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a plague o both your houses

Regarding Ecuador’s windfall tax on mining

Following on from the Denver Gold Forum presentations yesterday (see link in previous post), I’ve so far had two people, make that three people writing in and asking me about the windfall tax (WFT) proposed by Ecuador, cos apparently there are some scare stories propagated by the uninformed going around. What follows is based on my reply to the mailers adapted into a post.

The situation is that there’s a proposed WFT on metals prices that would take 70%. It still hasn’t been pacted and it’s also in the air whether it ever gets enacted, but the key to the whole story is the theshold level. The gov’t and miners still have to agree on where the payments for windfall gains start. Here’s a quick ‘n’ dirty example for Dynasty Metals (DMM.to) and for gold, but the situation is the same for all miners and WFT is proposed on all metals:

Let’s suppose the 70% Au WFT threshold is set at $1,000/oz and DMM has cash costs of $300 /oz and let’s also suppose total costs per ounce of $500/oz, so under this theoretical here’s how much the company would make per ounce:

$800/oz Au = $300 profit
$900/oz Au = $400 profit
$1000/oz Au = $500 profit
$1100/oz Au = $530 profit
$1300/oz Au = $590 profit
$1500/oz Au = $650 profit

Now if the WFT threshold is set at $1200/oz the numbers work like this:

$800/oz Au = $300 profit
$900/oz Au = $400 profit
$1000/oz Au = $500 profit
$1100/oz Au = $600 profit
$1300/oz Au = $730 profit
$1500/oz Au = $790 profit

As you can see, the threshold level doesn’t affect numbers below it and leaves plenty in the way of profits, but at some point it does limit the blue sky possibilities of a miner. Also, it’s pretty important to know what level it kicks in. The negotiations are ongoing, but what we do know is that the threshold level cannot be set lower than spot prices. Finally, I’ve heard that some fools are going around screaming that companies like DMM.to have “hidden” this information from investors. This is BS. The WFT proposal has been in the public domain for over a year and a half, first published by Ecuador’s gov’t, via its tax ministry (not the mining ministry) in December 2007.

So people new to the story can’t be bothered to do a bit of basic DD and are now running around saying that the sky is falling….well, as David Byrne would say, “same as it ever was“. The best thing is to let the uninformed believe what they want to believe. They’re the ones queuing up to give you their money, so just smile sweetly and let them.

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