The impacts of profit-based royalties on early-stage mineral exploration

Abstract

The impact of public policy on the mineral industries is difficult to measure due to little short-term responsiveness to policy changes by companies already investing in known fixed deposits. Nevertheless, early-stage (or grassroots) exploration has been suggested to provide early signals about the impact of a policy. Among mineral policies, taxation has received plenty of attention in theoretical analysis and simulation studies, but little empirical evaluation.Profit-based royalties should affect early-stage exploration by decreasing the expected value of a discovered deposit. The empirical approach here uses a difference-in-difference strategy, analyzing the Chilean mining royalty changes of 2004 and 2010. The first tax change is argued to be exogenous as it happened due to the political cycle and in line with a major increase in commodity prices, and the later modification occurred as a result of a major earthquake. Results indicate a surprisingly small average impact on grassroots exploration. However, the effect is heterogeneous as larger companies increased their budget as opposed to junior companies. The absence of geographical spillovers not only supports these estimated effects but also suggests that neighboring countries do not need to engage in harmful tax competition.