Mineral Exploration and the Neutrality of Rent Royalties

Bayesian techniques are used to analyze the effect on mineral project selection of the imposition of an ideal form of resource rent tax in which all costs, including exploration costs, are fully deducted from taxable income. It is demonstrated that higher rates of resource rent tax generally will alter the a priori probability of a deposit being mined due to a direct risk-sharing effect as well as indirectly by changing the amount of exploration undertaken before the firm decides whether to mine or not.