% 3% Net income attributable to Newmont stock C 60% 4% holders -Dividends paid to controlling interests 81% 5% -Dividends paid to non-controlling interests 19% 1% Total 100% 6% Grand total 100% Source: Manipulation of data from Newmont (2012a). a. Rounding errors exist. b. Refer to discussion in methods. 16
  17. 17. Results cont… SHARES, ENERGY RESOURCES AUSTRALIA 2010 FACTORFactor Sub factor Share of sub- Share of total factor factorsaLand Royalties (% of net sales) c -to Cth for Aboriginal Orgs (4.25%) A52% >NC 3% -to Cth for NT Government (1.25%) 16% 1% Income tax 32% <NC 2% Total 100% 93% A 6% ~NC 7%Labour Employee benefits and contractor expense B 97% 36% -Directors (non and exec.) and Chief 2% 1% Managers Defined contribution super 3% 1% Other employee payments 0% 0% Total 100% B 37%Capital Materials and consumables 41% 19% Purchased materials (e.g. U3O8) 37% 17% Inventory changes -12% -5% Commission and shipping 4% 2% Depreciation and amortisation 23% 10% Rental expense on leases 1% 1% Statutory, corporate and other 5% 2% Total 100% C 46% ~NC 50%Money Financing costs (~interest on debt) 25% 3% Profits (After Tax) 75% 8% -Dividends paid b 100% D 11% >NC 5% Total 100% 11% Grand Total 100% Source: Manipulation of data from ERA (2012b). a. Rounding errors exist. b. A dividend greater than profit was paid during that year. 17
  18. 18. FACTOR SHARES, NEWMONT TANAMI OPERATION 2011Factor Sub factor Share of sub-factor Share of total factorsLand CLC Royalties 30% 3% NT Royalty (considered as a tax) 26% 2% Community Relations 5% 0% Income tax A 39% >ERA 32% 3% total 100% A 8% 25% > ERALabour Wages & Salaries 96% 26% Super Contribution 4% 1% Total 100% B 27% <ERA/NCCapital Materials & Consumables B 35% 21% 37%,36% Inventory Change -3% -2% Depreciation & Amortisation 16% 10% Rental expense on leases 1% 0% Development Capital (Mine Development) 20% 12% Sustaining Capital 25% 16% Exploration 5% 3% Total 100% B 61% >ERA/NCMoney Bank Guarantee Fees 2% 0% 46%,50% Profit 98% 3% Total 100% B 3% <ERA/NC Grand total 100% 11%,6% Source: Manipulation of data from Newmont Tanami (K Eglington, 2012, Pers. Comm., 24 August and 5 Static September). 18
  19. 19. Assessment • How do labour shares compare with National averages and other industries? Use National Accounts Use Company Accounts/reports Australia ERA TanamiEmp.Comp. -> Lbr 54%->70% 37% 26%sharesYear 1986->1992 2010 2011Source Gollin 2002, p. 465, 470 ERA 2012b Pers. Com USA Industry Compensation share of value add Agriculture 21% Mining 36% Manufacturing 73% Services 75% Source: Gollin 2002, p. 464 19
  20. 20. EMPLOYEE COMPENSATION SHARES, AUSTRALIAN INDUSTRIES 2008Industry Labour Gollin’s self-employed share a adjustment bAgriculture, hunting, forestry; fishing (A+B) 26% 35%Agriculture, hunting and related service activities (01) 26% 35%Mining and quarrying (C) 20% 27%Manufacturing (D) 58% 77%Electricity, gas and water supply (E) 36% = 38% 48%Construction (F) AUS 54%~ 56% 75%Wholesale retail trade, repair of motor vehicles, 67% 90%motorcycles, etc.; hotels and restaurants (G+H)Transport, storage and communications (I) 43% 57%Financial intermediation; real estate, renting and business 46% 62%activities (J+K)Public administration and defence; compulsory social 81% 108%security (L)Education; health and social work; other community, 83% 111%social and personal services (M+N+O)Total Economy 54% 72% Source and notes: a. The labour shares were calculated using basic prices data from the United Nations (UN, 2011, pp. 29-35) = employee compensation / (employee compensation + operating surplus + consumption of fixed capital). b. The adjustment used the mean adjustment fraction for Australia of 17/50 from Gollin (2002, p. 470). 20
  21. 21. Discussion: Factor shares and the flow of incomefrom mining in remote locations? • Labour shares, mining < other industries • BUT in remote Australian case studies • labour shares > than mining industry averages • Capital shares • greatest proportion of disbursement • Reasons: Capital intensive nature of mining, changing role of labour unions • Reflects:  labour shares generally despite > labour shares in developing countries with lower MPL • Resulting from: factor price equalization from globalization,  mobility of capital, > FDI, exchange rate flexibility, financial crises • despite previous attempts to restrict L & K mobility,  gov’t spending, • all shift returns from labour  capital 21
  22. 22. Discussion: Factor shares and the flow ofincome from mining in remote locations?Continued… • Land returns • while small as % of total income • large in absolute terms • allows remote communities to undertake activities • ALSO mining companies are critical in providing important additional funding and support which if well planned can provide enduring value 22

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