IS PERCEPTION REALITY? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment

Transcription

1 IS PERCEPTION REALITY? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment Chris Gemell 1 1. Wood Mackenzie, Australia John P. Sykes 23 & Allan Trench MAusIMM, Centre for Exploration Targeting, The University of Western Australia 3. Greenfields Research, United Kingdom 4. FAusIMM, Business School, The University of Western Australia 5. Centre for Exploration Targeting, The University of Western Australia 6. CRU Group, United Kingdom AusIMM International Mine Management Conference Brisbane, Australia: 24 August 2016

2 Which of these is most attractive? Burkina Faso Ghana Mali South Africa Tanzania 10% free government ownership 10% free government ownership 10% free + 15% paid national ownership 28% corporate tax 4% ad valorem gold royalty Brazil Chile Columbia Guyana Peru Slide 2 of 24 1% gold royalty 20% corporate tax 4% gold royalty 40% corporate tax 30% corporate tax AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

3 Is perception reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment PERCEPTIONS: What does industry think? Slide 3 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

4 What does industry think? Investment Attractiveness Chile Peru Ghana Burkina Faso Brazil Guyana Tanzania Colombia South Africa Mali 1 st Quartile 2 nd Quartile But this considers geological and business attractiveness 3 rd Quartile Slide 4 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

5 Specifically about policy and tax Policy Perception Perception of Taxation Chile Burkina Faso 1 st Quartile Burkina Faso Chile 1 st Quartile Ghana Tanzania Tanzania Peru Guyana 2 nd Quartile Ghana Colombia Mali 2 nd Quartile Mali Peru South Africa Guyana Colombia Brazil 3 rd Quartile Brazil South Africa 4 th Quartile Slide 5 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

6 So is this the answer? Burkina Faso Chile & Slide 6 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

7 Is perception reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment ACTUALITY: What does the model say? Slide 7 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

8 Take a typical gold mine Capital cost: US$300 million Nominal weighted average cost of capital (WACC): 10% Development time: 3 years Capacity at full-scale operation: 300,000 oz pa Ramp-up: 50% in year 3; full production from year 4 Mine life: 11 years (50% production in final year) Mining and processing costs: US$900 / oz (at year 0) Gold price assumption: US$1300 / oz (at year 0) Real gold price escalation: 0.1% pa Real cost escalation: 0.1% pa General inflation: 3% pa Slide 8 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

9 and model for each jurisdiction Average Effective Tax Rate (AETR) 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% South Africa Chile Brazil Burkina Faso Colombia Peru Tanzania Mali Guyana Ghana Average Effective Tax Rate (AETR) South Africa 36.3% Chile 44.3% Brazil 44.8% Burkina Faso 52.2% Colombia 55.0% Peru 58.5% Tanzania 58.8% Mali 60.4% Guyana 63.9% Ghana 66.5% Slide 9 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

10 So is this the answer instead? South Africa Chile & Slide 10 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

11 Is perception reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment COMPARISON: Perception vs actuality Slide 11 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

12 Investment Attractiveness (Fraser Inst. 2014) The tax rate may not be the problem Average Effective Tax Rate (AETR) 30.0% 40.0% 50.0% 60.0% 70.0% 0 Potential Trend Line 20 BF Ch Ta 40 Co Gh Pe Ma Gu Outliers? 100 SA Br Most countries perception of taxation correlates fairly well with actual tax burden, suggesting industry perceptions are fairly strong on this factor. However, overall policy and investment attractiveness is made of more than just the tax rate. Some countries tax perceptions do not correlate with actual tax burden, suggesting than can be more to taxation, than just the tax rate too. Countries which plot substantially below the potential trend line such South Africa and Brazil have worse perceived taxation regimes than their tax burdens alone suggest this may indicate non-rate based taxation problems such as opacity and complexity. Slide 12 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

13 Perception Perception premiums & discounts? Unrecognised poor regime: Perception better than actuality (Investment trap?) Recognised poor regime: Perception matches actuality (Obviously avoid) Actuality Recognised good regime: Perception matches actuality (Safe investment) Unrecognised good regime: Perception worse than actuality (Investment opportunity?) Perceptions of policy and taxation and actual attractiveness can be different. This difference may influence investment decisions. Jurisdictions with a better perceived policy regime than actuality may be charging a perception premium and could be somewhat of an investment trap (Ghana?). Jurisdictions with a worse perceived policy regime than actuality may be charging a perception discount and could be somewhat of an investment opportunity (Brazil & South Africa?). This assumes that factors missing from the analysis do not swamp the data Slide 13 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

14 So is this the answer actually this? South Africa Brazil & Slide 14 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

15 Is perception reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment Is there an easier method? Slide 15 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

