Mining Policies, Laws and Fiscal Systems for the 21st Century

Transcription

1 Mining Policies, Laws and Fiscal Systems for the 21st Century Professor James Otto (retired) Formerly: University of Denver College of Law Colorado School of Mines University of Dundee CEPMLP United Nations Attorney and Mineral Economist 1

2 Mining Investment Policy Objective? to achieve a win-win situation for society & investors society: achieve development objectives and obtain income investors: achieve adequate return on investment It is in the interest of both parties to obtain successful projects 2

3 Structure of Talk Understanding the Changing Competition Investment Trends & Flows Country Factors Influencing Investment Two Hot Issues Promotion 3

4 Topic 1. Understanding the Changing Competition An unprecedented portion of the world is now open to mining companies Companies have many options, but only limited budgets Key factors need to be met to attract investment Some factors can be controlled or influenced by governments, others are beyond their control 4

5 Mining and Investment Laws: General Trends in 1990s Since 1985 over 120 countries have: introduced new mining law made major amendment initiated drafting effort almost every Asian and African nation has a new mining law Trends by type of economy differ developed industrial economies developing economies transition socialist economies Changes are unique in every country 5

6 Mining Investment Policy Developed Industrial Countries 1980s exploration open to all investors mining investment by foreign entities allowed, but some restrictions applied free-market principles apply relatively low tax levels environmental obligations moderate well-tested mining law 1994: Australia, Canada & USA attracted >70% of exploration 6

7 Developed Industrial Countries Today Issues: access to land (closed areas, NIMBY, role of local gov t) native title (Australia, Canada, some areas in the US) permitting delays (5 yrs +) technology controls (cyanide, backfilling) laws well tested; some antiquated (Europe & USA) exploration maturity security of tenure (Windy Craggy, Coronation Hill, New World) Trend: less attractive to investors (but 40%+) 7

8 Mining Investment Policy Developing Countries 1980s state or local-owned mining enterprises prevalent political duty to assert national control over minerals mandatory majority or minority participation by state/nationals investment terms include means to foster broader development relatively high levels of tax foreign exchange controls minimal environmental obligations mining laws outdated largest mines regulated by negotiated agreements Foreign investors viewed with suspicion 8

9 Policy Evolution in Developing Countries Motivating factors Why allow foreign investment in mining? : lack of indigenous exploration and mining expertise? lack of access to technology? declining ore reserves requiring fresh exploration? inability of state or locally owned enterprises to fund exploration? limited access to foreign exchange? declining mine cash flows requiring state subsidies/cash injections? pressures by international community from debt crisis? economy-wide move toward free market through private sector? increased competition for state investment from labor intensive sectors? project management degrades over time; inefficient (politics)? 9

10 Developing Countries Trends: 1990s new or amended mining law and regulations more efficient application procedures block-based exploration areas open file system improvements with mandatory reporting mineral title system improvements better access to land procedures some reclamation and environment requirements move away from negotiated agreements less government approvals than before (less control) means to stabilize fiscal terms lower taxes Trend: foreign investors welcome - investment levels up 10

11 Developing Countries Current trends reclamation & environmental requirements increase fiscal systems have bottomed out some increases increased awareness of sustainable development community interaction encouraged (move away from paternalism toward sustainable development) revenue distribution among more stakeholders EITI interest Trend: foreign investors welcome - investment levels up 11

12 Trends in Transition Socialist Countries Investment Policy 4 (5?) Phases of Transition Phase 1. Exploit the Exploiters policy changes to allow private ownership of mines embryonic joint venture or foreign investment law key decisions still under state control minerals allowed for foreigners restricted poor quality deposits made available substantial social obligations unlimited environmental liability for past operations geological information guarded or high cost internal disputes between government agencies distorted sense of value of deposits some foreign interest but few if any large investments 12

13 Trends in Transition Socialist Countries 4 (5?) Phases of Transition Phase 2. Accommodation increased need for capital realization that investor objectives must be met better understanding of profit motivation vs quota technological reserves replaced with economic reserves information more accessible new but inadequate mining law or amendment any large mining investment has special agreement increased level of foreign interest, most wait to see how pioneers fair 13

14 Trends in Transition Socialist Countries 4 (5?) Phases of Transition Phase 3. The Transition Commences existing operations marginal with large social obligations: remain with state sub-economic: closed or mothballed economic: go to private sector mining law approaches international norms foreign investors actively sought foreign investors viewed as beneficial geological information more readily available supplemental mining agreement maybe necessary Foreign & national investors active and acquire best known deposits and mines. Very little exploration. 14

