MINING CONTRACTS How to read and understand them
MIN I NG CONTRA C TS
CONTENTS STA R T
C O N TEXT
The Min ing In dust ry
Laws and Contra cts
Negotiat ing Peo p le
MINE O P ER A TIO NS
In troduc tion to Mine Op era tions
Legal Re gimes
Re con nais sance and Ex p lora tion
To Mine or Not to Mine: That is the Ques tion
Pro duc tion
F ISC AL
Money Matt ers
Fisc al Re gimes
Speci al Chal lenges
How (not) to spend it
EN V IR O N M ENT A L A ND SO C I AL
What are the is sues
Using the Contra ct to Man age the Is sues
Fin d ing Guidan ce and An sw ers Out side the Min ing Contra ct
EC O NO M IC LI NKA GES
In troduc tion
Min ing and Local Con tent
Min ing and In frastruc ture
LEGA L A ND NEGO TIA TIO N C O N SID ER A TIO NS
So You Think You Need Help After All
170 Years at the Table: Con fess ions of a Negotiator
Dis p ute Avoidan ce and Re solu tion
Plann ing for Troub le
To Pub lish or Not to Pub lish?
AP PEND IX
Glos sa ry
List of Com mon ly Re fer red to Contra cts
START FORE WORD
FOREWORD We are happy to pre sent the first edi tion of “Min ing Contra cts - How to Read and Un derstand Them.” Like its sist er book on oil contra cts pub lished at the end of 2012, it has been pro duced in just five days as a col lec tive ef fort using the booksprint tech nique. The aut hors and col laborators began work by the shore of the Chesapeake Bay in Maryland, USA, on Mon day De cemb er 8th and fin is hed on Friday De cemb er 13th, 2013. A booksprint is a facilitated pro cess through which a small group of con tributors with a wide range of ex p ert ise and per spec tives come togeth er to write a book col laborative ly in five days. We star ted with a title only, spent a day de cid ing on an out line, and then wrote, il lustrated, edited, pro ofed and “pub lished” the book in the re main ing four days. Build ing the book in a sprint has re sul ted in a com p rehen sive re sour ce that be nefits from the dynamic in terac tion of a di v er se group of lead ing ex p erts work ing at the in ter sec tion of min ing and economic de v elop ment. As with the oil book, the booksprint met hodology has two major im p lica tions for its con tent. First, it is a work of opt imiza tion not per fec tion. We are con fident in the qual ity and the value of the con tent, but de spite the aut hors’ best ef forts dur ing the sprint, we are sure the oc casion al fac tu al error or typo will have re mained, and there will cer tain ly be gaps. These are un avoid able when writ ing a book of over 150 pages in under a week. We hope this book be comes a li v ing docu ment; that this edi tion is just a first pass at a work that will be up dated and ex p an ded over time. We in v ite our col leagues to critic ize vigorous ly, and in this way help our or ganiza tions and our partn ers im p rove the text for the next edi tion.
Second, not every con tributor—nor every or ganiza tion spon sor ing this ef fort—ag rees with every de tail or judg ment in the book. We do howev er share the vis ion that a re sour ce of this kind is needed, to equip govern ments, citizens and other stakehold ers to bet t er un derstand the con tent and the im p act of min ing contra cts so that they can negotiate, an alyze and monitor contra cts more ef fective ly. We also all sup p ort contra ct trans p aren cy, the idea that major extra ctive in dust ry ag ree ments should be pub lished to help build more trust and bet t er gover nance around these in dust ries. The an alysis and quota tions in this book, of contra cts from Australia, Ecuador, Guinea, Li beria, Mon golia, Niger, Peru, Sier ra Leone and el sewhere, are just a small sam p le of what is pos sible if more contra cts come into the pub lic space. Apart from that, the goal is for this book to stand as an in for mation al in troduc tion to this com p lex and often con trover si al sub ject. There were li v e ly de bates among the aut hors throug hout the week, and per son al op in ions im p licit ly in form the way the aut hors have sequen ced and addres sed vari ous sub jects. This book is the pro duct of team work, not group think or a “con sen sus” docu ment. We trust that rea d ers will quick ly re cogn ize, as we have, the value of this uni q ue draft ing pro cess. The or ganiz ing in stitu tions are: the In ter nation al Sen ior Lawy ers Pro ject (ISLP), Op enOil, Re v enue Watch Institute-Natural Re sour ce Chart er (RWI-NRC), and the Vale Col um bia Cent er on Sus tain able In ter nation al In v est ment (VCC). Some fin an ci al sup port was pro v ided from with in our or ganiza tions, and more was generous ly pro v ided by Australian Aid, the World Bank In stitute, the World Bank Sus tain able En er gy, Oil, Gas and Min ing unit, and the Ger man Feder al Minist ry for Economic De v elop ment and Co opera tion (GMZ) through GIZ. Speci al thanks go to Anna Shakarova at ISLP for mobiliz ing such a wealth of legal ex p ert ise for the pro ject. The con tributors to this book are: Joseph Bell, of co un sel, Hogan Lovells, RWI-NRC and sec reta ry of the Board, ISLP; Zorigt Dashdorj, Mon golia De v elop ment Strategy In stitute Board mem b er; Matthew Genas ci, RWI-NRC; JeffreyDavid son, Robert M. Buc han De p art ment of Min ing, Queen's Uni v ers ity, Montre al; Juan José Her rera Extra ctive In dust ries Pro gram Co or dinator, Grupo Faro, Ecuador; Mic hael Jar v is, World Bank; Lise Johnson, VCC; Susan Ma p les, legal ad v isor; Her bert McLeod, lead er of the Sier ra Leone govern ment
negotiat ing team for miner als; Sam G. Russ, De p uty Minist er for Op era tions, Minist ry of Lands, Mines and En er gy, Li beria; Salli Anne Swartz Partn er, Artus Wise Partn ers, Paris, ISLP Volun te er; Per rine Toledano, VCC; Johnny West, Open Oil; JeffWood, Re tired Partner,Debevo ise & Plimpton & Volun te er, In ter nation al Sen ior Lawy ers Pro ject (ISLP) Adam Hyde, who in v en ted the booksprint tech nique, once again facilitated the book, as sis ted by Bar bara Rühling and Clara Roor da, Re search As sociate at VCC as tar get rea d er. The Book Sprint team also in cluded - Hen rik van Leeuw en (grap hic de sign), Raewyn White (re mote proof), and Studio Eyal & Myrthe (HTML book de sign). The book is is sued under Creative Com mons li cen se (CC BY SA). This means an y one is free to ex cerpt, trans late, copy and re-use for any pur p ose with out seek ing per miss ion– as long as you use the attribu tion specifica tion below and your work is also is sued under Creative Com mons li cen se. Going for ward, we anti cipate trans la tions into multi p le lan guages, and that the book will pro v ide materi al to be in teg rated into train ing co ur ses run by our or ganiza tions and oth ers. One of the fal la cies some times raised by those who op p ose contra ct trans p aren cy is that the broad er pub lic is not equip p ed to read contra cts or an alyze them in any meaning ful way. We hope that this book will be come a valu able tool to broad en and en rich pub lic de bate of the min ing in dust ry, by and for the hundreds of mill ions of peo p le around the world for whom it is an issue of vital pub lic poli cy. Daniel Kauf mann, Pre sident, RWI-NRC Garth Meintjes, Ex ecutive Di rec tor, ISLP Lisa Sachs, Di rec tor, VCC Johnny West, Found er, Op enOil
CON T EXT THE M IN ING IN DUS T RY L AWS AND CONTRA CTS NE G OTIAT ING PE O PL E
THE MIN I NG IN D UST RY The human sig nifican ce of miner als and the uses they have ser v ed ac ross human his to ry can hard ly be over stated. Miner als are so im p or tant that ages of his to ry have been named for them: the Co p p er Age and the Iron Age. Mines have been dis covered dat ing to 40,000 years ago. Greeks, Romans and Egyp tians wrote treatises about min ing thousands of years ago. Na tions have come to great ness and fall en on the ris ing and ebb ing tides of miner al com mod ity prices. Silv er and gold have taken co unt ries to faraway lands to find more. Every con tinent has had min ing of ores in some form or fash ion in its his to ry. Min ing is, in many re spects, an cient and uni v ers al. And it re mains vital ly im p or tant today. As min ing has be come more of an in dustri al pro cess in many parts of the world, min ing contra cts govern ing that pro cess have pro liferated as well. And, as re lative ly “easy ac cess” de p osits are be com ing fewer and farth er bet ween, min ing com p an ies are going to new loc a tions to hunt for new miner al de p osits. This chan ge has re sul ted in the ris ing sig nifican ce of the miner als sec tor in the glob al economy. One study re cent ly showed the numb er of econom ies which de p end on min ing rose from 46 to 61 in the per iod bet ween 1996 and 2011 - and also the de gree of de p end ence in creased, ac cord ing to Ox ford Poli cy Man age ment. Some of these co unt ries are among the world’s poorest. Oth ers are among the world’s wealthiest.
Mine de v elop ment holds much pro m ise for host co unt ries as the key pro mot er of growth through ex p ort earn ings, economic ex p ans ion, even tu al di v er sifica tion of the economy, and mas sive pover ty al levia tion. Fluc tuat ing but ris ing de mand for miner als ap p ears to pro v ide a log ical and economic way to build new in frastruc ture in rapid ly de v elop ing na tions and re p lace the old in ma ture econom ies. An as p ect of miner al re sour ces drives the dynamics that un der p in much of this book: miner als are de p let able, non-renewable re sour ces. When they are gone, they are gone forev er. A pre mium of ac cess can drive com p any de cis ions. The fin ite na ture of miner als makes them uni q ue as com p ared to other in dust ries and re v enues sour ces for com pan ies, govern ments, and the citizens in resource-rich co unt ries. But past ex p eri ence also sug gests that un less there is prudent man age ment of these re sour ces, these op p or tunit ies could be lost. Or, worse, cat astrop hic en v iron ment al and soci al con sequ ences can occur. "Be care ful to learn the na ture of the loc al ity, its roads, its salubr ity, its over lord, and the neighbours.” “The miner should not start min ing op era tions in a dis trict which is op p res sed by a tyrant." This is stun ning ly good ad v ice for an y one start ing out on a min ing pro ject. No, it does not come from one of the CEOs of the major min ing com p an ies, but in stead it comes from Geor gius Ag ricola, from his De Re Metal lica, Book 1 writt en in 1556. You read that right: 1556. And just as natur al re sour ce extra c tion has been around for a long time, so have the clust er of is sues that have come to de fine it. Al though "Re sour ce Curse" was only co ined as a phrase at the end of the 20th cen tu ry, its fea tures were also around in Ag ricola's time. Economic his torians have de v eloped theo ries to de scribe how, after the "dis cove ry" of the Americas by Col um bus, his im p eri al mast ers, Spain, fell prey in the six teenth and seven teenth cen tu ries to th ings like a drop in pro duc tiv ity in tradition al li v elihoods, cor rup tion, polit ical and soci al stag na tion and con flict - be cause of huge amounts of gold ar riv ing from the New World.
The Min ing In dust ry
The min ing in dust ry has of co ur se be come far more in dustri al since the days of Ag ricola. This book is, lar ge ly, about a min ing in dust ry that he would bare ly re cogn ize. One with earth-movers larg er than a house. Pits that go over a kilomet er into the earth and mine sites so big they are visib le with the naked eye from space. And, come to that, talk at least about space as the next major pro spect, going to mine on the Moon or the as teroid belt. An in dust ry dominated by mac hines: mech anized water treat ment facilit ies, huge sites with just a han d ful of en gine ers on site man ag ing the mac hines, not leagues of peo p le scratch ing out ore by hand. Giant mines that con sume as well as pro duce voracious ly. Sites that need an electric ity plant big en ough to power a city, en ough water to re duce a river, with their own roads and rail ways, their own settle ments and some times secur ity for ces. And with scale and mac hines have come capit al in v est ment on an un p receden ted scale and, ac cording ly, lengthy contra cts and de tailed laws. Un less Ag ricola was also a lawy er, and his to ry some how for got this de tail, he would hard ly re cogn ize the sub ject of this book: Min ing Contra cts. The rest of this book will focus primari ly on min ing contra cts and the legal frameworks sur round ing them. But these contra cts re flect the mar ket for ces and rea lit ies of sup p ly and de mand. The real world drives the legal framework. So, in order to un derstand the full im p lica tions of these ag ree ments and their ramifica tions for the de v elop ment of host co unt ries, it is use ful to ex amine the op era tions of the sec tor at the glob al level, how the mar kets func tion and are struc tured, and evaluate the links in the sup p ly and value chains for the average miner al.
M O R E O F J U S T A B O U T E V E R Y TH ING The big pic ture for the way min ing has evol v ed in the last two de cades is quite simp ly: “more”. Just more. More of every th ing. More min ing com p an ies spend ing more money to pro duce more stuff which is more speculated on and then sold for more money to meet more de -
mand than ever be fore. Ac cord ing to The Econom ist, lead ing co unt ries con sumed 50% more tin in 2011 than at the turn of the cen tu ry, 60% more nic kel, 60% more lead, 60% more coal, 40% more zinc, 30% more co p p er and 20% more silv er and gold. Iron ore pro duc tion has near ly tri p led in that time. A bi ll ion ton nes more are pro duced today than at the end of the 20th cen tu ry. Prices have also roc keted. Gold, silv er, lead, zinc, nic kel and co p p er all tri p led in price in the first de cade of the cen tu ry, and al though some com modit ies have fall en back from 2010-11 highs, they are still all high in his tor ical terms and many an alysts ex p ect de mand to stay strong, with the oc casion al blip. Some econom ists talk of the world now being in a com modit ies “super cyc le” such as has only oc cur red three or four times since the In dustri al Re v olu tion. Part of this, it is true, can be ex p lained by the world's ris ing popula tion – there are an oth er bi ll ion peo p le alive on the planet since the year 2000. But an oth er, per haps larg er part of it is ris ing li v ing stan dards, as parts of what used to be cal led the de v elop ing world rush towards pro sper ity as best they can. China's rise as glob al “swing con sum er” of a numb er of com modit ies has been stun ning ly fast. Twen ty years ago, it bought eight per cent of iron ore traded on world mar kets. Now it is 60%. Ac ross met als as whole, its share has risen from 3% to 30% and that de mand shapes the glob al mar ket for in dividu al com modit ies in very par ticular ways. De mand for co p p er is li ke ly to re main strong, for ex am p le, be cause China is plann ing to add 700 gigawatts to its domes tic grid by 2020 and co p p er fibre is an in tegr al part of grid net works. China’s de mand for im p or ted tin is also li ke ly to rise sharp ly as its bi ll ion con sum ers eat more pro ces sed food. There are also more min ing com p an ies on the scene now. Ris ing de mand has led “junior” less capitalised com p an ies into more re mote and harsh er loc a tions in more speculative ex p lora tion, where they may seek quick er re turns. Other com p an ies may be large but new to the in ter nation al scene, lured out of nation al strongholds by crazy de mand and prices.
The Min ing In dust ry
And just as pro duc tion, con sump tion and price all shot up in the last de cade, so did speculative in v est ment in fin an ci al in stru ments around com modit ies. These in stru ments in itial ly al lowed trad ers who needed real quan tit ies of stuff to lock in their price at some fu ture date, or to “hedge” the price against other as sets, and they have been en thusias tical ly em braced by in v est ment banks and funds. The Uni ted Na tions es timates the numb er of com mod ity fu tures contra cts traded more than doub led every year from 2001 to 2011 as a slew of com mod ity trad ing in dexes sprang up. The role of this “fin an cialisa tion” is hotly dis p uted. Some say it has driv en the price rises, oth ers say it has pro v ided li q uid ity at a time of un p receden ted growth in de mand. But it is un like ly to go away. Of co ur se, the clear trend toward more “more” and “bi gg er” has one im p or tant caveat: Small er mines, and ar tisan al mines in par ticular, still play an im p or tant role in many co unt ries. And these can have dis p ropor tionate ly large im p acts—on em p loy ment, on the en v iron ment, and the soci al fab ric. Throug hout this book we deal al most ex clusive ly with in dustri al min ing, but it is im p or tant to re memb er that this is not the whole story. We live in a globalised world, and the peo p le and com munit ies af fected by min ing op era tions are clear ly aware of these trends, even if they may not pore over the de tail. We are once again in a glob al ex p ec ta tions game which is hard to balan ce. The World Gold Co un cil an noun ces that the in dust ry created $78 bi ll ion of value in the glob al economy in 2012, but the Al Jazeera pre sent er asks their spokes man why only an eighth of that went to the work ers. Com p an ies stress the pre ssure on their bot tom line as costs have sky roc keted. Meanwhile the strik ing min ers of Marikana were de mand ing their wages be tri p led when they were shot dead in a con fron ta tion with the South Af rican police. Other mine riots have brok en out re cent ly in Guatemala, Zam bia, Ar gentina to name a few. A Chat ham House re p ort states that there were 126 ac tive local dis p utes over min ing in Peru alone. These pre ssures with in the min ing sec tor, co up led with broad er trends toward in creased cor p orate ac coun tabil ity and in creased at ten tion on the broad er im p acts of min ing on society, have spur red a numb er of in novative in itiatives such as the Extra ctive In dust ry Trans p aren cy In itiative (EITI).
