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Governments Take Aim at Gold Miners' Pockets

Regent is not concerned about outright nationalization and thinks the tax situation should stay in check as long as governments are open to working with the industry.

Silver Standard (SSRI - Get Report) has one operating mine in Argentina and is prepping for higher taxes and a potential export tax. "There is always going to be a tension as countries try to deal with their debt issues we will help them pay for that," says CEO John Smith, but "I believe that we are paying more than our fair share and we're committed to spending that locally with the people around our mine and with the federal government."

The company has a fiscal agreement with the current regime which could be in jeopardy following the presidential and legislative elections in late October, especially if the new leaders implement a tax on Argentina's $4.5 billion export industry. "Anything more than the fiscal stability agreement is an impact on the money that we make and the money that we return to shareholders ... any new tax is not a good tax."

Silver Standard is particularly vulnerable to higher taxes because it only operates one mine. The company has a plethora of projects in Mexico and Peru but those mines won't be in full-blown production mode until 2015.

Two companies that are relatively protected from the threat of nationalization are Silver Wheaton (SLW - Get Report) and Royal Gold (RGLD - Get Report). As royalty companies, they give money to miners in exchange for gold or silver but carry no production and execution risk.

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"When it comes into increases in taxation," says Silver Wheaton CEO Randy Smallwood, "they have no impact on our business. They are the responsibility of the operating partner." Silver Wheaton gives money upfront to a miner and then buys a percentage of silver at a fixed cost of $4 an ounce over the life of the mine.

Royal Gold has that type of streaming royalty but also has other arrangements where it can put up a lot of cash upfront for a portion of gold production over the life of a mine or it can take a percentage of the miner's profits. Profit royalties, as they are called, could be hurt by a higher tax rate although Jensen says he hasn't seen that yet.

Jensen also tries to stay in less risky areas. Ninety seven percent of the company's reverses come from the U.S., Canada, Mexico and Chile -- although Chile could see more tax reform -- and 80% of revenues come from those countries. "In all our business interests we have we don't have any kind of concern right now that nationalization might be on the forefront of any of those."

Smallwood says that some of their streaming royalty contracts might even protect them against nationalization "we've got, in some cases, corporate guarantees pertaining to ownership and such," meaning that in some cases its contract would pass over to the government.

"There is just such a long track record with nationalization," says Smallwood, "and as the information age gets broader and broader and that history is out there for everyone to understand that option just has less and less strength behind it" Smallwood sites the tax reform in Peru as a good example of government leaders being reasonable about taxes (if 50% of operating profits can be considered reasonable) "I think that anyone that was concerned about Peru has to be a bit humbled in terms of how positive it has actually turned out."

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NovaGold could actually be the biggest winner of increasing nationalization fears. Van Nieuwenhuyse was one of the few CEOs to highlight the nationalization trend during the Denver Gold Forum last month, as many ignored or dismissed it, and he made sure to use it to underscore the safety of NovaGold's properties located in British Columbia and Alaska. Shares are down more than 40% year-to-date and the company has received a lot of bad press recently due to rising capex budgets, so any kind of positive news is like a lifeline for the company.

International Tower Hill Mines (THM), also trying to shift from explorer to developer in Alaska, is relatively insulated from volatile regimes and higher taxes, but CEO Jim Komadina says over regulation from Washington still gets in his way.

"Regulation is really strangling the business," says Komandina, "let's have common sense regulations ... the way we are headed right now ... these are very stringent standards and they're exceedingly hard to meet." Meeting standards might force the company to put up more cash to "fix" problems. Although it might be a one shot cost versus a continuing tax, it does goes to show that no one is safe in the gold mining industry.


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-- Written by Alix Steel in New York.



>To contact the writer of this article, click here: Alix Steel.

>To follow the writer on Twitter, go to http://twitter.com/adsteel.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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