Incentives Watch: Economic Development Director Discusses Alaska’s Booming Mining Industry and Exploration Tax Credit

Guest blogger, Joe Jacobson, who is the Director of the Division of Economic Development in the Department of Commerce, Community and Economic Development, gives an overview of Alaska’s vibrant minerals industry and explains the tax credit that is available for certain mineral exploration activities.  The credit can be taken against the state’s mining license tax, corporate income tax or mineral production royalty payments.

Alaska’s Mining Industry [1]
With a total value exceeding $4.1 billion in 2012, the minerals industry is a critical component of Alaska’s economy. In 2012, Alaska’s six producing mines (Fort Knox, Greens Creek, Red Dog, Usibelli, Pogo, and Kensington) and more than 300 placer mines produced a total of $3.37 billion of zinc, lead, copper, gold, silver and coal. While gold was tops in terms of production value, zinc and lead concentrates were Alaska’s top mineral exports, with total statewide mineral exports totaling $1.6 billion.

Exploration Overview
Alaska’s mineral production total—while ranked #5 in production value in the U.S.[2]  — is still a fraction of what it could be. In contrast to most of the developed world, Alaska is still relatively underexplored and holds tremendous geological potential for new discovery. With new discoveries adding to known reserves each year, Alaska’s coal, copper, lead, gold, zinc and silver reserves are already in the top ten among mining jurisdictions worldwide. Alaska is also considered highly prospective in regard to strategic and critical minerals, including more than 70 occurrences of rare earth elements.

In pursuit of these resources, the mining industry spent an estimated $335.1 million on exploration during 2012, with 31 unique projects spending $1 million or more. Gold exploration accounted for 45 percent of expenditures and poly-metallic accounted for 45 percent. Advanced exploration and drilling at the Pebble, Donlin, and Livengood prospects topped the 2012 project list, accounting for 59 percent of exploration expenditures.

In additional to geological potential, Alaska is an attractive place for exploration thanks to its pro-development policies that support the minerals sector. The Fraser Institute’s Annual Survey of Mining Companies 2012/2013 ranks Alaska 6th among 96 global jurisdictions in the Current Mineral Potential index, indicating that Alaska’s mineral resource and policy climate both highly encourage exploration.  Alaska’s established land ownership, consistent and effective permitting, investment in critical infrastructure, and skilled workforce are all key points of differentiation. Alaska also offers a minerals exploration incentive credit to support continued exploration efforts in order to spur continued sector growth.

Minerals Exploration Incentive Credit
The Minerals Exploration Incentive Credit program was established to stimulate new mineral exploration activities in the State of Alaska. The credit allows up to $20 million of exploration expenditures to be carried forward and recovered against future state mining license tax and corporate income tax, or state royalty, owed.

Qualifying exploration activity expenditures include:
• Geochemical and geophysical surveys
• Exploration drilling
• Underground exploration
• Surface trenching and bulk sampling
• Other exploration work, including aerial photo, logging, sample analysis and metallurgical work

Only those exploration activities and expenditures taking place prior to mine construction commencement are eligible and exploration credits are site specific. However, operating mines may take advantage of them for exploration activities that could lead to expanding to adjacent ore bodies. Upon approval of exploration incentive credits, the credit may be used against tax or royalty liability owed to the state, up to 50% of the mining license tax, corporate income tax or production royalty. Approved credits that are not used in a given tax or royalty year may be carried forward but must be used within 15 years after approval. Certified or approved credits may be transferred if the property changes ownership and if the new owner is qualified.

Tax Structure
The current rates on mining net income were adopted in 1955 and are structured as follows: no tax on income under $40,000; $1,000 plus 3% over $40,000; $1,500 plus 5% over $50,000; and $4,000 plus 7% over $100,000. New mine production income may be exempted from taxation for a period of 3½ years after production commencement by acquiring an exemption certificate from the Department of Revenue.

In fiscal year 2013, firms paid $53 million in mining license tax before credits, over 100 times what was paid in 2003. Though individual company data is confidential, this upswing was largely attributed to the successes of Teck’s Red Dog, a large zinc mine located near Kotzebue, and Hecla’s Greens Creek, an underground silver, gold, lead and zinc mine near Juneau.[3]

Other Alaska-specific tax perks include 2012 legislation exempting quarry rock, sand and gravel, and marketable earth mining operations from the Mining License Tax.  Mining firms’ Alaska corporate net income tax is specifically included as a deductible mining expense on their Mining License Tax as well.[4]

[1] All dollars are expressed in nominal value.  

[2] Mineral Commodity Summaries 2011: U.S. Geological Survey , 198 p. 9.

[3] Pat Forgey, State Mining Profits Surge, Juneau Empire, June 18, 2007.

[4] Alaska Admin. Code tit. 15, § 65.125.

*For more information about Alaska’s minerals exploration tax credit and other natural resource exploration incentives, check out Bloomberg BNA’s Credits and Incentives Portfolios.