Sever al Af rican govern ments have an noun ced they are re v iew ing their min ing contra cts be cause of widespread per cep tions they have not cap tured en ough of the last de cade's “super p rofits”: Mexico has an noun ced new taxes, and In donesia's par lia ment is in troduc ing an ex p ort ban on some miner als that its govern ment is try ing to work around. One re spon se by a left-wing move ment cen tered in Latin America seeks to de fine “post-extractivism”. Since gett ing miner als out of the ground tri gg ers so much tur bul ence, they argue, the only way out is to sharp ly re duce its pro min ence in economic de velop ment, and re s ist glob al for ces that seek ac cess to extra ct it. There is fer ment every where, even in sleepy vil lages high in the Alps, where a bunch of vil lages re cent ly used Swiss municip al law to re p at riate some of what they re gar ded as ex cess pro fits ear ned by com mod ity trad ing com p an ies based in Swit zerland, such as Glen core, to sour ce co unt ries in Af rica. Con cern is on the rise for min ing com p an ies as well. De spite what could be viewed as an in exor able rise in com mod ity prices and a min ing boom that could hard ly see an yth ing more than a "blip" in miner als prices, PWC is re p ort ing that in v es tor con fid ence in min ing com p an ies is de clin ing re lative to the broad er equ ity mar kets. And al though pro fits rea ched re cord highs in 2011, they came against re cord costs, which meant that pro fit mar gins, and the value of such com p an ies, stayed flat or even di p ped. Since then, prices have come off their his toric highs, but costs have re mained high and the com p an ies are in troub le. Min ing stocks fell near ly 20% in the first four months of 2013. De loit te chimed in as well: the list of pro blems min ing com p an ies face in 2013 in cludes ris ing costs, fall ing prices, supply-demand im balan ces, and de creased pro duc tiv ity. Urg ing com p an ies not simp ly to "wait out the swing", their an nu al re v iew urged com pan ies to em brace in nova tion, in clud ing sys tematic use of soci al media to in crease their en gage ment with com munit ies. Hence the need for this book which seeks to de scribe neut ral ly, from an in for mation al point of view, the legal and contra ctu al frameworks that sur round min ing op era tions around the world.
The Min ing In dust ry
LAWS AND CONTRA C TS Every co unt ry has its own uni q ue his to ry, peo p les, cul ture, food, music. Is it in fluen ced by other cuisines, lan guages, and cul tures? Yes. But it is al ways, in some way, uni q ue. The min ing laws and contra cts in any co unt ry are the same way. It is im p or tant to stress at the out set that this book can not and will not cover every contra ct type or every th ing in a miner als law for any given co unt ry. This book pro v ides a road map help ing to loc ate what you can find; a guide to how to get to cer tain places in the legal framework; an approach to an swer ing ques tions. We can not drive the car, but we can pro v ide help ful di rec tions. The body of laws in all co unt ries can be treac her ous ter rain, es p ecial ly for the uni nitiated. One law will re fer ence an oth er law, which will in turn re fer ence yet an oth er law that re fer ences sever al sets of re gula tions. Look ing for an an sw er to a par ticular ques tion can send a per son on a long jour ney ac ross numer ous ar ticles, clauses, phrases, and sub-clauses. Now that may sound like world’s worst pos sible way of spend ing an af ternoon. But be fore you de cide to never visit the land of laws and contra cts, let us share with you a few ob ser v a tions that might chan ge your mind. No matt er what the legal sys tem is, a min ing com p any will al ways seek a re cog nized legal right to en gage in min ing ac tivit ies from the state. If there is large, in dustri al scale min ing going on, you can be 99% sure that there is a legal right loom ing in the background some where. While most co unt ries in the world have min ing codes (or
min ing laws), even if there is a co unt ry that does not have a min ing code, the state can issue de crees, ex ecutive ord ers or per haps enter into contra cts in the ab s ence of a min ing law. And here is some th ing else you can usual ly count on, an y w here in the world: the state, or the peo p le of the state, own the miner als in their raw form, i.e. be fore they have been extra cted. The most fam ous ex cep tion to this rule is the Uni ted States. Next, the vast major ity of min ing codes spend most of their text clarify ing the is suan ce of vari ous li cen ses by the state to the miner al com p an ies. These li cen ses fol low the life cycle of the mine: first there is an ex p lora tion li cen se—or maybe even a pro spect ing li cen se. Then, there is a pro duc tion li cen se, fol lowed by a closure or re clama tion li cen se. There are a numb er of other li cen ses that may be needed in a min ing code and other codes. But you can count on these basic li cen ses for the main phases of the mine life cycle in any min ing code. The whole point of a li cen se is to secure an ex clusive right to un der take a par ticular ac tiv ity on a par ticular piece of land. This is a fund ament al part of the miner als law in any co unt ry. This is the role of "The Contra ct" or li cen se in a li cen se sys tem. This sec tion pro v ides frequent ly asked ques tions about the land of laws and contra cts. What is "The Contra ct"? There are many types of contra cts in the miner als sec tor. This book con cerns it self with the contra ct that governs the re lationship bet ween the nation al govern ment and li cen se hold er for an ex p lora tion and/or min ing pro ject. In any legal framework, there is a contra ct that is "The Contra ct". This contra ct (or li cen se) pro v ides an ex clusive right to a com p any to ex p lore over a cer tain area of land and mine the dis covered re sour ces in ex chan ge for royalt ies, taxes, and other ob liga tions. These “contra cts” can have any numb er of names: Miner al De v elop ment Ag ree ment, Ex p lora tion and Ex p loita tion Ag ree ment, Min ing In v est ment Ag ree ment, Min ing Contra ct, Min ing Con cess ion. The im p or tant point here is: do not get in v es ted in the name and what is on the out side cover of the docu ment. No matt er the name, these contra cts are all de al ing with the same kinds of is sues, though per haps at vary ing
Laws and Contra cts
levels of de tail. The dif fer ences in the name of the contra ct is not an im p or tant fac tor. It is most ly a matt er of his tor ical ac cident.
IS A M IN ING CONTRA C T T H E E X CE P TION OR THE RULE? Contra cts are not re q uired or used by all co unt ries. The co unt ries that do not govern min ing by contra cts in stead de fine all rights and ob liga tions by the specific li cen se and general ly applic able laws. Com p rehen sive contra cts are more often em p loyed at the early stages of miner al sec tor de v elop ment when the legal framework is still evolv ing. In con texts in which the legal framework and govern ment in stitu tions are fair ly strong, it is more li ke ly that there re lian ce on general ly applic able law. In this kind of en v iron ment com p an ies can rely not only on the com p rehen sive na ture of the legal framework, but also on the re lative stabil ity of the legal en v iron ment and trans p arent gover nance mech an isms that guaran tee the safety of their in v est ment. For in stan ce, pro v in ces in Canada such as British Col um bia and On tario do not have for mal ly writt en contra cts bet ween the govern ment and the com p any, though there are vari ous other contra cts in v ol v ed, in clud ing contra cts with the in digen ous com mun ity. Similar ly, contra cts are not used at all in South Af rica, also a co unt ry with a long his to ry of min ing.
DOE S THE L AW TAK E PRE CE D E NCE OVE R THE CONTRA CT? Now this ques tion has an in terest ing an sw er. Theoretical ly, the an sw er is very clear: there is a hierarchy of laws, with the Con stitu tion at the top, then laws, re gula tions, and contra cts sitt ing way down at the bot tom. Laws take pre ced ence.
But theo ry does not al ways match rea l ity. When you get into the real world, the an sw er is quite dif ferent. There are cases where contra cts are specifical ly de sig ned to take pre ced ence over domes tic laws. And laws them selves will per mit contra cts to de v iate from the law. Further more, there are legal stabil ity clauses and ag ree ments that may af fect the hierarchy of laws. This topic will be treated in more de tail in vari ous other sec tions of the book. Howev er, as it was men tioned ear li er, the more com p rehen sive the domes tic legal framework, the strong er the ten den cy is for domes tic laws to take pre ced ence.
Laws and Contra cts
WAIT, WHAT AB OUT COM MUN ITY DE VE L OP MENT AG REE M E NTS ? AND OTHE R CONTRA CTS ? WHE RE DO THE Y FIT INTO THE PIC TURE? There are a numb er of contra cts that may also be sig ned in ad di tion to "The Contra ct" bet ween a com p any and the nation al level govern ment. These will serve a dif ferent func tion from grant ing the ex clusive right to mine. There may be contra cts sig ned by local aut horit ies and li cen se hold ers that re gulate local rights and ob liga tions. There are some times vari ous contra cts for usage of water and in frastruc ture con cluded bet ween govern ment aut horit ies and the li cen se hold er. Contra cts could be con cluded bet ween vari ous stakehold ers, in clud ing for in stan ce non-governmental or ganiza tions, par ticipat ing in the min ing pro ject. In short, there could be hundreds of contra cts as sociated with any given mine, but one is the most im p or tant of all, and that is the min ing contra ct bet ween the nation al govern ment and the com p any grant ing that ex clusive right to con duct min ing op era tions.
WHAT DOE S THE CONTRA CT COVE R?
A contra ct could cover a wide range of is sues such as op eration al ob liga tions, fisc al and economic de v elop ment is sues, en v iron ment al and soci al is sues, dis p ute re solu tion,
local em p loy ment and pro cure ment, chan ge of ow nership or man age ment con trol, among oth ers. In a re lative ly com p rehen sive legal en v iron ment, a contra ct could take the form of a fisc al stabiliza tion ag ree ment and re-iteration of ob liga tions in other areas under the law and be ex treme ly short. Quite lit eral ly, a contra ct in one co unt ry may be 250 pages long, while in an oth er it is only 15 pages.
Laws and Contra cts
Ex am p le of li mited scope ag ree ment
Ex am p le of a Com p rehen sive Ag ree ment While it is hard for many peo p le to im agine, there was a time when pro v is ions for basics such as en v iron ment al im p acts as sess ments and mine closure and re clama tion
Laws and Contra cts
were not in contra cts at all. In the past 20-30 years, pro bab ly the bi ggest de v elop ments in min ing laws and contra cts are in the soci al and en v iron ment al areas—so much so that there is an en tire sec tion of this book de v oted to those topics. Areas like soci al re spon sibil ity, human rights, anti-bribery pro v is ions, and local con sul ta tions are em erg ing as new is sues in the contra cts. New deal struc tures are also em erg ing that have in frastruc ture, pub lic hous ing and other non-monetary forms of be nefits for govern ments. This is often as sociated with the re cent en trants to the mar ket such as Chinese com p an ies. This book co v ers a wide range of is sues typ ical of a com p rehen sive contra ct. Hence, it dis cus ses many is sues such as fisc al is sues, core op eration al ob liga tions, en v iron ment al and soci al is sues, economic de v elop ment, dis p ute re solu tion, equ ity ow nership, force majeure among oth ers. Howev er, it needs to be stated again that if the domes tic legal en v iron ment co v ers them suf ficient ly, all is sues co v ered in the book would not neces sari ly end up in the contra ct.
HOW L ONG DO THE CONTRA CTS L AS T? There are two main prac tices when it comes to the dura tion of contra cts. One way is to set a hard time limit: 10 years, 15 years, 25 years. For a com p any to want to in v est, the contra ct per iod will need to be of suf ficient dura tion to allow the com p any to re coup its in v est ment and make a pro fit. There will typical ly be the op p or tun ity for ex tens ions as well. The other prac tice is to have the contra ct last as long as there is an economic de p osit there to mine. The li cen se for each phase may be 25 years or some other par ticular amount, but it will not be li mited by any hard amount of time. Under eith er prac tice, there are closure and re clama tion ob liga tions, and these are furth er co v ered in the Min ing Op era tions Sec tion of this book.
B ACK TO THE B E G INN ING : G E TT ING THE CONTRA CT We seemed to have jum p ed to the end of the contra ct with out talk ing about how you get one in the first place. Let’s end with the be ginn ing. The vast major ity of co unt ries around the world use a first come first ser v ed sys tem of is su ing li cen ses and contra cts for the right to con duct min ing ac tivit ies on a piece of land. This sys tem makes sense, as it theoretical ly should not favor any par ticular party and it should in cen tiv ize peo p le to come and get li cen ses to start min ing. In a few in stan ces, a co unt ry may be able to hold com p etitive bids for the right to mine or ex p lore. This is pro bab ly be cause there is a mini mum amount of neces sa ry geolog ical in for ma tion for bi dd ing to re sult in the re v ela tion of value, as it ought to. But most areas do not have that kind of geolog ical in for mation—so cal led “green field areas”. So, the li cen ses are awar ded on first come first ser v ed basis.
NEGOTIAT I NG PEO P LE The mys teri ous "negotiat ing table". Who sits at it? What do they do? What are some of the "tri cks of the trade" --what do good negotiators do? Do peo p le rea l ly pound their fist on the table and threat en to walk away? Who's rea l ly in char ge? And per haps most im p or tant ly, who's driv ing the pro cess be hind the scenes? This Chapt er will pull back the cur tain on the mys teri ous negotiat ing table and an sw er many of these ques tions. There is also a bonusl Chapt er "So You Think You Need a Lawy er After All" at the end of this book that pro v ides guidan ce on how to choose legal co un sel. And, we have "136 Years at the Table: Con fess ions of a Negotiator" to pull back the cur tain on the mys teri ous negotiat ing table.
WHO S ITS AT THE TAB L E ? The choice of who should sit at the negotiat ing table and who will be re p resent ing the vari ous part ies can be (and often is) one of the most im p or tant de cis ions that will in flu ence the out come of the negotia tions. The main ac tors: Govern ment, Com p an ies, Lend ers, Civil Society
Gover ment: At the table (though there could be mus ical chairs) There is no one struc ture for Government-side negotiat ing teams. Prac tice is di v er se ac ross the globe, but can be well sum marized into 3 main types, based on who takes the lead:
Minist ry of Mines, poten tial ly with in v ol v e ment of other Minist ries Inter-Ministerial com mit tee, which could be led by the Minist ry of Mines, Nation al Min ing Com p any, the Ex ecutive's Of fice, Nation al In v est ment Com miss ion or other Minist ry level Nation al Min ing Com p any, poten tial ly with in v ol v e ment of other Minist ries Rea son able minds can dis ag ree on which struc ture works best. In all li kelihood, any struc ture can work if there is the polit ical will for it to do so. Which struc ture a co unt ry uses will de p end lar ge ly on the co untry's gover nance struc ture and his to ry of prac tice in this area. It should be noted that bi gg er is not neces sari ly bet t er when it comes to seats at the table. A single negotiator or 3-4 negotiators may be much more ef ficient than a group of 15. Con fus ion, dis trac tion, and divide-and-conquer tech niques can be em p loyed for large negotiat ing teams. One negotia tion was held up by the fact that the seven negotiators in the room on the govern ment side typical ly needed to ac hieve un anm ity on all is sues.This isn't to say that a large team should sup p ort the negotiators and have their views taken into ac count; only that more is not al ways mer ri er when it comes to face to face negotia tions. If there is a Nation al Min ing Com p any (NMC) or some other speci al pur p ose vehic le created by the Govern ment to over see min ing per mitt ing and op era tions, its re p resen tative(s) will sit at the table, usual ly with a team of legal, fin an ce (fisc al), economic and min ing ad v is ers and ex p erts. Such ad v is ers and ex p erts can be govern ment em ployees or out side con sul tants de p end ing upon the ex p ert ise and re sour ces of the Govern ment. If there is no NMC, the Govern ment will often be re p resen ted by em p loyees of the Min ing Minist ry, with vary ing de grees of of fici al or un of fici al in v ol v e ment from other Minist ries. Which other minist ries might show up at the mys teri ous negotiat ing table?
Negotiat ing Peo ple
Here too, there is no con sis tent prac tice ac ross all co unt ries all of the time. One could rea sonab ly ex p ect re p resen tatives from the Minist ries of Just ice, En v iron ment, Labor and Em p loy ment, In digen ous Popula tions (if ex ist ing), Cul ture, Fin an ce (and Bud get), Strategic Plann ing (if ex ist ing), Land De v elop ment/Plann ing, Nation al In v est ment Com miss ion etc. Re p resen tatives of the Centr al Bank may be in v ol v ed, and some co unt ries pro v ide for ad hoc ex p erts to be of ficial ly part of the team. The fol low ing ex am p le is from Li beria's Mines and Miner als Law 2000. Later laws have since modified this par ticular structure--as they are apt to do! Howev er, it re mains as a good ex am p le of the legal lan guage that com p oses a negotiat ing team: "Sec tion 3.4. Es tablish ment of Miner als Tech n ical Com mit tee. There is hereby es tablis hed a Miner als Tech n ical Com mit tee com posed of the fol low ing: The Minist er of Lands, Mines & En er gy (Chair man); The Minist ry of Just ice; The Minist ry of Fin an ce; The Minist ry of Plann ing & Economic Af fairs; The Nation al In vest ment Com miss ion; The Minist ry of Labour; The Co un cil of Economic Ad visors to the Pre sident of Li beria; The Centr al Bank of Li beria. Sec tion 3.5. Power of the Com mit tee. The Miner als Tech n ical Com mit tee is hereby em powered under the chair manship of the Minist er to negotiate and con clude ag ree ments [...]"
The In ter nation al Min ing Com pany (IMC): At the table The IMC may be act ing alone, with a Joint Ven ture (JV) partn er, or as the man ag ing partn er of a Con sor tium of busi ness en tit ies. Who the IMC or JV sends to the table can de p end on a lot of fac tors: the size of the com p any, how im p or tant it sees a par ticular negotia tion or govern ment re lationship, or its gener al approach to negotia tions worldwide. The IMC side of the table may have a re gion al di rec tor, in-house co un sel, and other in-house ex p erts on its side. Small com p an ies may have a CEO or other very high level re p resen tative at the table.
