05/SOM/MTF/05 Agenda Item: 6 Mining in APEC Economies: Opportunities and Challenges Purpose: Information Submitted by: ABAC 9 th Mining Task Force Meeting Cebu, Philippines 6-7 August 05
Mining in APEC economies: opportunities and challenges ABAC Mining Task Force Presentation, August 5 th 05 SANTIAGO PITTSBURGH LONDON MUMBAI HONG KONG BEIJING SYDNEY Disclaimer This presentation is supplied on a private and confidential basis to the customer. It must not be disclosed in whole or in part, directly or indirectly or in any other format to any other company, organisation or individual without the prior written permission of CRU International Limited. Permission is given for the disclosure of this report to a company s majority owned subsidiaries and its parent organisation. However, where the report is supplied to a client in his capacity as a manager of a joint venture or partnership, it may not be disclosed to the other participants without further permission. CRU International Limited s responsibility is solely to its direct client. Its liability is limited to the amount of the fees actually paid for the professional services involved in preparing this presentation. We accept no liability to third parties, howsoever arising. Although reasonable care and diligence has been used in the preparation of this presentation, we do not guarantee the accuracy of any data, assumptions, forecasts or other forward-looking statements. CRU International Limited 05. All rights reserved. CRU CONSULTING
Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Recommendations Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Best Practices
Introduction to CRU We are independent and global experts in mining, metals and fertilizer industries. We were founded in the 960s and support our clients with market analysis, management consultancy and events. From our London HQ to regional offices, we have 0+ experts across the world. CRU Offices Opening 05 London Mumbai Beijing Tokyo Hong Kong Pittsburgh New York Sydney Santiago 5 Why the ABAC mining study? CRU was commissioned by ABAC in 0 to conduct a study on the status of mining in the APEC region. Key objectives: o o o Discuss the importance of the mining sector and how it can positively contribute to individual economies. Explain the positive steps governments can take to encourage investment in the mining sector. Describe the importance and benefits of mining companies maintaining best practices. The study included: Current and future potential of the Asia-Pacific (APAC) mining sector including CRU Mineral Potential Rating Socio-economic effects of mining Best practices for responsible and sustainable mining Impact of the mining sector investment on national government policy Source: CRU 6
Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Recommendations 7 The APEC region is a vital supplier of mined economies APEC collectively supplies >50% of the world s iron ore, >70% of the its copper, nickel, silver, lead, zinc, nickel, bauxite and tin, and >90% of its coal and molybdenum. 00% 90% 80% 70% 60% 50% 0% 0% 0% 0% 0% Top 0 producers of each commodity at the mining stage as % of total mined production APEC economy Other Data: CRU
In turn, mineral rents provide an important contribution to many APEC economies GDP in absolute and % terms 00 80 Value of mineral rents in APEC member countries, 0 (USD billions).78% USD billions 60 0 0 00 80 5.% 60 0 0-0.7%.6%.9% 0.% 0.99% 0.85% 7.09% 0.0% 0.8% 0.5% 9.85%.9% 0.07% 0.55% NB. Mineral rent as a % of GDP in 0 applied to 0 GDP figures. Data: World Bank, IMF The MCI is a useful tool for assessing the relative importance of mining across different economies However some economies may still be involved in the mining industry through investment in projects abroad, e.g. Japanese companies investing in Chile, Aus. Data: ICMM, 05
The CRU Mineral Potential Rating considers specific factors of individual economies in terms of mining potential Economies with a high CRU Mineral Potential Rating (Australia, Canada, US, Mexico, Indonesia, Chile, Philippines, Peru, PNG) fall into four main categories. Resource-rich, mature and/or diversified economy means that mining isn t a highly important part of the overall economy, e.g. USA, Canada. Resource-rich, developed economies, where mining is a key part of the total economy, e.g. Australia, Chile. Resource-rich developing or intermediate economies, where mining is by some margin the primary contributor to the economy, e.g. Papua New Guinea, Peru. Resource-poor economies, where resources have either been depleted or simply don t exist, and as such mining is not an important part of the overall economy, e.g. Japan, Singapore, Chinese Taipei, South Korea, Hong Kong SAR. Refer to pp. 55-56 in ABAC Mining Report Source: CRU Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Recommendations