15 Trends in Transition Socialist Countries 4 (5?) Phases of Transition Phase 4. Transition Accomplished fully market-oriented industry emerges state withdraws from any operator role role of state is as regulator new or amended mining law other laws brought into harmony state actively promotes for private investment open file systems exploration left to private sector Pioneer projects come on-line Foreign investors willing to commit to major greenfields exploration if geology is good, major new mine investment possible 15

16 Trends in Transition Socialist Countries 4 (5?) Phases of Transition Phase 5. Return of Nationalism? increased role by the state? increased requirements for local partner? Foreign investors pulling back or waiting to see how others fare 16

17 Lesser Developed & Transition Countries How should large scale exploration and mining investment be regulated? under the general mining law? under a model stability agreement? under a negotiated stability agreement? under a combination of law and agreement? agreement to supplement or supersede law? trend: less negotiated agreements depends on maturity of a harmonized legal system country s unique circumstances will determine Agreements can allow flexibility not present in law Agreements can clarify what is not said in laws Provides investor with greater security Provides a stable base for government administrators 17

18 Lesser Developed & Transition Countries Mining Agreements may be essential for large scale investment if: legal system is not harmonized or still changing Central and Provincial jurisdiction are not clear may cover many issues or just a few examples: Tax Stability Agreements: no changes to tax (Argentina, Chile, Peru ) Comprehensive Agreements: where large scale investment requires treatment under many laws and ministries - labor, finance, mining, water, infrastructure (Congo, Guinea, Philippines, Mongolia, Mozambique) 18

19 Lesser Developed & Transition Countries Agreements can be a WIN WIN approach- Both governments and company receive benefits provides risk reduction which can increase tax revenues through an expanded tax base as more investors develop mines mines will get lower loan rates, this increases profits, this increases income tax Example: some mining laws have many approval requirements an agreement can limit discretion and set a time limits on decisions 19

20 Time Needed to Get a Mining Agreement Usual attributes: Minimal delay (if tax only, a month or so; if comprehensive, less than 1 year) Can be done at either the exploration or mining stage Avoids changes in the rules of the game Purpose: increase investment and tax revenues by decreasing risk 20

21 Mining Agreement Duration Argentina 30 years (tax) Burkino Faso life of the agreement Chile 10 years (tax) Ghana negotiable Guinea negotiable, 25+ years Indonesia 25 years (existing COWS) Kazakhstan 10 years Peru 10 to 15 years (tax) Madagascar negotiable Mozambique negotiable Papua New Guinea loan repayment, 20 years 21

22 Mining Agreement Effectiveness Highly variable The Zambian government cannot alter mining development agreements it signed with mining companies some years ago when copper prices were low, the minister of justice said in a statement Wednesday. In a ministerial statement to parliament, George Kunda said the mining development agreements were above the law and couldn t be changed due to a number of provisions the government pledged to observe. April 19, 2007 Hoovers Contrast with invitations to renegotiate: Bolivia, Venezuela Findings of noncompliance: Russia Unilateral modification / cancellation Agreement ultra vires / not legally executed: Congo 22

23 Topic 2. Actual Investment Trends and Flows 23

24 Exploration Investment is Cyclical ( ) Rest of World SE Asia / Pacific Latin America Africa USA Canada Australia 24 Sources : WMC, MacKenzie & Metals Economic G

25 Investment Cycle Affects All Regions 1997 $5 billion 2002 $1.7 billion $ billion millions US$ Exploration Expenditure by Region Turnaround started in 2003, how will 2009 end? Pacific/SE Asia USA Rest of World Africa Australia Canada Latin America Source: MEG, WMC, ABM 25

26 Share of World Exploration Expenditure US12.6 Billion (13.75 with Pacific/ SE Asia 5% Rest of World 15% Latin America 25% USA 7% Africa 15% Canada 19% Australia 14% MEG

27 2008 Exploration Expenditures Top Ten Countries Canada Australia USA Mexico Peru Russia Chile Brazil S. Africa China If laws, policies, taxes, or social attitudes change, will investment be affected? (exploration in Venezuela decreased 40% from 2005 to 2006) million US$ MEG

28 Exploration Downturn & Upturn Regulatory & Fiscal Pressures Global exploration expenditure: (billions) 1997: US$ : US$ : US$ : US$ : US$ : US$ : US$ : US$ : US$ : US$ : US$ : US$ 12.6 Pressure to lower taxes Pressure to raise taxes MEG Top of the cycle? 28

