AFRICA. Africa mining code and legislation changes from 2008

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1 STAYING PROFITABLE AT A LOWER GOLD PRICE actively managing the fiscal regime ensures a sustainable business Graham Shuttleworth, Financial Director and CFO Africa mining code and legislation changes from 2008 AFRICA Mining code / legislation changes Mining codes / legislation currently under review Sources: EY Research, Deloitte, Randgold 1

2 Managing the risk of fiscal change We actively engage with all stakeholders to ensure the fiscal stability: Mining industry associations: we work with incountry based mining industry associations to formulate a common position on proposed amendments to mining legislation Civil society: we engage with civil society groups and politicians on legislation changes which could be detrimental to the building of a healthy mining industry in the country Government: we encourage open communication channels on fiscal issues direct discussions with government officials and civil servants on the merits and possible impact of any proposed legislation changes site visits arranged for government officials to inform them about mining and extraction processes, and to demonstrate the socioeconomic benefits of mining to the regions Regular board meetings of the operating companies, where government appointed directors are part of the decision making process Expert opinions: where necessary we obtain expert opinions on controversial proposals NGO s and international bodies: we engage with NGO s and the international bodies (World Bank, IFC, etc) operating in the country and internationally Local suppliers: in terms of our partnership strategy, we give preference to local, incountry suppliers and service providers. The local business community serves as an important influence on governments in ensuring that the legislation applicable to the mining industry remains sensible. Tax policy considerations related to mining projects and investments In our communication with governments we take the time to explain the unique characteristics of the mining industry s risk profile, which is materially different to other sectors, and the impact of tax and fiscal policy on investment: Lengthy period when large costs are incurred before income is generated (exploration risk) There is only a low probability that exploration work will lead to success (exploration risk) Normally capital expenditure is large (development risk) Risk that that the orebody/deposit will not perform as anticipated (geological risk) Most of the capital expenditure occurs upfront (development risk) Once an investment is in development and construction has been completed, it is not readily transferable (captive capital) Project life is normally long and has to withstand: Changes in political regimes (policy risk) Movement in product and input prices (market risk) 2

3 Investors requirement for an efficient tax system Because of the considerable risks associated with mining, tax and mining policy should allow mining companies to achieve the necessary level of returns to compensate for such high level of risk Be based on realised profitability Allow for the early payback of invested capital Recognise the volatility of revenues / sensitivity to fiscal burden when profits are low To reduce risks, there should be stability / predictability / transparency in tax regime Taxes which distort costs and extraction profiles or reduce incentives for managerial efficiency should be minimised Encourage exploration risk taking and the investment in economically marginal projects The administrative burden (cost and time of compliance) should be minimised The Mining Code review in Côte d Ivoire how Randgold engaged in this process In 2012 the Minister of Mines in Côte d Ivoire proposed the introduction of a windfall tax The proposed mechanism to measure the windfall tax was fundamentally flawed as it was not measuring profits at all: It assumed a measure of profitability (the windfall tax profit base) based on the difference between the actual gold price and an assumed cost base of US $615 per ounce. There was no link between the assumed profits per the Ministry s proposal and the real profits mining companies were making It ignored the fact that the real all in cost of the gold mining industry is substantially higher and closer to US $1 500 per ounce It failed to recognise the fact that different mining operations have widely varying cost bases It proposed a sliding scale royalty to be applied to the windfall profits measured per the Ministry s mechanism The effect of the proposal would have been to increase the effective royalty rate at a gold price of US $1 500 per ounce from 3% to 12%. At a gold price of US $2 000 per ounce the effective royalty would have been 19% of gold revenue Following extensive engagement with the government, the windfall tax was dropped, and the Cote d Ivoire has now implemented a sensible and attractive revised mining code which is mutually acceptable to the State and the mining industry 3