The IMC or JV will be typical ly as sis ted by its own in-house legal, fin an ci al (fisc al), economic, geolog ical, mar ket ing and tech n ical (en gineer ing and/or in frastruc ture) ad visors. The IMC or JV may also call on in tern al or third party ad v isors to help address any numb er of is sues, par ticular ly is sues that may be very local to that negotia tion, for ex am p le, in digen ous peo p les, com mun ity, cul tur al heritage or other soci al is sues that may be raised dur ing the negotia tions. In some cases, the IMC may even in s ist that cer tain com mun ity is sues be co v ered in the ag reement.While com mun ity groups or civil society or ganiza tions do not usual ly have a seat at the negotiat ing table, this does not mean that their voices can not be heard; the IMC (as well as govern ment) may be open to dis cuss ions and con sul ta tions in ad v ance of or dur ing negotia tions. It may be worth not ing here that in all but a very few in stan ces, the IMC and the Govern ment will often not be negotiat ing from the same in for ma tion. While the IMC may sub mit a numb er of stud ies on the geologic poten ti al of the area, en gineer ing plans, costs of pro duc tion, and other in for ma tion that is crit ical to de ter min ing negotiat ing posi tions, the IMC will li ke ly have more tools at its dis p os al to un derstand, an alyze, and frame that in for ma tion in a way that is be nefici al to the com p any. And this makes sense: min ing com p an ies are in the busi ness of min ing! This is their bread and butt er and prima ry pur p ose. If they are not the ex p erts, then some th ing is going quite wrong. The chal lenge for Govern ments is to meet that level of ex p ert ise as best they can. A nunb er of strateg ies for doing so are in cluded in this book. Last ly, the chal lenge of negotiat ing with IMCs can be com p oun ded if there is a Joint Ven ture or Con sor tium ar range ment. More in terests at the table usual ly means more is sues to work through. JVs and con sor tia are often neces sa ry for large-scale, in dustri al min ing pro jects. Such ar range ments di v ers ify the risks for the main pro ject com p any, can give ac cess to more equ ity fin an ce, ac cess special ist skills or tech nolog ies, e.g. in in frastruc ture de v elop ment, and evenass ist in secur ing part of the miner al sup p ly. Even with multi p le com p an ies at the table, ready to put their own cash into the pro ject, that may not be en ough. Enter: the Lend ers, the guys with the money.
Negotiat ing Peo ple
Lend ers: Not at the table (but hover ing close ly in the background) Min ing pro jects are ex p en sive. Very ex p en sive. In stead of co ugh ing up all of their own cash, as sum ing the com p any even has en ough, the IMC or the JV will pro bab ly turn to com mer ci al lend ers to pro v ide debt. For some min ing pro jects, debt could be used to fund as much as 70% of the total costs of build ing the min ing pro ject, with the third party lend er hav ing more cash tied up in the pro ject at cer tain mo ments in the mine life cycle than the IMC or JV. For this rea son, the lend er will often want to be quite well-informed about the negotia tions over what will be, in ef fect, its money for a sig nificant per iod of time. They may want to be in for med of pro gress or pro blems en coun tered at the negotiat ing table, and will cer tain ly have made their own con di tions and ex p ec ta tions clear to the IMC as part of the fin anc ing or equ ity ag ree ments drawn up with the IMC, such as de fault/breach and other pro v is ions that will need to be har monized with the terms of the Min ing Contra ct or vice-versa. Who are these money men be hind the scenes? They could be private com mer ci al banks like HSBC, Barclays, RBS, De utsche Bank, Credit Suis se, as well as pub lic Multi later al Lend ing In stitu tions such as In ter nation al Fin an ce Cor p ora tion or "IFC" (a mem b er of the World Bank Group). These ac tors, while not of ficial ly at the table, have been im p or tant in the over all con tent of Min ing Contra cts. For ex am p le, today most of the com mer ci al and larg er private lend ing in stitu tions sub scribe to the Equator Prin ci p les, and IFC in v ol v e ment in a pro ject means com p lian ce with its Soci al and En v iron ment al Per for mance Stan dards (more about this "En v iron ment al Health and Soci al" Sec tion of the book). These stan dards have been al most uni v er sal ly em braced as stan dard prac tice in these areas, and contra cts may make these stan dards legal ly bi nd ing. Just be cause a play er is not at the table does not mean they can not be high ly in fluen ti al, though it is cer tain ly not easy.
Who is usual ly not at the negotiat ing table? (An sw er: Al most Every one) Frank ly speak ing, just about every one else is not at the table. So fear not, if you felt left out of the ex cite ment, you are not alone. Al most every one is in the same place as you, won der ing what hap p ens be hind the cur tains at the mys teri ous negotiat ing table. There are a few ex cep tion al cir cumstan ces in which other groups may be in v ited to the table. Re p resen tatives of com mun ity groups may be in v ited to par ticipate in those parts of a negotia tion which bear on en v iron ment al pro tec tion, com mun ity de v elop ment, be nefit shar ing or soci al im p act man age ment. Some times, the Govern ment will in clude in its team re p resen tatives from Minist ries which are re spon sible for cul tur al and other is sues af fect ing local popula tions or subnational govern ment in terests. This pre sup p oses that there is a Govern ment en t ity of some na ture re spon sible for over sight or co or dina tion of in digen ous peo p les, sub nation al govern ment or local com mun ity in terests in gener al. More often, these agen cies di rect ly act on be half or re p resent the in terests of such popula tions. The more li ke ly way that civil society will par ticipate is through a con sul ta tion pro cess of some sort, though that of co ur se is not the same thing as being at the table. Com mun ity De v elop ment Ag ree ments and other com mun ity pro ces ses are dis cus sed more in the next sec tion, in the sec tion "En v iron ment al, Health and Soci al" and the Chapt er "What might be in the contra ct".
GETT ING TO THE TAB L E Now that the team of negotiators are at the table and every one knows--or thinks they know--who is re p resent ing what in terest groups and en tit ies, and who has aut hor ity to bind whom, the negotia tions can fin al ly begin. The mo ment of truth has ar rived: part ies will come togeth er and go into the in tel lectu al equivalent of hand-to-hand com bat. Angry words will be ex chan ged. Strateg ies and stratagems will be em p loyed; bluffs, maybe even out right lies. Who will crack first? Who will cave on the cruci al points? Who will come out on top? Which negotiator win in this test of wit and will?
Negotiat ing Peo ple
We have some dis ap p oint ing news. For those that pic tured men in suits de bat ing each other to the death in a wood-panelled con fer ence room in New York or Hong Kong, that is not quite how it hap p ens 99% of the time.
Negotia tions are often mark ing up a word docu ment with track chan ges and then sen d ing that to the other side by email. More often, it is a per son be hind a computer-maybe with a bi nd er with laws and contra cts, and pro bab ly sever al cups of coffee-reading and writ ing for hours at a time. The ratio of hours spent at the table, face to face with the other part ies to pass ing drafts of a word docu ment is hard to ac curate ly es timate; but be as sured that in al most all negotia tions, far more hours are spent away from the table than at it. An IMC may start the negotia tions with its model ag reement(s), or the Govern ment may start with its model or a chos en ag ree ment al ready in force that it views as its cur rent posi tion and prac tice. A model contra ct is one in which the gener al struc ture of an ag ree ment is laid out, but with a numb er of areas left open for negotia tion, such as the fin an ci al terms, ex p lora tion work pro grams, and com mun ity be nefits, for ex am p le. Other is sues may be open for negotia tion as well. What's the use of that, you might ask? First, it saves an en orm ous amount of time. Draft ing from a blank sheet of paper would be ex treme ly in ef ficient. Second, ex chang ing pre fer red models or re dac ted ex am p les often will re v e al the part ies‘ ex p ec ta tions:
a party will rare ly share a model or contra ct that does not in clude its favorite pro v is ions. And if a side does send a model that goes against its in terests, this would pro bab ly be a pre tty clear ex am p le of poor negotiat ing strategy, if there ever was one). By ex chang ing models or pre fer red re dac ted contra cts, the part ies will be able to as sess the first negotiat ing posi tions which each party may put on the table. These per ceived ex p ec ta tions should not be ig nored be cause they will sur face at some point in the negotia tions eith er as ex p ress re q uests or im p lied is sues. This does not of co ur se re sol v e which model or re dac ted contra ct will form the basis for the negotia tions but it will be a win dow into the part ies' wish lists. Once the part ies de ter mine which ag ree ment or ag ree ments they will negotiate from, the fun be gins. It is time to dive into the heart of this book, the text of Min ing Contra cts.
MINE OP E RA T IONS IN TRODUC TION TO M INE OP E RA TIONS L E G AL RE G IM E S RE CON NAIS S A N C E A N D E X PL ORA TION TO M INE OR NOT TO M INE : THAT IS THE QUE S TION PRO DUC TION CL OS URE
Mine Op era tions
IN T RODUC T ION TO MINE OP E RA T IONS Min ing is not for those who need the rush of the new and dif ferent. It is pro bab ly not the in dust ry for the fas hionis tas, twit terati, hipst ers, and trendsett ers. Min ing is an in dust ry that takes time. A view of the long-term horizon. If you had a child and applied for an ex p lora tion li cen se tomor row, your child would very li ke ly not see ex p lora tion until he or she is in grade school. Then con struc tion as a teenag er. And com mer ci al pro duc tion in col lege. And your great, great, great, great grandchild would have a good chan ce of see ing the last days of that mine's pro duc tion and fin al ly, its closure. Some of the great mines of his to ry have run for thousands of years. "The Great Co p p er Moun tain" is not a children's tale as its name might imply. Named Stora Kop p arberg, this mine las ted for a mil lenia, from the 10th cen tu ry to a very re cent closure in 1992. Fin d ing a re sour ce, build ing a mine, runn ing it and clos ing it down re spon sib ly is a long pro cess. Re con nais sance and ex p lora tion may in v ol v e de cades of in creasing ly focused ac tiv ity, by both govern ments and private com p an ies, in an ef fort to find re sour ces and ident ify those that may be worth de v elop ing. After that thres hold is cros sed, it may take many more years of feasibil ity stud ies and pro ject apprais al, along with ex ten sive con sul ta tions with govern ment agen cies, local com munit ies, fin an ci al in stitu tions and other key part ies, be fore a com p any is able to move on to mine de velop ment and ul timate ly pro duc tion.
Mine Op era tions
And then, pro duc tion may last, quite lit eral ly, for a hundred years. But that's if you're lucky. Most ex p lora tion ac tiv ity will fail to re sult in a pro mis ing dis cove ry, and many pro mis ing dis cove ries will never make it to the min ing phase. This chapt er takes a clos er look at each step in the min ing life cycle, from high-level re con nais sance through closure, de tail ing some of the key con sidera tions dur ing each stage. Some of these con sidera tions are tech n ical or en gineer ing re lated: it is im p or tant to have an un derstand ing of what the “footprint” of a min ing op era tion is at a given stage and the kinds of ac tivit ies that will be un der tak en. Other con sidera tions are legal and re gulato ry, and we will look not only at key re gulato ry pro ces ses and decision-points that govern and fea ture in each phase, but also at the broad legal prin ci p les, such as land ow nership, miner al ow nership and the li cens ing re gime, that run through the min ing life-cycle. And this will come as no sur p r ise to an y one, but money is im p or tant. Very im p or tant. Un derstand ing not only the cost of each phase, but where the money tends to come from will be co v ered in the sec tions that fol low.
In troduc tion to Mine Op era tions
Mine Op era tions
LEGAL RE G IMES Min ing contra cts and li cen ses are a com mon fea ture of miner al legal frameworks ac ross the globe. These contra cts go by dif ferent names – miner al de v elop ment ag ree ment, contra cts of work, “con v en tions” in civil law co unt ries -- but they all serve the same pur p ose of fill ing out the ob liga tions and rights of the in v es tor that are not in the min ing law it self. These con tacts may be separate ly negotiated or based on a model contra ct with specified ex cep tions. An il lustra tion shows the dif fer ence bet ween the two re gimes. Under any re gime, the Con stitu tion, laws, and re gula tions are general ly "above" or govern the contra ct or li cen se. The dif fer ence is the co v erage of li cen se ver sus contra ct of the rights and ob liga tions of the min ing com p any and the state.
Mine Op era tions
While these legal re gimes may have many uni q ue charac teris tics with in any given co unt ry, they fall under two types of legal re gimes.
Contra ctu al Re gime In a pure contra ctu al re gime, the prima ry docu ment govern ing the in v est ment is the contra ct. Very few co unt ries still have a pure contra ctu al re gime, but there are many co unt ries that have min ing laws yet still rely more heavi ly on contra cts to de ter mine most of the state and com p any ob liga tions. In a contra ctu al re gime, the miner als law will typical ly have less con tent than a miner als law in a li cen se re gime. It is often a long docu ment de fin ing the com p any's ob liga tions and rights with some specific ity. It will cover the in v es tor’s ob liga tions dur ing vari ous stages of de v elop ment, its rights to extra ct miner als and what miner als are co vered, rights and ob liga tions with re spect to in frastruc ture. It may also pro v ide the in ves tor with pro tec tions from un law ful tak ing of its pro p er ty, and will usual ly pro v ide for speci al dis p ute re solu tion pro cedures. In many cases, the contra cts re fer ence and in cor p orate gener al law, but they can also pro v ide for de p ar tures from gener al law. For in stan ce, in the tax sec tions, the contra ct may mod ify cer tain of the in come tax rules or it may pro v ide for dif ferent tariffs. In civil law co unt ries “con v en tions” or contra cts will fill in holes in the law or fill out de tails of the in v es tor’s rights, but con v en tions can not
Legal Re gimes
free in v es tors from ob liga tions ot herw ise set out in the law. Contra cts can be in dividual ly negotiated, but they can also be in a stan dard form, with the form being up dated from time to time. In donesia for in stan ce went through seven genera tions of model contra cts of work be fore re p lac ing them in 2009 with its pre sent sys tem.
Li cen se Re gime Al ter native ly, in a pure li cen se re gime, all of the major ob liga tions applic able to min ing op era tions are es tablis hed through legis la tion and re gula tions. Rath er than sign ing contra cts with in dividu al com p an ies, the govern ment es tablis hes a sys tem for com pan ies to apply for li cen ses to mine par ticular areas of land, and those li cen ses are sub ject to general ly applic able legis la tion re gard ing taxes, royalt ies, en v iron ment al re quire ments and so on. In this sense, com p an ies’ li cen ses con tain ident ical ob liga tions. In the chapt ers and sec tions that fol low we dis cuss the vari ous ob liga tions and rights that states, com munit ies, and in v es tors have wheth er es tablis hed in contra cts, legis la tion, or li cen ses.
L AND, M INE AND M INE R AL S OW NE RS HIP Miner als in the ground may be owned by the state or be owned private ly. For in stan ce, in the Uni ted States, sub soil rights under private ly held land are private ly owned; sub soil rights under state or feder al lands and of fshore are held by the feder al and state govern ments. In most of the world, the state, in clud ing in digen ous peo p les where sovereign, or more broad ly, the peo p le, own all natur al re sour ces. This in cludes miner als below the sur face even when the sur face rights are held by oth ers. This ow nership is often set out in the Con stitu tion and re p eated, but in an in creasing ly specific form, in the min ing act and the contra ct it self. For ex am p le: Ecuador Con stitu tion Ar ticle 1: “Non-renewable natur al re sour ces of the State’s ter rito ry be long to its in alien able and ab solute as sets.”
Mine Op era tions
This gener al state ment of land rights be comes more specific in a miner al law. An ex cerpt from Ecuador’s Min ing Law: “Art. 16: Ow nership of mines and de posits by the State. Non-renewable natur al re sour ces and, in gener al, un derground pro ducts, miner als and sub stan ces whose na ture dif f ers from that of the land, in clud ing those found in areas co vered by ter ritori al sea wat ers, are the in alien able pro per ty of the State and are not sub ject to the statutes of li mita tions or seizures. The State’s ow nership of the sub soil shall be ex er cised in depen dent ly of ow nership rights over the sur face land co ver ing the mines and de posits.” We do not have a min ing contra ct from Ecuador to con tinue the ex am p le; in stead, a Li beria contra ct shows how this gener al Con stitution al state ment then makes its way from law to contra ct in a Li berian contra ct, whose Con stitu tion and law have similar prin ci p les, as many co unt ries do. The ex cerpt of the Li beria – China Union Miner al De velop ment Ag ree ment: “A. Every Miner als on the sur face of the ground or in the soil or sob-soil, riv ers, water co ur ses, ter ritori al wat ers and con tinent al shelfs of Li beria is the pro p er ty and nation al wealth of Li beria and all rights re lated to the ex p lora tion for and ex p loita tion of Miner als be longs ex clusive ly to Li beria.” Land rights and rights in miner als are two dif ferent th ings. In most juris dic tions, once the com p any gets the neces sa ry rights to miner als for its min ing op era tions, it must reach an ag ree ment with the own ers of land. The own ers of land may be the State, a private land owner, or com munit ies, or a mix of these. Typical ly, in the first in stan ce, the ag ree ments for the rights to land for private own ers or com mun al own ers may be negotiated bet ween eith er of these part ies and the min ing com p any so that they have op p or tun ity to negotiate a win- win re lationship. In many juris dic tions, if these part ies can not negotiate a sol u tion with out the state, the state will step in and negotiate for them, or in the most ex treme cir cumstan ces, may ex p rop riate the land.
Legal Re gimes
Land rights are an ex treme ly con ten ti ous issue, and not all juris dic tions fol low the pro cess de scribed above. There are dif ferent varia tions. Some of these are de scribed in later chapt ers of this book and could eas i ly fill a whole book. For ex p edien cy of time, this gener al pro cess is one used in many places and it at least de scribes the separate legal rights of land ver sus miner als, which is typ ical of most co unt ries. The state could de v elop and ex p loit the miner als it owns by it self, using its own re sour ces, and in some cases does. More often, the state grants li cen sees or contra ct hold ers the right to ex p lore for and de v elop miner als. A li cen se hold er will most often be a min ing com p any, though it could be an in dividu al, joint ven ture, or other en t ity. The li cen se or contra ct hold er will have the right to mine, so long as the hold er fol lows the rules and ob liga tions set out in the min ing law. But it doesn't stop there. The min ing law is sup p lemen ted by other laws – tax, en v iron ment al, labor, land – and the com p any will need to fol low these as well. Some of these laws may be the same applied to other ac tiv ity and per sons, and some may be special ly de sig ned for min ing. For in stan ce, re v enue codes often have speci al sec tions de al ing with speci al fea tures of min ing. If you are look ing for the laws and rules applic able to a min ing com p any that holds a li cen se or contra ct in your co unt ry, the short an sw er is: poten tial ly all of them.