29 Challenge for Governments attracting sustained mineral investment is difficult countries just opening the door will initially have a high level of exploration activity (usually 5 to 10 yrs), followed by drop off examples: Mongolia Uzbekistan Kazahkstan initial rush is over, many companies have left Essential: success stories needed to maintain investment (the pioneer mines) 29

30 Implications for Governments Attracting sustained mineral investment is difficult Is a nation able to attract & maintain investor interest? On the down-cycle now, markets will turn up 30

31 Topic 3. Country Factors Influencing Investment Companies have many countries to choose from when deciding where to invest Nations with: prospective geology reasonable tax terms mature & acceptable laws political stability have brighter prospects for investment than where one or more of these are absent. Companies apply key criteria and see how well these are met; the types of criteria and the weight placed on each varies from company to company. 31

32 Exploration Investment Criteria United Nations Top ranked Company Decision Criteria for exploration (out of 62 factors) Geological potential for target mineral Profitability of potential operations Security of tenure & permitting Ability to repatriate profits Consistency of mineral policies Realistic foreign exchange controls Stability of exploration terms/conditions Ability to predetermine environmental obligations Ability to predetermine tax liability Stability of fiscal regime Ability to raise external financing Long term national stability Established mineral titles system United Nations (Otto) Survey of 45 companies Most criteria are regulatory 32

33 World Bank Studies Survey respondents: 35 governments, 20 mining companies, 23 experts 33

34 World Bank Studies Key Investment Criteria: geological potential for target minerals political stability mineral law mineral ownership security of tenure (right to mine) exploration/mining terms right to transfer ownership access to minerals fiscal regime stability / predictability of regime equitable ability to repatriate profits level of tax liability foreign exchange regulations permitted external accounts institutional factors Similar to the UN study findings 34

35 Importance of Geology Main factor to attract investment: GEOLOGY Good geology can overcome many investment obstacles How do investors perceive geological potential in your country? 35

36 Spain Ireland Venezuela India Bolivia Mongolia Equador Sweden Brazil Russia Philippines Peru W. Australia Quebec P. New Guinea Investor Perception Pure Mineral Potential Index (Geology) Geology the most important criteria Fraser Institute Poll 2008/

37 Guatemala Investor Perception Latin America Pure Mineral Potential Index (Geology) Venezuela Bolivia Panama Honduras Ecuador Colombia Brazil Argentina Chile Mexico Peru Geology the most important criteria Fraser Institute Poll 2008/

38 Fraser Institute Poll 2008/2009 Venezueala DR Congo P. New Guinea Philippines Mongolia Russia S. Africa Zambia China Brazil Ghana Peru Mexico W. Australia Chile Nevada Quebec Investor Perception Policy Potential Index Higher risk Lower Risk Geology must be balanced against government policy, regulation and taxes 38

39 Fraser Institute Poll 2008/2009 Investor Perception Latin America Venezuela Ecuador Guatemala Honduras Bolivia Policy Potential Index /6 & 2008/8 2005/6 2008/9 56% of the 64 ranked jurisdictions have a score better than 50 Argentina Panama Colombia Brazil Peru Mexico Chile Higher risk Lower Risk Why have most Latin American countries scores fallen? 39

40 Balancing Geology and Policies in Investment Decisions Guatemala Overall Investment Attractiveness Index - World Venezuela India Bolivia Mongolia Argentina S. Africa DR Congo Brazil Companies balance different factors when balancing geological potential and risk India P. New Guinea Chile Peru W. Australia Quebec Fraser Institute Poll 2008/

41 Balancing Geology and Policies in Investment Decisions Guatemala Venezuela Honduras Bolivia Panama Ecuador Colombia Argentina Brazil Mexico Chile Peru Overall Investment Attractiveness Index Fraser Institute Poll 2008/

42 Reality? Essential: success stories are needed to maintain investment How have foreign investors faired? Have foreign firms been able to move to mining? Is the nation too generous, too tough? 42

43 Investors Will Look Carefully at Tax Essential: success stories are needed to maintain investment How have foreign investors faired? Have foreign firms been able to make profits? Is the nation too generous? 43

44 Percent of Surveyed Mining Companies That Consider Jurisdiction s Mining Taxation Regime a Strong Deterrent Venezuela Mongolia Russia Zambia Indonesia PNG W. Australia Mexico Ghana Sweden Philippines Brazil Peru New Zealand Chile Quebec Fraser Institute Survey 2008/

45 Colorado School of Mines Copper Model Sales Revenue (the main benefit stream) billion US$ in cumulative sales revenues Revenues