4 How do we evaluate fiscal regimes Randgold Resources maintains its own a fiscal competitiveness model and evaluates all the major mining jurisdictions in the world as well as those jurisdictions in which it has a presence. The model assesses the competitiveness of these jurisdictions on the basis of: The relative returns a mining project would earn within the parameters set by different tax jurisdictions (NPV) The contribution a project would make to state coffers in each such country (proportional split of wealth created) We also take into account international surveys, such as: The annual survey done by the Fraser Institute on the competitiveness of international mining jurisdictions Annual survey by PWC on the tax compliance burden around the world Fraser Institute survey Fraser institute survey of international mining companies shows that more than 80% of respondents view the fiscal regime in Zimbabwe unfavourably. In contrast, less than 10% of respondents had an unfavourable view of the fiscal regime in Botswana. Taxation regime (includes personal, corporate, payroll, capital, other taxes and complexity of tax compliance) % / /13 4

5 The Randgold fiscal competitiveness model Model based on assumed parameters for a standard open pit gold mine 10 year operation assumed Tax system for each country selected applied to model mine The major gold mining countries used in the study are: Argentina, Australia, Brazil, Chile, China, Côte d Ivoire, DRC, Ghana, Kazakhstan, Mali, Russia, Papua New Guinea, Peru, Senegal, South Africa and Tanzania Broad mix of economies ranging from High income economies (Australia) Upper middle income economies (Argentina, Brazil, Chile, China, Kazakhstan, Russia, Peru and South Africa) Lower middle income economies (Ghana, Côte d Ivoire, Papua New Guinea) Low income economies (DRC, Mali, Senegal and Tanzania) Taxes and parameters used in the model Profit based taxes: Corporate income tax Withholding taxes on dividends Royalties based on profit / income measures Production based taxes: Royalty : unit and value based Other items considered are: Tax holidays State participation Accelerated depreciation Other taxes such as duties and employment taxes are excluded from the model Model Parameters: Type: open pit gold mine Reserve base: 3 million ounces Annual production: oz over a 10 year period Construction period: two years Life of mine: ten years of production Feasibility study cost: US $30 million cost at Time 0 Debt structure: 100% shareholder funding Shareholder funding: interest rate of 5% Base capital costs: US $300 million Ongoing capital: 3% pa of operating cost Cash operating costs: US $700/oz flat Gold price: US $1 200/oz flat (base) Discount factor: various Working capital: US $35 million 5

6 Ranking at 10% discount rate NPV and ranking Gold price (US$ / oz) NPV Rank NPV Rank Argentina Australia Brazil Chile China Côte d Ivoire DRC Ghana Khazakstan Mali Old code Mali New code PNG Peru Russia Senegal South Africa Tanzania Government share of economics Gold price (US$ / oz) % Rank % Rank Argentina 40% 4 30% 3 Australia 51% 10 40% 10 Brazil 47% 9 40% 11 Chile 34% 2 30% 2 China 43% 6 33% 4 Côte d Ivoire 43% 7 35% 7 DRC 54% 14 47% 16 Ghana 44% 8 35% 5 Khazakstan 43% 5 37% 8 Mali Old code 51% 11 39% 9 Mali New code 58% 16 46% 15 PNG 53% 13 45% 14 Peru 39% 3 35% 6 Russia 56% 15 44% 12 Senegal 29% 1 22% 1 South Africa 61% 17 48% 17 Tanzania 52% 12 45% 13 Other considerations not reflected in the fiscal competitiveness model An important consideration in evaluating a mining project is the infrastructure provided by the State in return for taxes paid. In developing countries mining companies often have to provide infrastructure such as roads, railways, power, etc., themselves, whilst these are provided by the state in developed countries The fiscal model is a quantitative model and important qualitative aspects which are not evaluated in the model also need to be considered, including: Fiscal stability (mining code vs establishment convention) Administrative burden in the various tax regimes Time and cost to comply and ability to enforce Total number of tax payments to be made, and enforcement regime 6