Mine Op era tions
RE C ON N AIS S ANCE AND EX P LORA T ION It all starts here. What ot herw ise looks like a field of grass, barr en sand, or a body of water could have valu able miner als just below the sur face. But fin d ing those miner als is one in a hundred busi ness. Or less, at least for gold, ac cord ing to the World Gold Co un cil: "Es timates vary wide ly but even the opt im ists re ckon that rath er less than 1% of the pro spects meet the thres hold to pro duce a vi able mine," they said in a re p ort at the end of 2013. So it's im p or tant to get the pro spect ing pro cess right. It usual ly starts these days with air borne stud ies and mapp ing. Be cause al thoughmost miner als are found be neath the sur face of the earth, a cer tain amount of geolog ical an alysis can be con duc ted by in credib ly sen sitive re cord ing of gravitation al and mag netic fields. Next comes seis mic an alysis - an alys ing rock struc tures by using sound waves - and sampl ing, pick ing up rocks and an alyz ing their chem ical com p osi tion and de ns ity. In the case of "green field" sites - places that have never been mined be fore - this must come from on-site work. "Brownfield" sites that have al ready been wor ked be fore may have both seis mic and sam p les held by the govern ment from pre v i ous pro jects.
Mine Op era tions
At this point, if all the re search looks good, the com p any will apply for an ex p lora tion per mit. The per mit grants the com p any the right to look for miner als, but not to take them, and is valid for a cer tain amount of time, say two or three years, often with a re new al clause. The com p any will also have to sub mit work pro grams, de tail ing work and the bud get to be al located to each phase of the work. Some co unt ries im p ose mini mum ex p lora tion ex p en di ture and/or in v est ment ob liga tions. Min ing codes, if they exist in a given co unt ry, will often pro v ide these terms, which will in clude a cer tain numb er of re p ort ing ob liga tions by the com p any. A contra ct will usual ly rea ffirm the right to ex p lora tion and ex tens ions, for ex am p le, the Li beria Putu Apprais al and Ex p lora tion Contra ct: 3.1 Grant of Ex plora tion Rights: On the terms and con d i tions herein pro vided the Govern ment hereby grants to the op erator, dur ing the per iod hereinaft er de fined, com mecn ing with the Ef fective Date plus any ex tens ion of such per iod to whic the Govern ment may agree (re fer red to herein as the "Ex plora tion Per iod") the ex clusive right to ex plore for Iron Ore De posits and appra ise the ex ist ing Iron Ore de posits in the Ex plora tion Area.
And the mini mum ex p en di tures will often be specified in the contra ct, too. This is also from the Li beria Putu Apprais al and Ex p lora tion Contra ct: 3.4 Mini mum Ex pen d i tures [...] (b) Dur ing the Ex plora tion Per iod, the Op erator shall ex pend not less than Uni ted States Dol lars one (US $1.00) per acre dur ing each calen dar as Ex plora tion Costs [...] If the right to ex p lora tion is gran ted, the com p any will then carry out on-site trench ing and drill ing. In some co unt ries, the govern ment will re q uire a com p any to set aside a cer tain per cen tage of the com p any’s ex p lora tion bud get to be spent on com mun ity de v elop ment
Re con n ais sance and Ex plora tion
pro jects negotiated by the com p any, local com munit ies and local, re gion al and pos sib ly nation al of fici als. Plus, the com p any will have to sub mit pro gress re p orts on work car ried out and money in v es ted. As the trench ing and drill ing re sults are an alysed, if the situa tion looks hope ful, the Com p any will con tinue with more and more drill ing. At this point, the Com p any will start an alyz ing bulk sam p les to es timate the size and qual ity of the miner als and begin pre p ara tion of a feasibil ity study. The com p any may be spend ing mill ions of dol lars by now, but this is still con sidered an early stage and the com p any has not yet made a com mer ci al de cis ion to pro ceed. The crunch point comes when the ex p lora tion per mit ex p ires. The com p any must eith er in v est or re lin q uish - give the site back to the govern ment. A com p any will not give up its ex lusive area lig ht ly. This is a strategic mo ment in the life of the contra ct. The com p any will need to de cide what areas it will re tain and which it will re lin q uish. Many govern ments re q uire the com p any to remit its feasibil ity study and all data used therein to the govern ment. Some times the com p any will re tain ow nership of the feasibil ity study and some times the Govern ment will re q uire the trans f er of ow nership of the feasibil ity study to the govern ment. When en ough geolog ical data has been col lec ted, an as sess ment will be made: can these miner als be extra cted at a pro fit? Is the poten ti al re turn en ough to just ify more re sour ces going in? If not, furth er work will be shel v ed. But if the as sess ment is positive, then what was the "miner al de p osit" now moves up to be come, of ficial ly, an "ore body". An ore body is a miner al de p osit that has suf ficient value and util ity to be mined at a pro fit, and has a par ticular sig nifican ce to com p any man age ment and their in v es tors. Now the com p any's pro ject de v elop ment de p art ment takes over. If the de p osit has been found by a "junior" com p any, it may de cide to try and sell to a major. Very few finds, as we have seen, have the poten ti al to be come pro fit able mines. Be cause it's not just en ough to find stuff.
Mine Op era tions
Stuff is, broad ly speak ing, every where in a geolog ical sense. Take iron ore. In 2012, about two bi ll ion ton nes of iron ore were extra cted. That seems like a lot. It is a lot, in fact. That amount of iron ore would fill out about half the volume of Mount Ever est. But it turns out that iron is the fourth most com mon ele ment in the Earth's crust, ac count ing for about 5% of a rock for ma tion which is rare ly less than 5 km deep (in the oc eans) and often rea ches as deep as 50km. That is, in fact, mill ions and mill ions of Ever ests. So what de ter mines which tiny frac tion of that iron gets extra cted? Cost and con v eni ence. Of all that iron, only the tinest frac tion is com mer cial ly extra ct able. Miner al ex p lora tion is a throw of the dice. You don't know until you throw the dice and put your money on the table, what will come up or what you will find, and wheth er you will lose or win. The un cer taint ies and costs as sociated with miner al ex p lora tion are a big part of the chal lenge faced by host govern ments in pro mot ing de v elop ment of their co unt ries' miner al re sour ce end ow ments. The di ag ram below shows the pro cess of evalua tion to im p lemen ta tion, which trans i tions us to the next chapt er on mine de v elop ment.
TO MINE OR NOT TO MINE: THAT IS THE Q UES T ION In an ideal world, which could be your own bac kyard, your metal de tec tor sug gests you are stand ing on top of a major gold find. You are ecstatic. All you need to do is dig the gold out of the ground, run it down to the local gold buyer (lots of them around today), take the money and run to the bank. The feds will never know and there will be no taxes. Your next purchase will be the yacht of your dreams or that long awaited vaca tion to the Seren geti Wildlife Pre ser v e. Time to dig the gold out of the ground. You've spent the whole morn ing di gg ing and sweat ing. You are now down six feet, still no gold, and the ground has be come too hard to dig with a shovel. Maybe you are di gg ing your own grave, but you will not give up. You go down to the local hardware store and rent one of those jackhamm ers. Now you get busy, shake, jump, shake. This is great. You're generat ing lots of rock. Uh oh, how are you going to get it out of the pit. Back to the hardware store to rent a winch and some buc kets, but who will op erate the winch? There's Joe; he's ag reed to help you out for a piece of the pro fits. Back to the pit. De ep er and de ep er you go; the waste pile is build ing up. Joe says there's no more room to put the stuff. Out you come and down to the equip ment re nt al shop to pick up a truck and a mini-front end load er. This is be ginn ing to get ex p en sive. Well, you take the time to haul away the waste and dump it at the dump. Oh no, the city wants you to pay for dump ing the gunk. Well, back to the pit to con tinue drill ing and tak ing out the waste. Now you are down to 15 feet and the sign al from the metal de tec tor is gett ing strong er. One more foot and the de tec tor is
Mine Op era tions
going wild. There it is - an old gold watch band. Well, it looks like gold. Now off to the gold buyer. It's real 18 carat gold! What? Only $500? After Joe takes his cut, and you re turn all the re nt al equip ment and pay every body off, you are now $500 in the hole. This was not what you ex p ec ted - the shovel alone could not do the job; you needed a drill to break up the hard er rock; you had to set up an electric winch to get the waste out, then trans p ort the waste to the dump - none of this was anti cipated and it all cost money. Fin al ly you had to pay off Joe and the gold buyer took his cut too. The re turn cer tain ly did not just ify the ef fort. Maybe you should have taken a break at 6 feet, and figured out all the extra tools and equip ment that you might need, and what it might cost you to con tinue di gg ing. You could have chec ked out your bank ac count and de cided how much money you were will ing or able to put at risk. You would never know until you got to the "gold" how much there was and wheth er it would be worth all the money and ef fort. Oh well, live and learn. Back to the real world. There are in fact many un knowns that need to be in v es tigated in order to come to a rea soned con clus ion about wheth er de v elop ing a mine makes sense. Min ing pro fitab ly and re spon sib ly today poses many chal lenges. Apart from ques tions of the qual ity and quant ity of the miner al, how to get it out, and how the mar ket is doing, there are cost, in frastruc ture, soci al, en v iron ment al and polit ical risks. What if the truck ing opt ion doesn‘t work out and you need to con sid er a more ex p en sive rail line, be cause you have to help build the rail line and it will delay the start-up date? And the new govern ment, it now wants to chan ge the terms of the ag ree ment and re v ise the taxa tion re gime? There are two chal lenges. One is gett ing to the point of being com fort able with tak ing the de cis ion to de v elop. Much can happ en to pre v ent one from rea ch ing that point. The second is the chal lenge of build ing and runn ing a suc cess ful min ing op era tion that re turns value to the com p any sharehold ers, the host govern ment, and the sur round ing com munit ies, and closes when it is scheduled to close. Let's start with the first one.
To Mine or Not to Mine: That is the Ques tion
When the pro ject de v elop ment de p art ment takes over, it must as semble a pro ject de velop ment team, upgrade the field camp, take a good look around and figure out what the in frastruc ture chal lenges might be, given the loc a tion of the de p osit, and what the soci al and en v iron ment al risks could be. This early due di lig ence is crit ical. Most pro ject de v elop ment teams will com miss ion risk as sess ments be fore the com p any gets too heavi ly in v es ted. One of this book’s aut hors did soci al risk and di lig ence as sess ments of pro jects in ad vanced ex p lora tion stages in Venezuela and Mon golia, and a "brownfields" pro ject ten dered by the Dominican Re p ub lic. In all these cases, it was the soci al risks that were crit ical, and needed to be un derstood. A feasibil ity study, wheth er pre limina ry or full, must con sid er a wide range of fac tors and con di tions. Take just one key tech n ical area, geology. Ques tions which need an sw ers in clude: what the de p osit looks like, the chem ical com p osi tion is of the ore zone, the charac teris tics of the waste materi al, how much of the materi al can be clas sified as re ser v es, what are its pos sible min ing opt ions, how much of the ore materi al can be re covered from the mine (a cer tain amount will be left be hind), are there any seis mic risks, what is the strength of the rock, what does all this mean for the de sign of pit slopes, un derground op en ings, waste dumps, leach pads, tail ings dams; where is the water table, how does groundwat er flow, where does it come from, where are the aquif ers loc ated? Much of this in v es tiga tion has to be done re mote ly, through drill hole sampl ing. There are no guaran tees that you have cor rect ly charac terized the geology, the ore, the waste, the hy drogeology, etc, until you ac tual ly de v elop the mine and get into the ore body. This will not happ en until after a go de cis ion has been taken, the mine con struc ted, and the ore body op ened up or ex p osed. That could still be ten years down the road. Why is this study pro cess so im p or tant? Some years ago, a study was un der tak en to try to un derstand why so many pro duc ing mines, which had been sub jec ted to full feasibil ity stud ies, were still fac ing seri ous op erat ing pro blems.
Mine Op era tions
Of 18 pro jects re v iewed, only four were found to be un q ualified suc ces ses. Five were still op erat ing but with net negative cash flows, and the re main ing nine had seri ous pro blems re flec ted in cost over runs, con struc tion de lays, and their de sig ned pro duc tion capacit ies. There were de sign is sues re lat ing to water, metal lurgy, equip ment, ground con trol and even the mines' re mote loc a tions. There was labor un rest, and lower prices and pro duc tiv ity than pre dic ted. This stuff can be tor tu ous. Here's one story. In 1996, a junior com p any sued the govern ment of Venezuela over its can cella tion of con cess ions in 1990, claim ing that this was done il legal ly and the miner al rights to the Las Cris tinas pro p er ty should be tur ned over to the com p any. At the time, an oth er com p any who hap p ened to be on site at the time, Plac er Dome, had com p leted its feasibil ity stud ies, had its per mits in place, had or ganized and fin alized the pro ject's fin anc ing and had begun the con struc tion of a camp. The law suit brought into ques tion Plac er Dome's secur ity of tenure. The banks pul led out and Plac er Dome was for ced to sus p end con struc tion. When Venezuela's Sup reme Court re fused to hear the case, a year later, Plac er Dome re sumed con struc tion and de cided to fin an ce the pro ject from its own equ ity funds. But then the price of gold fell below $300 per ounce and the economic viabil ity of Las Cris tinas was brought into ques tion. The com p any had to sus p end con struc tion again. It re-evaluated, hir ing an alysts to evaluate the mar ket, and re v iewed other de v elop ment opt ions (for ex am p le, start ing at a small er scale. After the stud ies were com pleted (about a year), the com p any de cided to pull out. A year later, in 2000, Plac er Dome was out of Venezuela. Thir te en years later, the mine has yet to be built (al though other fac tors and con di tions have also con tributed to this). The study pro cess has been tightened up over time, es p ecial ly with the dramatic es cala tion of costs. We are no long er talk ing about mill ion dol lar in v est ments. As we are throw ing terms of art around, let's put out an oth er one: "mega-projects". A megaproject is one which re q uires over a bi ll ion dol lars in v est ment. They used to be rare, but are now com mon ac ross glob al min ing. The list of risks has also chan ged over the past de cade. Ernst and Young, which pro duces an an nu al re v iew of min ing, now lists capit al re q uire ments and al loca tions, re sour ce national ism, the soci al li cen se to op erate, skill shor tages, and price and cur ren -
To Mine or Not to Mine: That is the Ques tion
cy volatil ity, and es calat ing costs. There are in creas ing de mands on a cash- and skillconstrained in dust ry to share more of the pie. Govern ments want a bi gg er take. Com munit ies de mand great er in v est ments, and the pub lic at large pay close at ten tion to en v iron ment al and soci al sus tainabil ity. But even if a full feasibil ity study looks good, an oth er ques tion is: is the govern ment also on board?
THE G OVERN M E NT PE R S PE C TIVE ON FE AS IB IL ITY AND DE VE L OP MENT The role the govern ment plays chan ges once a pro ject moves to de v elop ment. Now it be comes the re gulator, en forc ing min ing, health and safety, en v iron ment al and fisc al con trols. It over sees com p lian ce with the terms of the Min ing In v est ment Ag ree ment or Contra ct. A whole bunch of dif ferent agen cies are now in v ol v ed. The En v iron ment al Pro tec tion Agen cy would typical ly re v iew and approve the En v iron ment al and Soci al Im p act As sess ment (ESIA), the En v iron ment al Man age ment Plans (EMPs) and the re clama tion or closure plan. The Minist ry of Labor approves train ing, re cruit ment and em p loy ment plans. The Pub lic Health Agen cy approves de sign plans for clinics and health facilit ies. The Minist ry of Civil Works over sees road, township, water sup p ly and sanita ry sys tems. And so on. If the co unt ry has a min ing cadastre unit or agen cy, it will be in v ol v ed in re cord ing claims and han dl ing applica tions for ex p lora tion per mits, and pos sib ly in the con v ers ion of ex p lora tion to min ing li cen ses. The min ing per mits may be aut horized and is sued by the Minist ry of Mines, sig ned off on by the Minist er him or her self. Usual ly the min ing law con v eys to the hold er of the ex p lora tion li cen se, the first opt ion to apply for the miner al title, which in cludes the right to pro duce and sell the miner als. The li cen se hold er will also want to be able to trans f er its rights to an oth er com p any. If a pro spec tor or or the miner is pro hibited from trans ferr ing or sell ing its title , this may also serve as a dis in centive to ex p lora tion and pro duc tion. In most cases this is per mit ted, but may be sub ject to the approv al of the Minist er. The main con tin gen cy in the is -
Mine Op era tions
suan ce of the min ing title is the sub miss ion of an ac cept able feasibl ity study for re v iew and end or se ment by the Minist ry, though some juris dic tions will approve this be fore a final feas bil ity study is sub mit ted and approved. Then there is the trans ferabili ity of the title. If the IMC can not trans f er its title and ex ploita tion rights to oth ers, this can be a dis in centive. The government's need to re v iew the feasibil ity study is a major burd en on agen cies with li mited staff and re sour ces. These stud ies may be thousands of pages long and are sup p or ted by tech n ical stud ies based on sampl ing met hods with which only special ists may be familiar. It is part ly a matt er of in for ma tion over load. Some times, the govern ment is ef fective ly in a posi tion of hav ing to de p end on the pro fes sional ism and com p eten cy of the com p any. Feasibil ity stud ies pro v ide the opt imized bluep rint for the de v elop ment of the mine: it will de scribe where min ing op era tions are to be con duc ted; if there will be multi p le phases for mine con struc tion; what area will be mined first; if rail, road, and power in frastruc ture is needed, it will pro v ide selec ted routes; es timates of costs and timef rames con struc tion; labor and em p loy ment needs, ser v ices, en v iron ment al safeguards, com mun ity re settle ment, and so on. When it comes to the build, IMCs often em p loy a contra ctor to man age en gineer ing and con struc tion. It is typical ly a cost plus pro fit contra ct, and often turnkey. The contra ctor may be an in tern al unit or the com p any or a third party. The con struc tion per iod is when the soci al im p acts are most in ten se and severe, and the owner's team also has to en sure that all of the work com p l ies with the de sign specified in the Feasibil ity Study. A goven ment may want early phase in for ma tion to be shared. This was specified in the re cent ly negotiated (August 2011) Miner al De v elop ment Ag ree ment bet ween Li beria and a con sor tium of com p an ies op erat ing in the Wes tern Clust er area. 4.6 Pre-Feasibility Study "[...] the Pre-Feasibility Study for the Bea Moun tain De p osit will be com p leted and a copy pro v ided to the Govern ment no later than the third an niver sa ry of the Ef fective
To Mine or Not to Mine: That is the Ques tion
Date, it being un derstood that the Pre-Feasibility Re p ort will be pro v ided for in for mation al pur p oses only and not sub ject to approv al by the Govern ment"
B UM PS IN THE ROAD (1) Should we start di gg ing? Re memb er our bac kyard gold mine at the be ginn ing of this Chapt er, when we went through all the ef fort to dig up the gold and at the end of the day we lost money? Even if we found a bit more gold, en ough to cover our costs, the even tu al pro fit was not worth all the time and ef fort (not the men tion the fact that our bac kyard is now just an un sight ly hole in the ground). Eith er way, that mine is not com mer ci al, re gardless of wheth er the govern ment was going to tax it or not. This could cer tain ly be the case for a miner al dis cove ry, and all the study up front is the way com p an ies seek to minim ize the risk of this hap p en ing. But we didn't even look at the taxes. The situa tion is more dif ficult when we throw that into the mix. Let's as sume our mine tur ned out to be quite full of gold in the end, and we stand to make a good pro fit be fore taxes. But the govern ment has a law that re quires it to take 90% of our net pro fits. For al most any miner, bac kyard or ot herw ise, that mine is not com mer ci al eith er, at least not as long as the govern ment is going to take this deep cut of the pro fit. In a real world scenario, a miner may come to the govern ment to dis cuss chang ing the law that de mands an ot herw ise pro fit able mine to be un com merci al. In a contra ctu al sys tem, there may be room to negotiate this mine. And if the 90% tax is un reason able, this might pro v ide an op p otur tun ity to agree on some th ing lower, where both the govern ment and the com p any stand to gain from the mine going for ward. The feasibil ity study will cer tain ly be neces sa ry. More know ledge, for both part ies, should mean fewer un cer taint ies and therefore a quick er, more ef ficient negotia tion.