The APAC commodities sector is huge and growing APAC demand as a proportion of global demand, 0 90% 80%.%.6%.9%.%.7%.%.0%.%.%.9%.% 5.% 70% 60% 50% 0% APAC Demand as % of Global Demand -9 CAGR Global Demand < APAC equivalent -9 CAGR Global Demand > APAC equivalent 0% Note: Asia includes China, India & S.Asia, SE.Asia and N.Asia The excellent geological prospectivity of various APAC economies presents a significant opportunity Fraser Institute survey rating of whether a jurisdiction s geology encourages exploration investment essentially a subjective measure of mineral potential Papua New Guinea Chile Philippines DRC Peru Indonesia Greenland Mexico Canada Kazakhstan Colombia Zambia USA Brazil Ireland Finland South Africa Madagascar Liberia Eritrea Botswana Ghana Australia Sweden Turkey Myanmar Mongolia China Norway Russia Angola Bolivia Namibia Burkina Faso Kenya Ivory Coast 0% 0% 0% 60% 80% Guatemala Spain Nigeria Tanzania Serbia Venezuela Mali Guinea New Zealand Kyrgyzstan Zimbabwe Ecuador Romania Greece Panama Fiji Honduras Poland Guyana Vietnam Ethiopia Laos Malaysia India Sierra Leone Nicaragua Dominican Republic Bulgaria France Portugal Thailand Mozambique Saudi Arabia Suriname French Guiana Niger APEC APEC in APAC Non-APEC 0% 0% 0% 60% 80% Fraser Institute Global Mining Survey
The mining sector provides benefits to host economies in three main ways Direct Expenditure in constructing and operating the mine: labour employed, materials purchased, capital invested Indirect Suppliers to the mine purchasing goods and services and hiring workers to meet demand from the mine Induced Economic impacts resulting from employees at the mine using their wages to purchase goods at a household level GDP growth Job creation 5 Beyond direct GDP contribution, mining also provides benefits to local infrastructure and government revenue Infrastructure provision includes both transport and community infrastructure Road Rail Port Power Water Schools Healthcare Public Spaces Government revenue through taxation of mining projects improves the national balance sheet and particularly in developing economies where mining tax take is an important source of revenue for the government provide funds for public services. 6
Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Recommendations 7 Mining projects are challenged by a large upfront capital investment and volatile revenues Large upfront investments Nonrenewable resource Immovable assets High visibility Long period before revenues Volatile revenues Challenges vary between projects in terms of extent (severity) and length (time) with some lasting the entire lifecycle. 8
Investment intensity also varies throughout the lifecycle Investment required per year over lifespan for a theoretical mid-sized mining operation Investment intensity ($m per year) 00 90 80 70 60 50 0 0 0 0 0 Design Scoping studies (Pre-)feasibility Social & economic impact Exploration Drilling Licensing Rent Revenues commence Construction Pre-stripping Site preparation Infrastructure Operation Sustaining capital expenditures 0 5 0 5 0 5 0 5 0 5 Lifespan in years Closure Decommissioning Reclamation There is also a significant risk that the market landscape changes during lead times 9 Some APEC economies have a large gap between investment attractiveness under ideal vs. actual conditions Fraser Institute implied room for improvement index Sierra Leone Bolivia Laos France Madagascar Myanmar Guatemala Romania Liberia Mongolia Ivory Coast India Vietnam Saudi Arabia South Africa Greenland Guinea Kazakhstan Turkey Finland Nigeria French Guiana Zimbabwe Thailand Angola Burkina Faso Serbia Russia APEC Mozambique Guyana Ghana Botswana Fiji Australia Brazil Greece non-apec China Sweden Spain Tanzania Dominican Republic Nicaragua Kyrgyzstan USA DRC New Zealand Mali Namibia Niger Mexico Colombia Papua New Guinea Honduras Panama Suriname Venezuela Zambia Norway Philippines Canada Indonesia Peru Poland Ethiopia Bulgaria Portugal Eritrea Chile Malaysia Ecuador Kenya Ireland 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% This discrepancy is preventing some APEC economies from achieving the full potential benefits available from their mineral wealth Fraser Institute Global Mining Survey
Apart from Australia, as GDP increases, the relative importance of mining decreases No. of commodities in reserves 0 8 6 - Size of the bubble represents mineral rents as a % of GDP for the year 0*. > 5% -% <% Papua New Guinea New Zealand Australia Mexico Canada Russia China 0 00,000 0,000 GDP 0 (bn $USD) Peru Vietnam Chile Indonesia Thailand Malaysia Philippines USA *Mineral rent as a % of GDP in 0 applied to 0 GDP. Data: CRU, IMF, World Bank Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Recommendations