16 BEWARE: Every jurisdiction differs Structure of Average Effective Tax Rate by individual tax components 80% 70% 60% 50% 40% 30% 20% 10% 0% South Africa Corporate Tax Royalties Ownership Dividend Other Taxes Chile Brazil Burkina Faso Colombia Peru Tanzania Mali Guyana Ghana Slide 16 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

17 Average Effective Tax Rate (AETR) Average Effective Tax Rate (AETR) No single rate predicts overall burden 70% 70% R² = % R² = % 50% 50% 40% 40% 45.0% 35.0% 25.0% 30% 15.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 30% 0.0% Corporate Tax Rate Royalty Rate Slide 17 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

18 Is perception reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment IN SUMMARY: Beware initial perceptions Slide 18 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

19 Misperceptions & opportunities? Modelling mining tax rates is complicated: current fiscal regimes are probably too complicated to be effective; Beware headline tax rates: do detailed due diligence before investment; Perceptions do not match actuality in minerals taxation: Overall combined tax rates over the life of the mine are the only true measure; Mining policy is not all about taxation: Some jurisdictions will have nontaxation based policy issues impacting upon their image; Mining taxation is not all about the headline tax rate: Some jurisdictions may have non-tax rate related issues impacting their image; Some jurisdictions may be providing a perception discount: they are seen as worse than they actually are a potential investment opportunity? Some jurisdictions may be charging a perception premium: they are seen as better than they actually are is this something the industry realises? Slide 19 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

20 Further research required i.e. beware these limited findings! Will the results be the same for different types of gold mine? Will the results be the same for different commodities? Will the results be the same for different types of corporate structure and financing (debt/equity etc.)? How will the opacity and volatility of different tax structures affect the investment climate? Slide 20 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

21 Further reading Main references Gemell, C., Sykes, J.P., & Trench, A Is Perception Reality? Evaluating the Fiscal Attractiveness of International Jurisdictions for Gold Mining Investment. AusIMM International Mine Management Conference. Brisbane, Australia August. Trench, A., Gemell, C., Venables, T., Curtis, M., & Sykes, J.P Evaluating the Attractiveness of Fiscal Regimes for New Gold Developments: African and South American Peer Country Comparisons. International Mining for Development Centre (IM4DC). May. Other references Collier, P, The Plundered Planet: Why We Must and How We Can Manage Nature for Global Prosperity, Kindle edition (Oxford University Press: Oxford). Jackson, T, Survey of Mining Companies 2014 [online], Fraser Institute: Vancouver. Available from: < Trench, A and Sykes, J, 2015a. The forgotten economic potential of new mineral discovery [online], MiningNewsPremium.net. Available from: < Trench, A and Sykes, J, 2015b. Three rules to build a resources economy [online], MiningNewsPremium.net. Available from: < Wilson, A, McMahon, F and Cervantes, M, Survey of Mining Companies [online], Fraser Institute: Vancouver. Available from: < pdf>. Slide 21 of 24 AusIMM International Mine Management Conference, Brisbane, Australia 24 August 2014

22 THANK YOU Contact details: Chris Gemell: John Sykes: Allan Trench: AusIMM International Mine Management Conference Brisbane, Australia: 24 August 2016

23 Investment Attractiveness (Fraser Inst. 2014) Attraction based on more than tax Average Effective Tax Rate (AETR) 30.0% 40.0% 50.0% 60.0% 70.0% 0 Expected Trend Line 10 Ch 20 Pe No Real Trend Line R² = BF Gh Gu SA Br Co Ta Ma Lack of correlation between calculated tax burden and overall investment attractiveness suggests there is more to investment attractiveness than tax rates. Countries which plot substantially above the expected trend line such as Chile, Peru and Ghana are more attractive than their tax burdens alone suggest. Countries which plot substantially below the expected trend line such as South Africa, Brazil and Mali are less attractive than their tax burdens alone suggest. The Fraser Institute Investment Attractiveness ranking includes both geological and non-geological factors, so it is likely that geological or other non-tax factors are responsible for this discrepancy.

24 Investment Attractiveness (Fraser Inst. 2014) Policy perception more than tax Average Effective Tax Rate (AETR) 30.0% 40.0% 50.0% 60.0% 70.0% 0 Expected Trend Line No Real Trend Line R² = Ch BF Ta Gh Pe Gu SA Ma Co Br Lack of correlation between calculated tax burden and policy perception suggests there is more to minerals policy than taxation. Countries which plot substantially above the expected trend line such as Ghana have better perceived policy regimes than their tax burdens alone suggest. Countries which plot substantially below the expected trend line such South Africa and Brazil have worse perceived policy regimes than their tax burdens alone suggest. The Fraser Institute Policy Perception ranking includes both non-tax policy factors, so it is likely that such factors are responsible for this discrepancy.