Mine Op era tions
Maybe so. Maybe the geologic stud ies and economic an alysis clear ly shows a world class de p osit that, under many price and cost scenarios, looks good and will be com mer ci al under the cur rent tax sys tem in the law or model contra ct. But maybe not. The negotia tion of the min ing contra ct can be come a long and ar du ous pro cess in which the govern ment still knows re lative ly lit tle about the as sets it has. In these scenarios, a govern ment might hear a com mon re frain from its com p an ies: the mine is economic, but only if there are just a few neces sa ry chan ges to the model contra ct. Govern ment negotiators will hear this over and over again. If there is the op p or tun ity to negotiate a lower tax or royal ty rate or any other pay ment to govern ment, any ration al com p any would take it. If there is an ar gu ment that the pro p osed ar range ments in the model ag ree ment are un economic, then a com p any would not be ir ration al to negotiate terms that made the mine economic under even the worst scenarios (though a forward-looking miner might be cauti ous about sign ing a deal that is "too good to be true", anti cipat ing govern ment dis satis fac tion and poten ti al con flict down the road). The com p any will want to make sure its equivalent of the bac kyard gold mine is still pro fit able after it has in cur red the costs of gett ing the gold out of the ground, to mar ket, and paid the govern ment its shares. But the govern ment will want to be sure of some th ings as well. Its job is not to bend over backwards, but to maxim ize the total be nefit to the co unt ry. Cor rec tion, the total NET be nefit. This is a key con cept. Min ing comes at a cost. The feasibil ity study is the key here. What can govern ments do? What can com p an ies do to try to avoid lengthy negotia tions, just at the point that a mine looks pos sible? A numb er of contra cts and laws re q uire a feasibil ity study by an in depen dent third party, as op p osed to the min ing com p any doing its own. The Model Min ing De v elop ment Ag ree ment, Sec tion 2.4.1 Feasibil ity Study sug gests this: The Com pany shall have a Feasibil ity Study pre pared by (i) an in depen dent
To Mine or Not to Mine: That is the Ques tion
third-party or (ii) by the Com pany and verified by an In depen dent Sole Ex pert, on the basis of sound en gineer ing and economic prin ci ples in ac cordan ce with Good In dust ry Prac tice. This may pro v ide a measure of com fort to the govern ment that the com p any is pre sent ing an ac curate pic ture upon which both part ies can make an in for med de cis ion on the key ques tion: should this mine go for ward?
(2) Dis ag ree ments and De lays Even if there is not a dis cuss ion about wheth er the mine may not be economical ly vi able under the taxa tion sys tem cur rent ly in place, the govern ment and com p any may not be al ig ned on other is sues. Maybe the govern ment pre f ers a cer tain rail or road route; or it is con cer ned about mov ing com munit ies; or there is a de sire to use the power plant that will sup p ly the mine to also sup p ly near by areas. There could be any numb er of con cerns from a variety of agen cies. This may or may not be part of form al negotia tions; it can arise under any sys tem. It is not un com mon to see time frames in which the govern ment must eith er re spond to what the com p any has sub mit ted or it is de emed approved. The Model Min ing De velop ment Ag ree ment pro v ides an ex am p le: 2.4.5 Com plian ce with Law; Re ques ted Chan ges by the State. The State shall cause its approp riate agen cies to re view the Docu ments as pro mpt ly as rea sonab ly pos sible after re ceipt and to pro vide com ments thereon to the Com pany of any failure to con form to Applic able Law or to the terms of this Ag ree ment. The Com pany shall cor rect any failures to con form to Applic able Law or to the terms of this Ag ree ment, or shall sub mit the matt er for re solu tion pur suant to Sec tion 32.2/ If the State does not pro vide com ments of any failure of the Docu ments to con form with Applic able Law or to the terms of this Ag ree ment with in one hundred eighty (180) Days after re ceipt of the Docu ments, the Docu ments shall be de emed to have satis fied the re quire ments of this Ag ree ment, pro vided that the forego ing shall not re lieve the Com pany of its ob liga tion to com p ly with Applic able Law.
Mine Op era tions
There may be per mits needed be fore con struc tion and op era tion, as part of gener al laws on busi ness, health, safety, labor or oth ers, at the local or nation al level. This may be han dled in the contra ct as is pro v ided in the Model Min ing De v elop ment Ag ree ment: 2.5 Re quire ment to Ob tain Per mits Where the Com pany is re quired under this Ag ree ment or Applic able Law to ob tain a per mit, li cen se or approv al, the Com pany shall ob tain the neces sa ry per mit, li cen se of approv al from the approp riate State agen cy (in clud ing Local Govern ment) prior to pro ceed ing with or un der tak ing the ac tiv ity aut horized by the per mit, li cen se, or approv al. Any numb er of ex tern al events could also slow down the pro cess. New laws may cause the com p any to make a new as sess ment of the viabil ity of the mine. Com mun ity pro tests could re sult in local op p osi tion. Dramatic chan ges in price could cause a reevaluation. Natur al dis ast ers could strike.
(3) "Con struc tion!" or, "Con struc tion?" A com p any may not al ways be in a hurry to con duct op era tions, par ticular ly if that phase is ex p en sive, like ex p lora tion and con struc tion. It might pre f er to use its funds on an oth er pro ject, or not at all. A com p any may need to raise funds, or just want to bide its time while a par ticular com mod ity price re cov ers or the polit ical winds chan ge. A min ing contra ct has a value as an ex clusive right or opt ion to con duct the vari ous min ing ac tivit ies dis cus sed so far. This ex clusive right is valu able in and of it self to a com p any, as poten ti al pro spects are li mited and keep ing a com p etitor off a piece of land is an ad v antage unto it self. The com p any will not give up that right eas i ly. Some times tak ing th ings a lit tle bit slow ly seems like a good strategy. For these kinds of rea sons, govern ments might in clude a firm ob liga tion for the com pany to start de v elop ment of the mine once all other ac tivit ies have fin is hed. After all this time, the govern ment will be keen to start col lect ing its share of the re v enues, to em p loy its citizens, and general ly to start rea p ing the be nefits it has de ter mined it stands to reap.
To Mine or Not to Mine: That is the Ques tion
Take the Model Mine De v elop ment Ag ree ment 2.6 Con struc tion: (b) With in 180 Days after to the last of occur of (i) the Com pany's re ceipt of all per mits re quired for con struc tion of the Pro ject and (ii) the Com pany's sub mitt al of the Docu ments, the Com pany shall com m ence and di ligent ly con tinue con struc tion of the Pro ject until its com ple tion in ac cordan ce with the Feasibil ity Study and any non-material chan ges re sult ing from en gineer ing and other stud ies con duc ted by the Com pany after com ple tion of the Feasibil ity Study. Even with lan guage like this, when prices of a com mod ity crash or polit ical winds chan ge, it will be hard for a govern ment to con v in ce a com p any to keep calm and carry on with con struc tion. At the end of the day, con v inc ing a fund amen tal ly economical ly motivated actor like a com p any to con duct un economic ac tiv ity is well nigh im p os sible. You might then say: This kind of lan guage is useless! Why both er?! There are still good rea sons to in clude this sort of lan guage. If the delay is not a gener al mar ket price crash that would keep al most any com p any from min ing the de p osit, but an issue uni q ue to the company--a shor tage of cash due to bad man age ment, perhaps--the govern ment may be able to ter minate the contra ct for a failure to un der take this ob liga tion. Or, a strong contra ctu al pro v is ion might be the dif fer ence bet ween a com p any de cid ing to delay op era tions in Co unt ry A in stead of op era tions in Co unt ry B. This pro v ides a govern ment with a measure of pro tec tion under those kinds of cir cumstan ces. Though a govern ment can most li ke ly count on a fight against any de cis ion to ter minate: that ex clusive right to that area is a valu able asset; and only more so after ex p lora tion. And, if you thought the paper work was fin al ly over, think again. Here too, a contra ct might re q uire the sub miss ion of a con struc tion plan to the govern ment as well: (a) [...] the Com pany shall sub mit to the State a de tailed schedule for the per for mance of all plan ned ac tivit ies dur ing the con struc tion per iod if such schedule is not in cluded in the Feasibil ity Study. The State shall have the right
Mine Op era tions
to com ment upon and re quest ex plana tion of such schedule and any chan ges that occur in the schedule. This lan guage, from the Model Miner al De v elop ment Ag ree ment 2.6 Con struc tion, il lustrates one of the cross-cutting themes of this chapt er: the com p any pro v ides a plan or re p ort or study to the Govern ment, and the Govern ment then must re v iew and approve or en sure it com p l ies with law. Ul timate ly, the min ing contra ct or code can be viewed as a se ries of pro p osed plans for every phase of op era tions from the com p any to the govern ment. Not so much the re sult of a negotia tion, as the framework for a per manent and con tinu ous negotia tion.
PRO D UC T ION After the mine, in clud ing any pro cess ing facilit ies, has been con struc ted, when tthe site has been cleared, ac cess roads put in place, sur face facilit ies erec ted (pro cess ing plant, water and or ganic waste treat ment plants, main tenan ce garages, warehouses, of fices, camp ac comoda tions, etc.), trans miss ion lines, water lines, slur ry (tail ings) pipelines and pump sta tions in stal led, waste and tail ings sites and dumps pre p ared, sur face drainage and water con trol sys tems put in, over burd en stripp ing com men ced and the first cut of ore ex p osed, or the shaft or de cline ex cavated and the de v elop ment drifts driv en to the ore body, extra c tion of the ore can com m ence. The amount of materi al first pul led out will be less than the tar geted/desig ned pro duc tion rate, and there will be a gradu al ramp up to full capac ity, as more ground is op ened up. Dur ing ramp up, the com p any may al ready have a full com p le ment of tech n ical, pro duc tion, main tenan ce and camp and mine ad ministrative staff on site, from mine geolog ists and en gine ers (plann ing, en v iron ment al, blast ing, ground con trol, ven tila tion (if un derground), safety, civil, miner al pro cess ing, mech an ical), to skil led trades peo p le (electricians, plumb ers and hy daulic tech nicians, en gine mech anics, metal work ers), to equip ment and plant op erators and other skil led labor, to super v isors, as sor ted un skil led labour, to sup p ort staff (med ical staff, com mun ity re la tions, human re sour ces, ac count ing, IT, mine site secur ity among oth ers), man ag ers, and oth ers, or may still be need to fin ish staff ing up. Many work ers and pro fes sion als may be housed on site for logist ical and op erat ing rea sons. The mine may op erate around the clock, al though in some cases, the mine may only run two shifts with the third re ser v ed for main tenan ce.
Mine Op era tions
At some point, if all goes ac cord ing to plan, the mine will reach and be able to main tain pro duc tion at its plan ned month ly (daily) rate. There are two is sues hereto do with quant ity (ore ton nage) and qual ity (ore grade). This materi al is then fed to the mill (miner al pro cess ing plant), which will eith er re cov er much of the metal di rect ly or pro duce a con centrate. Wheth er the mill meets its scheduled/plan ned pro duc tion of metal or con centrate de p ends on the ab il ity of the mine to pro v ide materi al that meets the mill's quant ity and qual ity criteria. The right peo p le are in place, all the equip ment is there. All sys tems are go. Pro duc tion is humm ing along. At long last, your mine is con struc ted and the pro duc tion phase has star ted. Now you can sit back, relax and have a 100 years of pro duc tion. As one might guess, it pro bab ly won't be that sim p le. Min ing is not an ac tiv ity to try at home. There are a large numb er of pos sible in ter rup tions to pro duc tion, and re lated is sues which may arise. The pro cess ing plant can fail to ac hieve its plan ned metal re cove ry rate or con centrate grade, and may need to be fine tuned. Plan ned mine pro duc tivit ies may have been over es timated and the min ing sys tem and approach re fined, or equip ment chan ged out or blast ing pat terns and load ings modified, and so on. Tail ings con tain ment dams can leak and con taminated wat ers can es cape. Even be fore the point of full pro duc tion is rea ched,the mine will reach the pro duc tion rate that meets the criteria set in the contra ct for com mer ci al pro duc tion, which may range from 60 to 85% of the mine's pro duc tion at full plan ned capac ity. De p end ing on the con figura tion of the mine, commer ci al pro duc tion will be tied eith er to mine or pro cess ing plant pro duc tion. Why would there be a mini mum pro duc tion criteria in the contra ct? This is to en sure that the min ing com p any con tinues to pro duce ore even if its own busi ness strategy may di ctate ot herw ise. If a com p any has a numb er of iron ore mines ac ross the globe, and one is not per form ing as it wis hes, it might put that mine on care and main tenan ce. It may do so even if the glob al price for iron ore is, over all, quite good. Be cause of the
Pro duc tion
re v enues it will lose due to de creased pro duc tion, the co un ty would not want to see its mine pro duc tion de crease in an ot herw ise be nefici al mar ket for iron ore. Hence the need for pro duc tion mini mums. Dur ing ramp-up and then dur ing steady state pro duc tion, it will be in the in terest of both the mine op erator and the govern ment of fici als char ged to monitor the pro ject to main tain a re gular com munica tion. In spec tors from the govern ment mines in spec torate or from the Minist ry of the En v iron ment should make re gular visits to the site. Re lationship main tenan ce and com munica tion bet ween the mine / com p any and the govern ment and bet ween the mine and sur round ing com munit ies will be es senti al throug hout the pro duc tion per iod. The mine de sign, pro cess ing or upgrad ing re q uire ments, and the mar ket ing approach are also de p en dent on the type of miner al that is being mined and how it is de p osited in or on the ground. Wheth er it is a fuel miner al like coal or uranium; an in dustri al miner al like salt, kaolin, potash, titanium di oxide, metal lurg ical coal; a base metal like co p p er, zinc, lead, tin; a ferr ous metal like iron ore, tungst en, man ganese; a pre ci ous miner al like gold, silv er, platinum, di amonds and gemstones: their de p osition al charac teris tics will de ter mine how they are mined, pro ces sed and mar keted. For ex am p le, al luvi al gold may be mined using plac er or hy draulic met hods, while gold in quartz veins may need to extra cted mech anical ly from the ground, crus hed and then pro ces sed using grav ity re cove ry, mer cu ry amal gama tion or cyanida tion met hods to strip out the gold. In the case of cer tain polymen tallic ores, for ex am p le a nickel-copper-cobalt ore, the ore will have to be mined and con centrated, the con centrate smel ted to re cov er all of the pay able miner als. While nic kel may be the main pro duct, the co p p er and co balt may be value add ing co- or by-products, de p end ing on the ex tent to which they con tribute to the re v enue stream. De p end ing on the mar ket value of the miner al, it may be sold as run of mine ore, as con centrate, or as a metal matte or re fined metal. Whatev er the mar ket able pro duct is, and de p end ing on the ex tent of the pro cess ing oc cur ing at the mine, the pro duct may need to be stockpiled or warehoused until such time as en ough materi al has been ac cumulated to meet the IMC's sales com mit ments, or til trans p ort con di tions per mit it to be sent out. Again de p end ing on the pro duct's
Mine Op era tions
charac teris tics and the pro xim ity of the mine to port or final mar ket, it will eith er be truc ked or railed out, ship p ed out, or flown out to get it to the buyer(s). Now it is also pos sible that the mine is op erated as a stand alone busi ness, in which case the mine is the prin cip al cost and pro fit cent er. If the mine is part of a horizon tal ly or vert ical ly in teg rated min ing and pro cess ing busi ness, the mine may be a cost cent er only. This has im p lica tions how fisc al terms and taxa tion are as ses sed (dis cus sed in the next sec tion of the book), but will also have im p lica tions for how the mine is op erated and as sociated in frastruc ture re q uire ments met. Dur ing the op erat ing life of the mine, the IMC may con tinue to ex p lore for near by or con tigu ous ex tens ions of the ore body, which could ex tend the life of the mine or re sult de p end ing on mar ket con di tions, to ex p and pro duc tion capac ity. In eith er case, there may also be im p lica tions for new approv als, amend ments to ex ist ing ag ree ments or li cen ses. In the best of op era tions, the mine op erator will begin to re claim dis tur bed areas dur ing the mine's op erat ing life and not wait until the mine rea ches the end of its life and is de com missioned. This is cal led pro gres sive re clama tion. This may be man aged by the op era tion or contra cted out to local or nation al busines ses.