What makes an economy attractive for mining investors? Four factors generally dictate the attractiveness of an economy to investment in mining. Geological prospectivity Country risk Mining sector policy The last three are all subject to Government policy Infrastructure Mineral potential is worthless if the region is not mining friendly The Fraser Institute's Mineral Policy Potential - advertised as a scorecard to governments. Data presented below by jurisdiction some provinces are better. 90 80 70 60 50 0 0 0 0 0 Worst scores APEC economy Best scores Fraser Institute Global Mining Survey
Policy stability is extremely important to mining companies given the high upfront investment required Geological prospectivity Country risk Mining sector policy Infrastructure General policy Rule of law Property rights Sanctity of contracts Efficiency of administration & courts Macroeconomic policy Monetary policy- inflation Exchange rate policy Policy towards FDI Convertibility and repatriation Mining sector policy Exploration and mining licensing Taxation Regulations Export policy Tariffs, taxes, quotas and bans Port & logistics access/ownership Regulations & red tape Policy equitability across economies/wto Decentralisation Delineation of powers at central, provincial and local levels Summary measures Fraser institute Cost of capital Corruption indices 5 Governments can also play a key role in facilitating best practice operation of mining projects At a minimum, this involves the creation of legislation outlining appropriate standards in the mining industry throughout the lifecycle e.g. the requirement for: Environmental and social impact studies An appropriate regulatory environment for mining exploration Construction and operation in terms of its impact on local communities, limits on emissions, etc. A robust legislative environment that protects the rights of the local communities is also important: Communities are likely to be more positive about a project if they feel that the host government has their interests protected e.g. health and safety Legislation which allows for mining returns to be distributed to the affected communities are also important. 6
Licensing policy is central to an economy s mining regime If an economy wants to encourage growth in its mining sector, then it must first encourage exploration activity Key issues Investors perspective Ownership of minerals (usually the State) Permitting (exploration, mining, artisanal) General law or individual agreements or contracts Level of jurisdiction (eg Provincial in Canada) Mode of granting licences (eg auction, first come first served) Reporting requirements Administrative simplicity and efficiency Low transaction costs Security of tenure within the law Mortgageability/transferability of rights Transparency Minimal administrative discretion 7 Key desirable features of a mineral tax regime from both a government and company perspective Government taxation criteria Revenue raising potential Neutrality Risk profile Stability and timing of revenues Impact on investor perceptions Adaptability and progressivity Simplicity and ease of administration Non-discrimination Company perspective Maximise after tax NPV, subject to fairness (unequal bargains are unstable) and to: Maintaining social licence to operate Stability of tax regime Preference for profits taxes over production and indirect taxes 8 8
Structure Background The importance of mining in APEC Opportunities Challenges 5 Impact of government policy on mining investment 6 Recommendations 9 CRU s main recommendations for APEC economies Host government education Education in the fundamental aspects of mining, inherent challenges, and positive impacts, especially those that are less obvious or hard to quantify e.g. benefits beyond national borders, community involvement and training. Adopt a project specific approach Engage stakeholders as early as possible to identify and manage site/project specific issues. A one-size-fits-all template in terms of mining project planning and operation is not feasible. A stable mineral policy Governments can enact transparent and stable mining policies which can help to minimise the risks to mining projects, and therefore potentially ensure a consistent source of government revenues, employment etc, over a long period of time. Involve industry associations to facilitate best practice Industry associations are an excellent source of data, knowledge and expertise. They can assist with public-private consultations and facilitating best practice. And importantly, closer private-public sector engagement is critical to drive growth Source: CRU 0