Resource World Magazine

S P E C U L AT I O N S L e o n a rd M e l m a n Everybody wants a bigger piece of the action M ining has always been a highly risky venture. Miners have to overcome challenges which include failed drilling programs, uncertain metallurgy, difficulties in raising sufficient funds, fluctuating metal prices, short supplies of equipment or personnel and so forth. However, over the past few decades, a new and imposing set of obstacles in the form of governmental interference is being encountered in an ever-rising crescendo. Some of these problems relate to environmental concerns which are understandable and which most miners generally agree must be met by positive action and only request that governments adopt understandable rules and a timely review process. Unfortunately, there is another series of relatively new problems of a different nature which the industry faces being brought about by specific government actions involving pandering to social interest, corruption and fiscal confiscation of one sort or another. The nature of many African and South American countries in particular is that they are chronically short of funds, especially foreign 'hard' currencies and they do not have a long history of judicial support for property rights or reliable corporate law. As such, many of these nations have recently turned to policies they have decided might ameliorate some of their negative conditions. Quite typically, governments put on their best face when a company is considering advancing a mineral natural resource because during the exploration and development phases, money pours into their country. However, many companies have learned that once they have advanced toward production and are about to earn profits and take money out of those countries they find themselves faced with an array of demands for higher tax assessments; frequent NSR requirements and even M AY 2 0 1 3 requirements for government ownership of a portion of their project(s). The problem of corruption is entirely self-explanatory within the concept of government histories which have long accepted unofficial bribery as a way of life – a problem which, to date, has eluded an easy solution. Countries identified as being particularly susceptible to corruption are Democratic Republic of Congo, Guinea, Papua New Guinea, Venezuela and Zimbabwe. The trend toward increasing taxation rates has been growing and now includes such developing nations as Ghana, Gabon, Guinea, Tanzania, Namibia and Uganda which are looking to increase their regular corporate taxation rates and are considering mining royalty taxes which will be imposed against production. The last of these could actually transform potentially profitable mines into money-losing operations. Unfortunately, many developed nations are also joining the trend toward increasing taxation. Australia recently enacted a new Mineral Resource Tax which created a Mineral Resource Rent Tax aimed at socalled 'super profits' when metals prices are high. Brazil is planning to increase their NSR royalties from 2% to 4% plus introduce a new Special Participation Tax aimed at large mining operations. Peru recently increased its royalty taxes in 2011 and Chile is planning to increase their mining taxes in 2018 after the present legislation expires. Even China, which has transformed itself into a giant economic power through massive foreign investments, is now looking to increase its resource taxation. Not surprisingly, specific assessments against production are on the rise in many nations. Included, among the more marginal countries is Ghana, which just revised its Mineral and Mining Act to include a new 5% royalty rate and Burkina Faso which has just legislated a floating royalty rate based on the price of gold; when gold is priced below US $1,000 per ounce the rate is 3%; from $1,000 to $1,300 it is 4% and above $1,300 the rate is 5%. Royalty payment increases are not limited to emerging countries. Recent legislation that introduced or increased such rates in advanced jurisdictions includes new impositions in Québec, Nevada, Western Australia and New Zealand. This leads to another point and that is the idea that many countries, which lure mining ventures with low published tax rates, can easily revise those rates upward at any time, given the dominant nature of most emerging nation legislative bodies. Social interference is particularly pernicious to mining as it can result in enormous expenses to mollify local communities and, in addition, until social concerns are adjudicated, the entire permitting process can be delayed indefinitely. In South America, Newmont's Minas Conga Project in Peru has been delayed; other mining companies encountering social difficulties in that continent include Barrick, Xstrata, Southern Copper, Bear Creek Mining and Anglo American. Miners in several African and Asian nations have also faced social problems as well. Mining management has to take these risks into consideration. Taken to the extreme, they can be become project killers. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca www.resourceworld.com 23

• Cover