Closure In a nutshell, the clos ing of a mine is the pro cess dur ing which the com p any dis mantles some of the in frastruc ture and equip ment which has been used to carry out the min ing op era tions, en gages in en v iron ment al re media tion tasks and leaves the area at least in the state in which it found it. This “nutshell” in cludes ex ten sive and com p licated pro ces ses that re q uire con sider able in v est ment and rigor ous con trol. The closure stage, like the oth ers, can be risky and volatile if care ful plann ing has not been done. In most cases, com p an ies negotiate the gener al con tours of their closure ob liga tions at the time of the negotia tion of the min ing contra ct. The de tails that must be in cluded in a closure plan will be specified in the Min ing Ag ree ment or in the min ing law in a li cen se re gime, or a bit of both. Then, as closure be comes a more pre ss ing matt er, the com p any will need to sub mit an up dated plan and that is more and more specific per iodical ly. Ar ticle 26 of the Model Min ing De v elop ment Ag ree ment pro v ides a good ex am p le of some parts of this pro cess: 26.1 Closure Plan and Closure Ob liga tions (a) The Com pany shall pre pare and de liv er a closure plan to the State pur suant to Sec tion 2.4(e) of this Ag ree ment (“Closure Plan”). The Closure Plan shall address the anti cipated en viron ment al, soci al and economic state of the Pro ject Area dur ing the next five-year per iod of Min ing Op era tions, and shall be pre pared in Con sul ta tion with com munit ies in the Pro ject Area. It shall be con sis tent with any Com mun ity De velop ment Ag ree ments, and pre pared con sis tent with guidan ce pro vided by the Plann ing for In teg rated Mine Closure Tool kit and re lated guidan ce pub lished by the In ter nation al Co un cil on Min ing and Met als. The Closure Plan shall be up dated through the same pro cess by which it was pre pared each time that there is a sub stan ti al chan ge in Pro ject op era tions. In the event that no such up dated Closure Plan has been sub -
Mine Op era tions
mit ted for five (5) years, the Com pany shall de liv er an up dated Closure Plan on the sixth an niver sa ry of the last such sub miss ion. (b) The Com pany shall, after Con sul ta tion with com munit ies in the areas af fected by Min ing Op era tions, de liv er to the State a pro posed final Closure Plan not later than twel ve months be fore the plan ned end of the Com mer ci al Pro duc tion. After re view and com ment by of the State (with or with out modifica tion), the Com pany shall de liv er the final Closure Plan to the State by the plan ned end of Com mer ci al Pro duc tion. The final Closure Plan may be amen ded by ag ree ment bet ween the Part ies, dur ing the per for mance of closure ac tivit ies, at the re quest of the Com pany or the State, sub ject to any approv al re quired by Applic able Law. The closure ob liga tions do not end with the sub miss ion of a closure plan. The com p any has to con tinue to ac tual ly im p le ment that plan. This is what that ob liga tion looks like: (c) After ces sa tion of Com mer ci al Pro duc tion, the Com pany shall con tinue to per form the re quired en viron ment al man age ment of the Pro ject Area as set forth in the En viron ment al Man age ment Plan and the final Closure Plan. And further more, the com p any has to up date the Govern ment on its pro gress of im plemen ta tion: (d) After ces sa tion of Com mer ci al Pro duc tion, the Com pany shall pro vide to the State every 180 Days (or such al ter native per iod as may be ag reed by the Part ies from time to time) a re port ex plain ing pro gress in the im plemen ta tion of the final Closure Plan. Last ly, the Govern ment will need to in spect the final closure and cert ify that the com pany has ful filled its closure ob liga tions: (e) Upon com ple tion of the final Closure Plan, the State shall in spect the Min ing Area and pro vide the Com pany with Notice as to wheth er the Com pany has com pleted closure in ac cordan ce with the final Closure Plan.
What if the govern ment is wor ried it might have a com p any that will not ful fill these ob liga tions? a com p any that will take its pro fits and run after pro duc tion has run out? What can the state do to pro tect it self? The sol u tion that most contra cts and laws use is to re q uire the com p any to pro v ide a fin an ical guaran tee. General ly, in non-technical terms, a fin an ci al guaran tee is money that is set aside to en sure that an ob liga tion is met. The money can be ac cessed by the other party that be nefits from the ob liga tion of the com p ly ing party, in this case closure of the mine. If the ob liga tion is ful filled, the fin an ical guaran tee is re tur ned to the party that pro v ided the guaran tee and ful filled the ob liga tion: 26.2 Guaran tees for Closure Ex pen ses The Com pany shall with in ninety (90) Days of the Ef fective Date, pro vide a mine closure guaran tee to the State. The pur pose of this mine closure guaran tee is to en sure the com ple tion of the Com pany’s Closure Plan. The mine closure guaran tee shall be in an amount cal culated to be neces sa ry to im ple ment the Closure Plan should the Com pany fail to im ple ment the Closure Plan dur ing the five-year per iod co vered by the then cur rent Closure Plan. The amount of the guaran tee shall be up dated any time the Closure Plan is up dated, or with the five-year up date of the Closure Plan under Sec tion 26.1, so that it con tinues to be suf ficient to en sure that all steps in the Closure Plan can be com pleted in a satis facto ry man n er should the Com pany fail to im ple ment the Closure Plan. [...]
(d) The State shall re turn to the Com pany the full sum of the Com pany’s mine closure guaran tee with in [X] Days fol low ing verifica tion by the State that the Com pany has ful filled all the ob liga tions of the final Closure Plan. [...] The Model Min ing De v elop ment Ag ree ment sug gests furth er monitor ing by the local com mun ity:
Mine Op era tions
26.3 Post-Closure Monitor ing The Com pany shall in Con sul ta tion with local com mun ity lead ers, de velop and im ple ment a post-closure monitor ing com mit tee, with the man date to super v ise the monitor ing of geop hys ical stabil ity, water qual ity, and re habilita tion of con taminated sites and re stora tion of land for post-closure use. The post-closure monitor ing shall take place for a per iod after the ces sa tion of Com mer ci al Pro duc tion, the length of which shall be ag reed in the Closure Plan. One issue which can arise is the ab il ity of the Govern ment to pro p er ly monitor and ver ify the Com p any’s com p lian ce with its ob liga tions. This will frequent ly re q uire tech n ical and monitor ing capac ity which the Govern ment and its re gulato ry agen cies lack. When negotiat ing the closure terms and cost, the Govern ment ‘s capac ity for over sight of the pro cess should be taken in to ac count, and if re q uired, the costs should in clude fund ing of tech n ical ex p ert ise for the Govern ment or the pro v is ion of third party verifica tion and over sight. One final issue may be the in frastruc ture as sociated with the mine being closed. If the in frastruc ture is pub lic use, there may be a pro v is ion that al lows the Govern ment to take ow nership of that in frastruc ture and the re spon silit ies as sociated with it.
FISC AL M ONE Y M ATT ERS FIS C AL RE G IM E S S PE CI AL CHAL LENGES HOW ( NOT) TO S PE ND IT
MONEY MATT E RS Let’s face it: most of us do not do mat hematics every day. In fact, the last time you pro bab ly thought about taxa tion was when you read our book Oil Contra cts: How to Read and Un derstand Them. And if you didn’t read that, first, you de finite ly should. And second, then who knows the last time you thought about taxes. Maybe you never do! Even if you rare ly think about taxes, you do pro bab ly care very much about schools, hous ing, roads, rail and power. The fisc al sys tem is what makes these happ en. At the end of the day, it is what govern ments and com p an ies are look ing for.
B ACK TO THE B AC K YA R D G O L D M I N E Re memb er that goldmine you thought you found in your bac kyard back in the last sec tion, Min ing Op era tions? Let's think back to that for a minute. That gold was so hard to get out of the ground, you went $500 in the hole just try ing to get this stuff out of the ground. Even with out taxes, it was not worth doing. It wasn't com mer cial ly vi able. But maybe you stop p ed search ing too soon. Maybe it wasn't a gold watch after all. Your second round with the metal de tec tor seems to in dicate there's real gold down there. New tech nology makes it easy to get out of the ground. Maybe now it only costs a $1000 an ounce to get out of the ground and to mar ket, whereas be fore it cost al most $1700 an ounce.
With cur rent prices still at $1200 and costs only at $1000, you get $200 an ounce in pro fit. When you sell your gold for $1200 an ounce, you'll make $200 pro fit. It is worth gett ing the gold out of the ground after all. Maybe not en ough for a yacht, a vaca tion to Italy, and to send your kids to col lege, but maybe still worth doing. The govern ment, howev er, will want to share in your $200 of pro fit. If it has a fisc al sys tem that takes near ly 90% or more of your $200, maybe spend ing that $1000 to get that ounce of gold out of the ground seems like a risky proposition--too risky in fact. Your once pro fit able mine now looks pre tty bleak. Your bac kyard gold was com mer cial ly vi able, but the in troduc tion of shar ing re v enues with the govern ment has re ndered your bac kyard mine un economic. It may seem quite ob v i ous though it bears re-stating: com p an ies will not un der take a pro ject if there is lit tle to no pos sibil ity of mak ing a pro fit from it. Be cause the govern ment will also be nefit from the ex p lora tion and de v elop ment of a mine, it may negotiate its “share” in the pro fit in order to make sure you will still ex plore and de v elop the re sour ces. This govern ment may need to do that, or maybe not. We can not know with just this in for ma tion in this high ly simplified and stylized ex am ple. And the aut hors want to make it ab solute ly clear that this is an ab solute ly un realis tic scenario, please do not buy a metal de tec tor to try to get rich in your bac kyard! This hy p ot het ical does cap ture the na ture of the com mer ci al as sess ment of a min ing op era tion. Is it feasib le to make a pro fit from this de p osit? Then, if you take off the government's share of that, is it still pro fit able? Let's go back to our ex am p le and as sume you de cide to create your own min ing com pany, Bac kyard Goldmine Co. Your com p any has the ex p ert ise and know ledge about how to get the gold out of the ground and sell it. But the govern ment owns the gold your com p any needs. The Bac kyard Goldmine Com p any is going to have to pay the govern ment for that gold. It is a partnership, if per haps one that feels a bit for ced at times. Most govern ments will pro bab ly want to levy a royal ty on the value of the gold be fore the de duc tion of costs. And it will want to re ceive cor p orate in come tax from pro fits in
Money Matt ers
ad di tion to this royal ty. It might want a bonus when your first ship ment of gold goes to mar ket. These dif ferent pieces, taken togeth er, are how the govern ment re ceives money from the goldmine. They are com mon ly cal led "the fisc al re gime". To un derstand a state’s min ing fisc al re gime, and to as sess its ef fective ness, one must first un derstand the multi p le ways in which a state can extra ct re v enues from a min ing pro ject. The prin cip al “re v enue tools” in a "fisc al re gime" are: royalt ies in come tax ex cess or windfall pro fit taxes re sour ce rent taxes sign ing bonuses and miles tone pay ments equ ity par ticipa tions in the min ing com p any taxes on gains from the trans f er of in terests in the min ing com p any with hold ing taxes on cer tain pay ments made by the in v es tor im p ort dut ies and VAT levied on im p orts and purchases by the in v es tor land or “sur face” re nt als Each of these com p onents of state re v enue is dis cus sed more fully in the next sec tion (“Fisc al Re gimes”), fol lowed by speci al chal lenges.
FISC A L RE G IMES When it comes to re v enue tools, not all are created equal. Or even equivalent. Or even ter rib ly similar. They are quite dif ferent in the way they are cal culated, the func tion they serve for poli cy pur p oses, and how dif ficult they are to col lect. Simp ly put, a 5% royal ty is not equal to nor equivalent to a 5% tax. And as we'll see, even one 5% royal ty may not be equal to an oth er 5% royal ty.
Why is this the case?
There are many rea sons, but one of the prima ry rea sons is that dif ferent fisc al tools are applied to dif ferent bases. Mat hematical ly, 50% of 100 (50) is bet t er than 100% of 5 (5). Or as the an cient pro v erbs have said, a half of a goat is bet t er than a whole chick en. This Chapt er will il lustrate just how dif ferent the vari ous re v enue tools are. The two most im p or tant miner al re v enue com p onents for most govern ments are royalt ies and in come tax, and this Chapt er con sid ers them first and in the greatest de tail. In al most any co unt ry in the world, Bac kyard Goldmine Co. is going to be sub ject to these re v enue tools.
R O YA L T IE S We'll start with royalt ies. They are among the most com mon and sim p le of the re v enue tools.
Royalt ies Measured by Pro duct Value Royalt ies are most com mon ly based on the value of the extra cted miner al pro ducts. In Latin, the re v enue tool goes by the name “ad valorem”. Let's re turn to our bac kyard gold mine. The royal ty rate in the co unt ry where Bac kyard Goldmine Co. is min ing the gold is 5%. The value of the gold is $1200 an ounce. If one ounce of gold is extra cted and sold, the govern ment will take 5% of $1200, so Bac kyard Goldmine Co. (nickname: BMC) will pay the govern ment $60 as the royal ty pay ment. Under an ad valorem sys tem, as the price of a miner al rises, the royal ty that goes to the govern ment will too. So under that same 5% royal ty applic able to Bac kyard Goldmine Co., if the price of gold goes back up to $2000 an ounce, the royal ty pay ment that BMC will make to the Govern ment will shoot up to $100 per ounce. Why? Be cause 5% of $2000 is $100. What does this lan guage look like in contra cts? Here is an ex am p le from Mon golia Oyu Tol goi, Ar ticle 3.13:
Fisc al Re gimes
"The In ves tor shall pay a royal ty under Ar ticle 47.3.2 of the Miner als Law at the date of this Ag ree ment equal to 5% (five per cent) of the sales value of all Pro ducts mined from the Contra ct Area that are sold, ship ped for sale, or used by the In ves tor. [. . .]" Hopeful ly, so far, so good. The royal ty cal cula tion is pre tty straight for ward as re v enue tools go. Now for a bit more com p lex ity: how is value to be es tablis hed? This ques tion has two separate as p ects: (1) at what point in the mine-to-market pro cess is value to be measured, and (2) does the measure ment at the selec ted point rea l ly es tablish the “value” of the miner al in v ol v ed? One way to minim ize the valua tion pro blem and to simpl ify ad ministra tion is to use an in ter nation al re fer ence price for the value of a miner al, such as the Lon don Met als Ex chan ge or other pub lished mar ket price. The price of gold is a good ex am p le of ex act ly this kind of in ter nation al re fer ence price. Contra cts re gular ly refer to these in ter nation al re fer ence prices in order to have a value that is in depen dent ly es tablis hed by the mar ket. Take the gold contra ct for the Qara Zag han de p osit in Afghanis tan: "Ar ticle 8. After the start of com mer ci al pro duc tion and based upon a solar calen dar [Com pany] ag rees to pay, month ly, to the [Minist ry of Mines], royalt ies at the rate of twen ty six per cent (26%) of the gross re venue from sale of gold at a price set on the date of sale by the Lon don Met als Ex chan ge for each sale of gold. Pay ment of Royal ty to the [Minist ry] is due no later than on the seventh (7) work ing days after the end of the month, and is based on the sale of gold from that month." Even with an in ter nation al re fer ence price, there may still be a numb er of ques tions about the approp riate value of a miner al. The base for the royal ty is usual ly the value at a fixed point such as the mine mouth or the ex p ort point. There are a numb er of dif ferent terms that frequent ly arise in mine-to-market de ter mina tions, and for some one con cer ned about how and wheth er pro duct value is
measured, it is neces sa ry to be familiar with those terms. Some of the more com mon terms you might see are: Mine mouth valua tion: value is de ter mined at the en tran ce to the mine, with out re fer ence to any extra value created by fu ture pro cess ing or trans p or ta tion per for med by the mine owner. Net-Back value: where a miner al is sold in pro ces sed form and is not pro ces sed by the mine op erator, the royal ty base is the price at which the pro ces sed miner al is sold less the cost of pro cess ing and the cost of trans p ort ing the miner al from the mine to the pro cess ing facil ity. Net Smelt er Re turn ("NSR"): the royal ty base is the amount paid by the smelt er or re fin er to the mine for miner al con tain ing materi al (which is based on the value of the miner al con tained in the materi al) less the trans p ort costs to the smelt er and the smelt er pro cess ing char ge. Free on Board (“FOB”): where a price is FOB, it in cludes the cost gett ing the pro duct to the port and on board the ves sel, but does not in clude shipp ing costs. If there is not an in ter nation al re fer ence price for the miner al, there will still need to be an as sess ment of the mine-to-market point to fix the value of the miner al. This adds more com p lex ity to this de ter mina tion. And now you can see why a 5% royal ty is not al ways the same thing as a 5% royal ty. The big ques tion, which it pays to ask for most of these fisc al tools, is: "5% of what?" If you are a govern ment of fici al try ing to col lect the right amount of royal ty, this is very im p or tant. You may find your self in a dis p ute over miner al valua tion quite re gular ly. Get ex p erts, hire lawy ers, do whatev er you need to do to en sure you're gett ing the royal ty that is due. The Chapt er "So You Think You Need Help" addres ses these kinds of is sues. If you work for a min ing com p any and are rea d ing this book, we're very glad to have you, we hope it's been in terest ing so far. You pro bab ly have a team of peo p le that are well-versed in all of these th ings, so those chapt ers may be less re levant to you, but hopeful ly they're an in terest ing read non et heless.