46 Colorado School of Mines Model Copper Mine Cash Benefits Chart (50% effective tax rate) Profits and Taxes Input costs: goods, services wages Capital Costs Operating Costs Taxes & Fees Company Profits 46

47 Model Copper Mine Cash-flow Diagram Before Tax Cashflow Taxes -150 Standard reference used by many nations in mining sector tax reform 47

48 A Measure of All Taxes Collected value of all amounts paid to government Effective Tax Rate = value of profits before taxes are paid EFT was calculated for over 25 countries using the standard Colorado School of Mines copper model 48

49 Sw eden Yemen Western Australia Chile Zimbabw e Argentina China P.N. Guinea Bolivia South Africa Philippines Kazakstan Indonesia Peru Tanzania Poland Mexico USA (Arizona) Greenland Guinea Ghana Ivory Coast Uzbekistan Model Copper Mine: Comparative Effective Tax Rates Base metals ideal range? ETR = 40 to 50% Effective Tax Rate - % 49

50 Model Gold Mine Sweden South Africa Chile Argentina W Australia Peru Egypt Zimbabwe Alaska Nevada (USA) Papua NG Bolivia Kazakhstan Greenland Tanzania Ghana Mozambique Uzbekistan Mexico Central Arfican Reb Philippines Ontario (CAN) Domican Republic Ivory Coast Indonesia Romania China Vietnam Poland Burkina Faso Gold mine ideal range? ETR = 40 to 70% Extreme systems are prone to change Effective Tax Rate - ETR 50

51 Typical Average Mining Tax System Income tax 30% Dividend withholding tax 15% Royalties (gross value based) 2% - 4% Import duty on equipment none Export duty on minerals none VAT negated Depreciation accelerated (5 yr) Excess profits tax none Depletion none Ring fencing none Exploration amortized (5 yr) Environmental costs expensed Tax holidays none Loss carry forward 5 year limit 51

52 Short vs Long Term Tax Perspective Cash cow approach Milk every operation to the maximum amount possible Herd will remain small Grow the herd approach Reasonable tax burden that encourages additional exploration & expansion Attracts new cows Increase the size of the tax base Nations with limited mineral potential cash cow Nations with good mineral potential grow herd 52

53 Royalties 53

54 Topic 4. Hot Regulatory Issues Social Licence to Operate Reclamation and Closure 54

55 Social Licence to Operate In countries across the world, gaining the right to mine is a 1 st step Increasingly, gaining the social licence to operate is also important Non-governmental organizations Local communities 55

56 Social Licence to Operate Is there a trend to formalize the relationship between projects and communities? agreements/arrangements have tended to be between the miner and the community voluntary guidelines (ICMM) soft law moving to hard law? 56

57 Social Licence to Operate ICMM Toolkit 57

58 Reclamation and Closure Requirements are found in: Statutory law moving from soft to hard law (labor law, environmental law, mining law) Ad hoc agreements (Africa, Asia) Voluntary guidelines (ICMM) Third Party Requirements Lenders Equator Principles 58

59 Reclamation and Closure Forthcoming Sept 2009 James Otto, Global Trends in Mine Reclamation and Closure Regulation, Mining, Society and a Sustainable World, ed. Jeremy Richards, Springer-Verlag. 59

60 Reclamation and Closure - Essential Reading 60

61 Reclamation and Closure - ICMM Toolkit 61

62 Topic 5. Investment Promotion Mineral endowments are like any other commodity if you have a product, it must be advertised to attract buyers How do governments market and distinguish their mineral endowment so that investors are aware of the mineral potential? 62

63 Investment Promotion Methods International Conference Circuit (PDAC) National Conference Prospectus Special Journal Edition Targeted Marketing Internet Critical: Pioneer projects Promotion methods are not mutually exclusive Promotion is important as any other regulatory or scientific function of the Ministry responsible for mines 63

64 Technological Developments to Promote Investment Block-based exploration applications systems On-line application for exploration license Integrated geographical information system To see what s open & closed to application To monitor existing operations To view prior exploration reports Many developing nations are implementing GIS application and data retrieval systems computerized cadastre 64

65 Investment Promotion Many governments are actively marketing to attract investors In some countries, a % of royalty is used for cadastre & promotion 65

66 Concluding Remarks Countries compete for investment Globally, mining investment levels will go up and down Investment flows to where geology is attractive & regulatory systems are workable Most countries have new mining laws: a more level playing field Tax systems are converging, need to be competitive Developed industrial countries becoming less attractive Developing countries are addressing key investor issues Transition countries will take time but will compete in the future If markets cooperate, countries with stable and attractive political, legal and fiscal systems will attract more investment. 66