7 Active engagement is critical Following the previous mining boom, a new round of resource nationalism has hit resource rich countries Governments in may jurisdictions are currently reviewing mining and fiscal legislation with the aim of capturing a larger portion of the profits from mining ventures, not discounting the fact that the mining boom has ended, and that many companies in the resources sector are struggling financially In order to ensure a fiscal framework that will support continued investment in the mining sector, it is extremely important that mining companies engage regularly with host governments on fiscal matters In order to engage constructively, mining companies need to stay on top of: Competitiveness of fiscal regimes Changes in fiscal regimes Actively engaging with host governments to inform them of the importance of fiscal stability for the long term benefit of the industry/country is an essential part of our business Group cash operating cost (by element) OTHER OPERATING COSTS 7.6% REAGENTS & GRINDING MEDIA 10,4% CONTRACTOR S MINING UG 10,1% GRID / HYDRO POWER 2,9% REAGENTS & GRINDING MEDIA 8,8% CONTRACTORS UG MINING STORES (CONSUMABLES) 8,2% STORES (CONSUMA BLES) 12% CONTRACTORS OTHER 8,5% CONTRACT ORS MINING OC 17,4% CONTRACTO RS OC MINING 17,1% EMPLOYMENT FUEL 24.7% GRID AND HYDRO POWER 2,5% EMPLOYMENT 9,7% OTHER OPERATING COSTS 10,6% CONTRACTORS OTHER 8,6% FUEL 20.0% 7

8 Mines cash operating cost 2015 Loulo Complex 13,3% 5,1% 18% Tongon 10,7% 11,8% 6,6% REAGENTS & GRINDING MEDIA CONSUMABLES 14,3% FUEL CONTRACTORS OTHER 30,6% 14,3% OTHER OPERATING COSTS 7,5% EMPLOYMENT 10,8% 7,6% Morila 11,2% 7,8% 23,1% 15,3% 5,8% Kibali 16,1% 6,3% 10,8% 0.6% 9,4% 12,0% 3,8% CONTRACTORS MINING OC CONTRACTORS MINING UG GRID / HYDRO POWER 13,5% 15,6% 15,1% 9,8% 36,2% 18,9% 8,7% 9,2% Cash Operating Cost (by activity) 2014 YTD 2015 $/tonne processed 90,0 90,0 80,0 5,0 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 4,0 3,0 2,0 1,0 0,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 Trucking & Hauling G&A Processing Mining UG Mining OC Grade (g/t) 5,0 4,0 3,0 2,0 1,0 # Group Consolidated cost including equity share of joint ventures 8

9 Group total cash cost forecast $/t processed Grade g/t 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 Stockpile Royalties Trucking & Hauling G&A Processing Mining UG Mining OC Grade (g/t) # Group Consolidated cost including equity share of joint ventures Key cost drivers Mining (UG and Opencast) makes up some 50% of costs, of which 2/3rds are contractor costs considerable effort has been devoted to enhancing contractor productivity, as well as reducing costs: Reduced overheads and corporate allocation Increased nationalization of workforce Optimised mining design and sequence The key drivers of processing costs (+30% of costs) are Power (37%), Reagents (19%) and Grinding Media (9%) 3,6% 3,8% 4,3% Reagent Costs Components 9,4% 3,6% 3,5% 20,1% 51,7% Cyanide Lime PAX Flocculant Caustic Soda Copper Sulphate Hydrochloric Acid Other Cyanide & Grinding Media Price Change Price $/kg 5,00 4,50 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 Cyanide Stores Price Dec Budget Grinding Media 9