Fisc al Re gimes
The second ques tion is a man ifes ta tion of the “trans f er pric ing” pro blem, dis cus sed more fully in Chapt er 3 of this Sec tion. In brief, while it is general ly un derstood that the value used as a base for the applica tion of an ad valorem royal ty should be a value based on so-called “arm’s-length” trans ac tions bet ween will ing and un related buy ers and sell ers, such trans ac tions may be hard to find. In deed, if the min ing pro ject is one com p onent of an in teg rated miner als pro ject that takes most or all the out p ut to an oth er loc a tion for furth er pro cess ing or fab rica tion, or if the min ing com p any primari ly sells to af filiated com p an ies, there may be no arm’s-length trans ac tions. This is an oth er rea son why those Lon don Met als Ex chan ge and pub lished prices are so handy--who needs an arm's length trans ac tion when you can read the price in the newspap er?
Royalt ies Measured by Pro duct Volume Under a unit or volume-based royal ty, the com p any pays a fixed amount for each unit of pro duc tion. In these sys tems, wheth er gravel is sell ing for $5 or $50 dol lars per unit, only a set amount is paid to the state for it, maybe $1 per tonne. Unit royalt ies are rare and general ly are li mited to very low value com modit ies such as stone and gravel. With out in tend ing any of fen se against the gravel and stone in dust ry, this kind of royal ty is...well, not very im p or tant for most in dustri al min ing contra cts around the world, so don't worry too much about it.
Royalt ies Measured by Mine Pro fitabil ity Some juris dic tions, in clud ing Canada and Botswana, util ize royalt ies based on pro ject pro fit levels. These royalt ies can be quite attrac tive to a com p any. Bac kyard Goldmine Co. is rea l ly hop ing for this one. Why? If there is no pro fit, no royal ty will be due. The royal ty level will in crease as pro fit in creases. This makes Canada and Botswana quite attrac tive to in v es tors, as they will not have to pay any royal ty in the early years when there is no pro fit. Moreov er, profit-based royalt ies do not simpl ify the valua tion ques tion. . . they mere ly trans f er the ques tion from “what is the value?” to “what is the pro fit?”. This can be hard er to figure.
A profit-based royal ty can also be cal led a net pro fit royal ty, net in terest royal ty, or net pro ceeds royal ty. The royal ty rates set on a pro fit basis will be general ly higher-sometimes well above 5%-- than those set on the sale value basis (bet ween 1% and 4%). This will make more sense once you read the Chapt er on in come tax, but just trust us for now: the al low able costs to be de duc ted for a royal ty measured by mine pro fitabil ity will be much great er than in the case of ad valorem royalt ies (the first ones dis cus sed) Stay tuned for more on other profit-based re v enue tools in fu ture sec tions.
Slid ing Scale Royalt ies So far, we've been talk ing about fixed rate royalt ies, but royal ty rates can vary as well. Let's say there is a new slid ing scale royal ty that will now apply to Bac kyard Goldmine Co. When gold is at or below $1000 per ounce, the royal ty rate is 2.5%. When the gold price is bet ween $1001 to 1500 per ounce, the royal ty rate is at 5%. When the gold price is bet ween $1501 to $2000 ounce, the rate is 7.5%. If the gold price is $2001 per ounce or high er, the rate is 10%. As sume that Bac kyard Goldmine Co. creates one ounce of gold each month and it sells that gold on the first day of each month. Furth er as sume that each month, the price is goes up. A high er price will be nefit Bac kyard Goldmine Co., of co ur se, but it will also be good for the govern ment. Let's com p are a flat 5% royal ty ver sus a slid ing scale the new slid ing scale royal ty. Janua ry 1 price is $900 per ounce: the slid ing scale is at 2.5% and yields a $25 to the govern ment, while a flat 5% yields $45. Feb rua ry 1 price is $1300 per ounce: the slid ing scale is at 5% and yields $65 to the govern ment and the flat 5% royal ty pay ment to the govern ment is $65 March 1 price is $1700 per ounce: the slid ing scale is at 7.5% and yields a pay ment of royal ty of $127.50, while the flat royal ty yields $85. April 1 price is $2100 per ounce: the slid ing scale is at 10% and yields a pay ment of $210 while the flat 5% royal ty pay ment to the govern ment is $105.
Fisc al Re gimes
While the slid ing scale yiel ded less to the govern ment at the lower price, the govern ment does much bet t er at the high er price. As sum ing the cost of gett ing that gold out of the ground is not going up too, a high er price leaves Bac kyard Goldmine Co. and the the govern ment bet t er off. This is what a slid ing scale royal ty looks like in a the Li beria - China Union min ing contra ct: Sec tion 15.1(b): The royal ty rate for ship ments or sales of Iron Ore in any month dur ing the Term shall be as fol lows: (i) when the Index Price is US$100 per met ric ton or less the royal ty will be 3.25%, (ii) when the Index Price is great er than US$100 per met ric ton and less than US$125 per met ric ton, the royal ty will be 3.5%, (iii) when the Index Price is great er than US$125 per met ric ton and less than US$150 per met ric ton, the royal ty will be 4%, and (iv) when the Index Price is US$150 per met ric ton or more the royal ty will be 4.5%. The "Index Price" shall be the CVRD spot price FOB Brazil for ship ments to China for the same pro duct of equivalent grade and qual ity pro duced at [the mine]. In this pro v is ion, "CVRD spot price FOB Brazil" re f ers to a pub lished price for iron ore that is com p ar able to the price of the pro duct pro duced at the mine. When that price is high, it is pre sumed that the pro fitabil ity of the pro ject is high, and thus a high er royal ty will be rea son able. In these ex am p les, the royal ty chan ged with the price, but other tri gg ers can be used. In South Af rica, the royal ty rate goes up from a minim al amount as pro fits go up, from 0.5% to 7% for un refined miner als. The theo ry be hind a royal ty is that it is a pay ment to the state for the miner al re sour ces owned by the state on be half of the peo p le. A royal ty is not, strict ly speak ing, a “tax”. It is an ex chan ge for the right to mine. Therefore, royal ty pro v is ions are often found in a state’s min ing law rath er than in its tax law. Re gardless of the philosoph ical un der pinn ing, howev er, royalt ies are a cost to the in v es tor, like taxes, and are viewed by in ves tors as the equivalent of a tax for fin anc ing plann ing pur p oses. Which br ings us to...
COR PORATE IN COM E TAX A cor p orate in come tax is a stan dard ele ment of every min ing fisc al re gime. In deed, a cor p orate in come tax is a part of any busi ness en tity's life. Bac kyard Goldmine Co. will de finite ly be sub ject to cor p orate in come tax. In deed, be cause it is a min ing com p any, it will li ke ly be sub ject to speci al in come tax rules for min ing pro jects, some of which may be use ful for it to re coup the large costs as sociated with the min ing in dust ry, while oth ers may tax the high pro fits that can occur. Cor p orate in come taxes are measured by the total in come of the busi ness less op erat ing costs and an al lowan ce that per mits the cost of the com p any’s in v est ment in the mine to be re covered over a numb er of years. Most other amounts pay able by the min ing com p any to the govern ment, such as royalt ies, im p ort dut ies, bonuses, and the like, will be de duc ted in de ter min ing the com p any’s tax able in come. (Some pay ments might be cal culated after the tax, but let's leave that aside for now.) Let us il lustrate. As sume that Bac kyard Goldmine Co. man aged to generate $12,000 in total re v enues in its first year of busi ness from sell ing a few pieces of gold here and there while it set up its of fice, hired staff, and the like. As sume that it had op erat ing costs of $500 for the year (for those that might be wor ried about wheth er any capit al ex p en di ture has been in v es ted in the gold mine, as sume for the an sw er is "no, not yet" de spite the fact that this would be well near im p os sible in real life). For simplic ity, as sume the the com p any sold 10 oun ces of gold, and the price is $1200 an ounce, yield ing $12,000 in com p any re v enues. Bac kyard Mine Co. pro p er ly paid its royal ty on the value of the gold it sold, which is still a rate of 5%, and 5% of $12,000 is $600. It still costs $1000 an ounce. The cor p orate in come tax rate is 25%. What is the cor p orate in come tax due on this ex am p le? Start with $12,000, the total re v enues Bac kyard Mine Co. generated. If there were no de duc tions for costs or an y th ing else al lowed at all, the govern ment would get 25% of $12,000. But that's not the way cor p orate in come tax typical ly works. It is try ing to tax pro fit, so it al lows for the de duc tion of costs (contra st this to royal ty above, which did not).
Fisc al Re gimes
We need to start de duct ing costs (that are al lowed to be de duc ted by the tax code) to get to the base to which the in come tax rate will apply. Put simp ly, we need to find the "tax able in come" of Bac kyard Goldmine Co. and then apply the 25% rate to it. The royal ty pay ment to govern ment will be sub trac ted first, so $12,000-$600 = $11,400. Now sub tract the cost of extra ct ing the gold, $10,000, from the $11,400, leav ing $1400. Now we need to de duct over head costs of $500 from $1400. This gets us to $900 of tax able in come. It is on this amount, our tax able in come of $900, that we apply the 25% cor p orate in come tax rate. Bac kyard Goldmine's cor p orate in come tax pay ment for this year would be $225. Be fore we move on to more com p licated de duc tions, it bears not ing that cor p orate in come taxes around the world have fall en in re cent years, and now are general ly in the range of 25 to 35%. Check your local and nation al tax code for de tails on your applic able cor p orate in come tax rate. As im p or tant as the in come tax rate is, the rules for measur ing in come are equal ly vital in de ter min ing the im p act of the in come tax, as we saw above with our first ex am p le. These measure ment rules can be quite com p lex and have a sig nificant im p act on the tim ing of in come tax pay ments when tax codes start to take ac count of the huge los ses that min ing com p an ies accrue in the early years of a min ing pro ject. The cal cula tion of tax able in come is an area that could be a whole book on its own. For ex am p le, de precia tion of as sets and the de duc tion of in terest from debt both re duce tax able in come. These are dis cus sed more below and in the next Chapt er. We look at a few of the key rules below.
De precia tion of Capit al In vest ments It’s easy to un derstand the basics of a tax cal cula tion. You take money com ing in, sub tract money going out, and voila … that’s your in come tax base. Th ings get a lit tle tri ckier—but not too much—with the large in v est ments general ly made at the start of a min ing pro ject. In that case, rath er than sub tract ing the costs paid in one lump, tax rules pro v ide de p recia tion rules that make a com p any sub tract those ex p en ses a lit tle at a time for a numb er of years. From a com p any’s per spec tive, the fast er the bet t er, as it’s al ways bet t er for tax p ay ers to pay their taxes as far in the fu ture as pos sible. That’s why many min ing com p an ies will push for so-called “ac celerated de p recia tion”.
Loss Carry For ward A typ ical min ing com p any that is un der tak ing a min ing pro ject from the be ginn ing will have much high er ex p en di ture than in come in its in iti al years, as it needs to in v est in miner al dis cove ry and mine con struc tion be fore it can begin re ceiv ing any re v enue. The hy p ot het ical com p any, Bac kyard Min ing Co., would be no dif ferent. It has never mined in any other juris dic tion be fore, so when it starts it has no other pro jects with in come that could af fect how it is taxed. How would Loss Carry For ward help Backward Goldmine Co.? In come tax laws re cogn ize that sever al years of ex p en di ture with no pro fit is hard on a min ing com p any, or any com p any. Thus, the law per mits tax p ay ers to de duct in fol low ing tax years items that could have be de duc ted in de ter min ing tax able in come in the cur rent year but were not “used” be cause other per mit ted de duc tions had al ready been applied to re duce tax able in come to zero in the cur rent year. For ex am p le, let's say the Bac kyard Goldmine Co. had $5000 in op erat ing costs for the year in stead of $500. We start still with $12,000, de duct a royal ty pay ment to the govern ment of $600 and the cost of extra ct ing the gold, $10,000, leav ing us with the same $1400 be fore the de duc tion of op erat ing costs. If we now de duct $5000 from $1400, we are in the red, -$3600. At this point, the govern ment does not want 25% of $3600! It doesn't want to take on any of Bac kyard Goldmine's debt, that is for sure. It pro bab ly has en ough of its own. In stead, the cor p orate in come tax pay ment on that negative amount will be con sidered zero, and 25% of zero is zero.
Fisc al Re gimes
But what hap p ens to that -$3600? The de duc tions ex ceed ing in come for year one can be car ried over to year two, and of fset against year two in come to re duce taxes pay able in year two. Un used de duc tions that can be car ried for ward for use in fol low ing years are cus tomari ly cal led “loss carry for wards". Bac kyard Goldmine Co. will be able to carry that loss for ward into the next year and de duct it from its re v enues next year, in ad di tion to the other de duc tions (royal ty, cost of extra ct ing the gold, etc.). Most tax codes will limit the length of time com p an ies can con tinue car ry ing for ward such un used de duc tions, and if they can not be of fset against in come with in the re levant time per iod, they are forev er lost. Some com mon per iods are 5 years, 7 years, 10 years, and even an un limited carry for ward. In co unt ries where there is a limit, the dis ap p earan ce of un-utilized loss carry for wards can be per ceived as a positive re sult for the state be cause it will ac celerate (and in crease) the in come taxes paid by the com pany. Min ing com p an ies will often press for ex tens ions for long er per iods of the basic loss carry for ward pro v is ions in the tax law in order to en sure that all al low able los ses can be used to of fset in come and thereby re duce total cor p orate tax li abilit ies. Mine ex p lora tion may last 10 years, then an oth er 4 years for con struc tion. If loss carry for wards run out dur ing this time per iod in which the min ing com p any is only in curr ing steep los ses, there is hard ly any point to the loss carry for ward. At the point the com p any is generat ing re v enues, in year 14, there would be no loss carry for ward avail able. That would, to say the least, not be the out come Bac kyard Goldmine Co. would hope for. And it is li ke ly that Bac kyard Goldmine Co. would not in v est in a co unt ry with such re gime, un less there was some other very com p ell ing rea son. Some tax codes per mit loss carry for wards to sur v ive forev er. Yes, you will pass from this earth one day, but your loss carry for wards will re main. These tax codes limit the amount that can be used in any year as a way to limit the ef fect of the un limited carry for ward.
We will leave this Chapt er with a point to pond er to generate de bate: min ing is hard ly the only capit al in ten sive in dust ry. From this view, de spite the ar gu ments that Bac kyard Goldmine Co. will cer tain ly try to get as much loss carry for ward be nefit as pos sible, is speci al tax treat ment de ser v ed?
Ring Fenc ing Ring fenc ing. Out of all the tax phrases we have dis cus sed so far, this might be the one you would puzzle over the most with out a bit of ex p lana tion. Rings? F ences? Am I still in the tax sec tion? Yes, you are. Let us ex p lain. For in come tax pur p oses, min ing pro jects are often "ring fen ced." This means that the items of in come and de duc tion or loss from one pro ject can not be com bined with the items of in come and de duc tion or loss from an oth er pro ject for in come tax pur p oses. The con sequ ence to a min ing com p any of a “ring fenc ing” re q uire ment is that the min ing com p any can not com bine the de duc tion and loss items that arise in its de v elop ment of a second mine to of fset the in come aris ing from an older mine where all loss carry for wards have been used and in come tax is now being paid. So if Bac kyard Goldmine Co. finds an oth er gold de p osit sever al hundred miles down the road, ring fenc ing rules will de ter mine wheth er ex p en ses from the second mine can be used to set off taxes from the first mine.
From the government’s view p oint, ring fenc ing ac celerates the col lec tion of in come tax re v enue by the host govern ment, and it also keeps an ear li er in v es tor from hav ing an
Fisc al Re gimes
ad v antage in bi dd ing for new pro jects. From the min ing com p any’s view p oint, the ab s ence of ring fenc ing makes it eas i er to de v elop a second mine in the juris dic tion in which it has the first mine, be cause it can use the ex p lora tion and de v elop ment ex pen ses of the second mine to of fset taxes pay able on the in come from the first mine. This re sults in a large re duc tion in the cost of de v elop ing the second mine: if the in v es tor has $100,000,000 of tax able in come at the first mine in year 8, and $50,000,000 of ex p lora tion ex p en ses at the second mine, and could use those ex p en se to of fset the in come from the first mine, tax able in come would drop by $50,000,000. At a 30% tax rate, the in v es tor would have saved $15,000,000 that ot herw ise would have gone to the govern ment that year. If the second mine is suc cess ful, the gain would not be a per manent gain to the in v es tor, be cause that $50,000,000 would not be avail able to of fset in come from the second mine when it starts to accrue, but it could ef fective ly delay the flow of that $15,000,000 tax to the govern ment by many years. Most govern ments will seek ring fenc ing be cause of its re lative ly favor able ef fect on short term tax re v enues, and be cause it is be lieved to level the play ing field on new ex plora tion ven tures bet ween min ing com p an ies al ready op erat ing in the co unt ry and poten ti al new en trants.
Separate Tax Rates for the Min ing In dust ry One last point. While cor p orate in come taxes general ly apply to all sec tors, it is not un com mon for speci al rules to apply to the min ing sec tor. These may be speci al rules for de p recia tion, or speci al li mita tions on the ab il ity to de duct cer tain “home of fice” costs from in come, or they may in clude speci al rates. With re gard to the ques tion of speci al rates, in v es tors may argue the min ing busi ness is so capit al in ten sive that min ing in vest ment should be en couraged through a lower tax rate, whereas the state may argue that be cause min ing utilizes a de p let ing re sour ce that can not be re newed, it should be taxed at a high er rate than other busi ness. Well, that wraps up our dis cuss ion of cor p orate in come tax. With out a doubt, it is a sub ject that can and does have en tire books de v oted to it. We hope this sec tion pro -
vided an ac cessib le prim er to the topic and to royalt ies, the two most im p or tant re venue tools used by govern ments to re ceive a moneta ry re turn on their miner als.
B ONUS ES Bonuses are a com mon ele ment of a min ing fisc al re gime in which miner al rights are primari ly es tablis hed through specific contra cts rath er than through the grant of li cen ses under a re gime that does not re q uire negotia tion for the is suan ce of the li cen se. Bonus ob liga tions are typical ly stated in terms of ob liga tions to pay fixed amounts on the oc curr ence of specific events, such as the ef fective ness of a contra ct, the com men ce ment of com mer ci al pro duc tion, or the rea ch ing of stated pro duc tion levels.