10 Key cost drivers (cont) Oil price vs LFO and HFO West Africa Oil price $/bbl Fuel price $/l 130 1,00 Currency exposure 2014 YTD Brent crude $/bbl (1 month lag) LFO Price ex Dakar $/l HFO Price ex Dakar $/l Sep13 Oct13 Nov13 Dec13 Jan14 Feb14 Mar14 Apr14 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Fuel makes up approximately 20% of group costs in 2015 Oil price is the major driver behind the diesel and HFO prices (approximately 2/3 of this cost) A 10% change in the price of oil would result in an approximate $10/oz change in Total Cash Cost per ounce 0,90 0,80 0,70 0,60 0,50 0,40 71% 4% 1% 1% 23% EUR & XOF USD ZAR GBP OTHER The Group s Euro denominated cost is forecast at approximately 20% in 2015 A 10% change in the US$ / Euro exchange rate would have an effect of approximately $15 on Total Cash Costs per ounce Group allin cost forecast Cost $/oz breakdown Total cost $/oz* Depreciation $ /oz Corporate Tax $ /oz Corporate & Exploration $ /oz Total Cash Cost $ /oz * Group Consolidated cost including equity share of joint ventures (excl. deferred tax) 10

11 Consolidated production, cash cost and capital spend including equity share of joint ventures Production Oz Capital spend US$m Total cash cost US$/oz total cash cost/oz capital spend US$m actual production forecast production Disclaimer CAUTIONARY NOTE REGARDING FORWARDLOOKING STATEMENTS: Except for the historical information contained herein, the matters discussed in this presentation are forwardlooking statements within the meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the US Securities Exchange Act of 1934, and applicable Canadian securities legislation. Forwardlooking statements include, but are not limited to, statements with respect to the future price of gold, the estimation of mineral reserves and resources, the realisation of mineral reserve estimates, the timing and amount of estimated future production, costs of production, reserve determination and reserve conversion rates. Generally, these forwardlooking statements can be identified by the use of forwardlooking terminology such as will, plans, expects or does not expect, is expected, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or state that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. Assumptions upon which such forwardlooking statements are based are in turn based on factors and events that are not within the control of Randgold Resources Limited ( Randgold ) and there is no assurance they will prove to be correct. Forwardlooking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Randgold to be materially different from those expressed or implied by such forwardlooking statements, including but not limited to: risks related to mining operations, including political risks and instability and risks related to international operations, actual results of current exploration activities, conclusions of economic evaluations, changes in project parameters as plans continue to be refined, as well as those factors discussed in Randgold s filings with the US Securities and Exchange Commission (the SEC ). Although Randgold has attempted to identify important factors that could cause actual results to differ materially from those contained in forwardlooking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forwardlooking statements. Randgold does not undertake to update any forwardlooking statements herein, except in accordance with applicable securities laws. CAUTIONARY NOTE TO US INVESTORS: The SEC permits companies, in their filings with the SEC, to disclose only proven and probable ore reserves. We use certain terms in this release, such as resources, that the SEC does not recognise and strictly prohibits us from including in our filings with the SEC. Investors are cautioned not to assume that all or any parts of our resources will ever be converted into reserves which qualify as proven and probable reserves for the purposes of the SEC s Industry Guide number 7. Randgold reports its mineral resources and mineral reserves in accordance with the JORC 2012 code. As such numbers are reported to the second significant digit. They are equivalent to National Instrument Mineral resources are reported at a cutoff grade based on a gold price of US$1 500/oz. The reporting of mineral reserves is also in accordance with Industry Guide 7. Pit optimisations are carried out at a gold price of US$1 000/oz, except for Morila which is reported at US$1 300/oz. Mineral reserves are reported at a cutoff grade based on US$1 000/oz gold price within the pit designs. Underground reserves are also based on a gold price of US$1 000/oz. Dilution and ore loss are incorporated into the calculation of reserves. Cautionary note to US investors: The United States Securities and Exchange Commission (the SEC) permits mining companies, in their filings with the SEC, to disclose only proven and probable ore reserves. Randgold uses certain terms in this annual report such as resources, that the SEC does not recognise and strictly prohibits the company from including in its filings with the SEC. Investors are cautioned not to assume that all or any parts of the company s resources will ever be converted into reserves which qualify as proven and probable reserves for the purposes of the SEC s Industry Guide number 7. 11