Sig na ture Bonus As the name im p l ies, a “sig na ture bonus” is paid in con nec tion with the sig na ture or ef fective ness of a min ing contra ct or a min ing li cen se. One of the origin al pur p oses of a sig na ture bonus is to help the govern ment re coup its negotia tion costs. While the amount may be the sub ject of negotia tion, the sig na ture bonus nor mal ly in vol v es the sim p le pay ment of a lump-sum amount. A gener al rule is the high er the ex pec ted value of the de p osit, the high er the sig na ture bonus. From the state’s view p oint, a sig na ture bonus should be paid con cur rent ly with contra ct sig na ture and not at some later date, after the contra ct has be come ef fective. Why? Be cause the state may have no ef fective re medy for failure to pay at that time other than ter mina tion of the contra ct. This may be very dif ficult for the state to do if the contra ct ot herw ise is viewed as a good deal for the state. No one wants to have to start over again. If the pay ment must be made be fore the contra ct be comes ef fective, and the com p any fails to make it, then the state does not have to go through the pro cess of ter minat ing the contra ct, it can find a new com p any in stead. For a com p any, the lack of a bi nd ing contra ct in place makes pro v id ing a large upfront pay ment a risky pro p osi tion.
Fisc al Re gimes
On the other hand, sig na ture bonuses or other pay ments made to the state be fore a de v elop ment de cis ion has been made are dis liked by in v es tors. Prior to the time the in v es tor de cides to de v elop a dis covered de p osit, the in v es tor will view all its ex p en di tures as speculative and high ly risky. Bac kyard Goldmine Co. will not want to pay any bonus, and sig na ture bonuses are par ticular ly harsh on pro ject economics since pro fitabil ity may never occur if miner als are not found; and even if it does, it is years away. It is therefore often eas i er for a state to re q uest and ob tain size able bonuses as sociated with specific stages of de v elop ment and pro duc tion.
Pro duc tion Bonuses By contra st, pro duc tion bonuses are treated by the in v es tor as part of over all pro duc tion costs, and are part of the total de cis ion made to de v elop the mine. An ex am p le of a staged pro duc tion bonus from the DRC - Tenke Fun gurume contra ct, Ar ticle 4(d): In ad d i tion, TFM [Min ing Com pany] will pay to Gecamines [Nation al Min ing Com pany] the fol low ing ad dition al amounts: - US$ 5 mm after the con d i tions set forth in Ar ticle 15 herein have been met in full force and ef fect - US$ 5 mm at 0.5 mm ton nes cum ulative co pp er pro duc tion from the Pro ject - US$ 5 mm at 1.0 mm ton nes cum ulative co pp er pro duc tion from the Pro ject - US$ 5 mm at 1.5 mm ton nes cum ulative co pp er pro duc tion from the Pro ject - US$ 5 mm at 2.0 mm ton nes cum ulative co pp er pro duc tion from the Pro ject - US$ 5 mm at 2.5 mm ton nes cum ulative co pp er pro duc tion from the Pro ject. Bonuses are the most sim p le of all re v enue tools. Lest you get too com fort able, let's go to the most con trover si al of re v enue tools.
S TATE E QU ITY PAR TICIPA TION Im agine that Bac kyard Goldmine Co. has been doing fair ly well for the past few years and and it is about to go into com mer ci al pro duc tion of gold, at long last. Just at this point, your lawy er gets out the Min ing Contra ct and tells you to sit down, she has some im p or tant news for you: the state is about to come in as a sharehold er in Bac kyard Goldmine Co.. You have no choice in the matt er what soev er. The state has the right to join in a legal in terest hold er in the min ing com p any. The issue of state equ ity par ticipa tion in min ing contra cts may be the most con trover si al as p ect of any com p onent of the fisc al re gime. State par ticipa tion in pro ject equ ity can take many forms: the state could par ticipate as a norm al in v es tor, and pay a share of pro ject ex p en ses pro p or tionate to its ac q uired equ ity in terest. the state could re ceive what is cal led a “car ried in terest” where the in v es tor pays all or a por tion of the state’s nomin al share of pro ject costs, and re cov ers that amount, plus a re turn on its ad dition al in v est ment, from pro ject in come out of di vidends that would ot herw ise be paid to the in v es tor. the state could make some non-cash con tribu tion to the pro ject in re turn for its equ ity, such as the pro v is ion of in frastruc ture facilit ies. the state could trade re duc tions in fu ture tax li abilit ies for a pre sent equ ity in terest in the pro ject. the state could re ceive an ab solute free in terest, pur suant to which it would pay noth ing for its in terest and would be en tit led to di v idends as soon as any other in ves tor in the min ing com p any re ceived any dis tribu tion. While the chal lenges of state par ticipa tion are many, a few are im p or tant to highlight. The pre ssure for state equ ity par ticipa tion usual ly comes from both politicians and or dina ry citizens. There is com mon ly a gener al feel ing that be cause the miner al is the pro p er ty of the state, the state should par ticipate in the ex p loita tion of and share in
Fisc al Re gimes
the “up-side” of its miner al de p osits – and the ob v i ous way to do this is to par ticipate in pro ject ow nership. It is ar gued, not with out just ifica tion, that state par ticipa tion in ow nership can as s ist in the trans f er of tech nology and in the de v elop ment of man age ment capac ity, and place the state in a bet t er posi tion to take over full ow nership and op erat ing re spon sibil ity on ex p ira tion of the min ing contra ct or the un der ly ing min ing li cen se. Some states have been re lative ly suc cess ful with this strategy. But a state par ticipa tion in a pro ject com p any is a two-edged sword. Par ticipa tion in ow nership im p l ies, in the first in stan ce, par ticipa tion in the costs of de v elop ing the mine; un less the state re ceives an ab solute free carry, which has its own is sues. De velop ing states, which most com mon ly make this de mand, typical ly do not have that amount of money rea di ly avail able, which means that they have to ask the in v es tor com p any to pay the state share of de v elop ment costs as well as the in v es tor’s share. And if the state does try to make the pay ment it self, it will pro bab ly be di v ert ing funds from ur gent in frastruc ture or other de v elop ment needs. Furth er, un less the state uses great care in struc tur ing its in v est ment in the min ing com p any, it may also find it self in a re lative ly power less posi tion. In a cor p orate struc ture, the major ity owner can nor mal ly con trol the pay ment of di v idends and the tak ing of most major ity cor p orate de cis ions, so that a minor ity state sharehold er must negotiate a com p licated sharehold er ag ree ment to pro tect it self from such th ings as a de cis ion to use all avail able free cash to upgrade the mine rath er than to dis tribute di vidends to the com p any’s own ers. Such par ticipa tion can lead to an ac rimoni ous re lationship bet ween the state and the com p any. There can be many dis ag ree ments over costs, strategy, and other areas that typical ly fall ex clusive ly with in the decision-making power of the com p any. Therefore if the state is truly look ing for re v enue and not pre stige, it should at least con sid er wheth er the ex p ec ted be nefits of equ ity ow nership can be sub stan tial ly ac hieved through the use of other more flexib le fisc al in stru ments. Fin al ly, com p an ies, par ticular ly private com p an ies, are general ly free to partn er with whomev er they would like to con duct their busi ness. Putt ing togeth er the right peo p le for a team of any kind, wheth er as sharehold ers or joint ven ture partn ers, can be
critical ly im p or tant for the suc cess of a pro ject. State par ticipa tion li mits the choice of partn ers a com p any can chose for man age ment and ow nership. While there may be clear be nefits to the state, it can pre sent ad dition al chal lenges for a com p any.
CAPIT A L G A I N S T A XE S In ad di tion to the pro fits generated through the sale of miner als, min ing com p an ies and in v es tors may also rea l ize pro fits through the sale of a pro ject or min ing right to other com p an ies. In some cases, the gains from such trans ac tions have been quite spec tacular, and govern ments have been high ly criticized and the pub lic frustrated when the co unt ry does not share in the gain. This is par ticular ly so when the in v es tor is sell ing or “flipp ing” its in v est ment early in the in v est ment life when the govern ment may not yet have re ceived any sig nificant re v enues. The bi ggest chal lenge for the host govern ment is juris diction al – ac tual ly hav ing power over the sell er or the buyer. If the local com p any sells the li cen se, its gain will be sub ject to the same tax rules applic able to any other capit al gain in the host co unt ry. But typical ly, the local com p any will be held by a hold ing com p any loc ated out side of the host co unt ry, often in a low or no tax juris dic tion. If the in v es tor sells an in terest in the hold ing com p any, neith er the sell er nor the buyer will be pre sent in the host co unt ry. Be cause of the dif ficul ty in rea ch ing the sell er – and in some cases be cause of re stric tive tax treat ies – most juris dic tions have until re cent ly left such gains un touc hed by contra ct or statute. The size of re cent gains rea lized by sell ing sharehold ers in some less de v eloped co unt ries has attrac ted clos er scrutiny, and govern ments are now in the early stages of de velop ing contra ctu al and statuto ry approac hes for rea ch ing such gains. Some contra cts al ready re q uire govern ment approv al of chan ges of con trol which would in clude in direct chan ges re sult ing from sales of a con troll ing in terest in the hold ing com p any. The approv al can re q uire de monstra tion that the upstream sell er has paid any tax due to the co unt ry on the gain, but wheth er a tax is pay able still de p ends upon modifica tion of contra cts or chan ges in tax law or re gula tions. Moreov er, such rules only reach
Fisc al Re gimes
cases where the sale of in terest is suf ficient to cause a chan ge of con trol. Al though we have not seen it in the min ing area, some re cent contra cts in the pet roleum sec tor have specifical ly addres sed the tax ob liga tions of the upstream in v es tor if an in terest is sold. It should be noted that the con cept of “con trol” is it self chal leng ing. Lawy ers can spend many words try ing to en sure that any ac tion which re sults in a new per son, group of per sons or com p any hav ing the di rect or in direct ab il ity to elect a major ity of the di rec tors of the min ing com p any is treated as a chan ge of con trol.
WITH HOL D I N G T A XE S As the owner of Bac kyard Goldmine Co., you will cer tain ly want di v idends from your in v est ment. And the govern ment will want to with hold taxes on that di v idend, as some th ing like a pre-payment against your year-end in come tax li abil ity (this is similar in prac tice to many taxes that are with held from the payc hecks that em p loyees re ceive from their em p loy ers). With hold ing taxes are an im p or tant and often poor ly un derstood ele ment of a min ing fisc al sys tem. The pay ments made by a min ing com p any to its lend ers (in terest), to its own ers (di v idends), or to its contra ctors, ser v ice pro v id ers and con sul tants are usual ly sub ject to with hold ing taxes. When Bac kyard Goldmine Co. hires a drill ing com p any to take core sam p les, it will "with hold" a cer tain amount on the pay ment to that drill ing com p any for its ser v ices on its in come tax form at the end of the year. The first thing to un derstand about with hold ing taxes is that they are not taxes on the local min ing com p any at all. They re p resent amounts the min ing com p any is re q uired to “with hold” from the kinds of pay ments li sted in the pre ced ing para graph and to pay over to the state on ac count of the ac tu al or pro jec ted tax li abilit ies of the pay ment re cipients. For ex am p le, as sume a contra ct or law calls for a 10% with hold ing tax on pay ments to sub contrac tors. If the sub contrac tor char ges $1 mill ion for a ser v ice, the min ing com pany would be re q uired to with hold $100,000 from its pay ment. The sub contrac tor would thus re ceive only $900,000 (in prac tice, a sub contrac tor might ad just its fee to
$1.1 mill ion to make sure it re ceives its full mill ion dol lars). If that sub contrac tor is a re sident tax p ay er, the money with held by the min ing com p any will be treated as a tax paid by that sub contrac tor and would be credited to its even tu al tax bill. If the sub contrac tor is not a re sident, howev er, the amount with held will often be treated as a “final” tax, fully satis fy ing any tax li abil ity the contra ctor may ot herw ise be de emed to have to the state with re spect to in come from that contra ct. The rea son for this, in a nutshell, is prac tical ity and ease of ad ministra tion. The im p or tance of with hold ing taxes can be eas i ly seen with a sim p le ex am p le. As sume Com p any A, Bac kyard Goldmine Co., is a local min ing com p any using no sub contrac tors. It does all of the drill ing, waste treat ment, and all other min ing op era tions it self. The pro fits from the min ing ac tiv ity would be tax able in come of Com p any A (we're simplify ing th ings here for pur p oses of il lustra tion), and the state would col lect taxes on that in come through the gener al cor p orate in come tax. Now as sume Com p any B, Fron tyard Goldmine Co., op erates an ident ical mine, but re l ies on over seas sub contrac tors for most of its op era tions. In stead of all of the pro fits from min ing accru ing to the local op erator, as in the case of Com p any A, here some share of the pro fits are in fact ear ned by the over seas sub contrac tors. Those pro fits are part of the pay ments made by Com p any B and de duc ted in com p ut ing its in come tax, and with out a with hold ing tax or some other way to reach the sub contrac tors, the pro fits would go com p lete ly un taxed. General ly applic able rates of with hold ing are typical ly in cluded in in come tax legis la tion, but min ing contra cts may pro v ide for full or par ti al ex emp tions of these taxes or may stabil ize them for some per iod of time as an in cen tive. Prac tice va ries wide ly both in terms of the rate of with hold ing and in terms of dif ferent treat ment of vari ous kinds of pay ments – in terest, di v idends, or ser v ices – and rates may be lowered for some in iti al per iod as an in cen tive. Rates at the level of 5% and 10% are com mon. It is also com mon for doub le taxa tion treat ies to limit with hold ing taxes as dis cus sed in more de tail in Chapt er 3 of this Sec tion and thus what is writt en in statute or contra ct may not be the ac tu al rate when the in v es tor is able to take ad v antage of a lower treaty rate. Below is an ex am p le of the issue of with hold ing taxes being treated in a min ing contra ct, the Li beria - China Union contra ct, Sec tion 14.3(c):
Fisc al Re gimes
"In lieu of the with hold ing rates pro v ided by Sec tion 806 of Schedule 6 for nonresidents and as pro v ided by the Re v enue Code for re sidents, the Con ces sionaire shall with hold tax on pay ments made to non-residents and re sidents at the fol low ing rates for the first 12 Years: (i) Di v idends, 0 per cent; (ii) In terest, 5 per cent; (iii) Pay ments for ser v ices, 5 per cent. Thereaft er with hold ing shall be at the rates pro v ided by Sec tion 809 of Schedule 6 for non-residents and as ot herw ise pro v ided by applic able Law for re sidents." One im p or tant issue with re spect to with hold ing taxes that is too com p licated to dis cuss in de tail here is the ques tion of wheth er a state’s with hold ing tax ob liga tions should ex tend to pay ments made by the min ing com p any for ser v ices per for med or by a non-affiliated com p any done at loc a tions out side of the state, when that ser v ice pro vid er has no con nec tion with the state other than the fact that it is bi ll ing the in-state min ing com p any for the work. For ex am p le, Bac kyard Min ing Co. sends core sam p les to an oth er co unt ry for test ing for its gold con tent. Should that drill ing com p any, which has no re lationship with the home co unt ry of Bac kyard Goldmine, be sub ject to with hold ing tax in that other co unt ry? This book does not take a posi tion on this ques tion, but it is one that is sub ject to much de bate.
F L E XI B L E T O O L S A N D R E N T T A XE S Miner al prices are in herent ly un p redict able and may rise and fall dramatical ly over the co ur se of a given mine's life. Costs may also fluc tuate sig nificant ly. One chal lenge govern ments face in the de sign of fisc al sys tems is how to cap ture a size able share of un usual ly high pro fits with out mak ing pro jects un sus tain able dur ing times of lower pro fitabil ity. For this pur p ose, states now are favor ing pro gres sive re v enue tools that will cap ture an in creas ing share of re v enues as pro fitabil ity rises. As dis cus sed with re spect to profit-based ad valorem royalt ies ear li er in this Chapt er, the hope is that re gimes con tain ing such tools will be more st able over time be cause they pro v ide equit able re turns to the min ing com p any and to the state over a wider range of cir cumstan ces.
Such re v enue tools usual ly come in the form of ad di tions to other base-line fisc al in stru ments. While the ac tu al names of these taxes dif f er from country-to-country, they usual ly are ex p res sed as: Windfall or ex cess pro fits taxes, which de spite the names are typical ly tri ggered by high prices with out re gard to the as sociated level of pro fits; Re sour ce rent taxes; and Sliding-scale royalt ies based on pro duc tion: In ad di tion to the ad valorem and profit-based royalt ies dis cus sed above, there is the poten ti al for a productionbased royal ty. While these are com mon in oil, they are less com mon in min ing, but are pos sible. First, some ter minology. "Rent" is the term used by econom ists to de scribe the re turn in ex cess of the mini mum re turn an in v es tor re q uires in order to make an in v est ment. Thus, if an in v es tor re q uires a 25% ex p ec ted re turn for a given in v est ment, re turns in ex cess of 25% are the "rent". Theoretical ly, these could be taxed at a 100% rate with out af fect ing the in v es tor’s de cis ion to in v est. In prac tice there is no clear line re gard ing the mini mum re turn re q uired by in v es tors and there is no seri ous at tempt to tax all “rents” over and above the pro fits tax ex cept in modest amounts. Flexib le tools to cap ture rents are quite pre v alent in the pet roleum sec tor, but less so in min ing. But there is in creas ing in terest in such taxes in mineral-rich co unt ries in tent on cap tur ing a larg er share of rents with out over tax ing the in dust ry dur ing per iods of lower pro fitabil ity. Each of these may be found in legis la tion and/or contra cts. While the em p hasis and polit ical motiva tion in in troduc ing pro gres sive tax in stru ments has been on cap tur ing up side re v enue or pro fit poten ti al, they are also ex p ec ted to bring fisc al flexibil ity or robust ness to the over all fisc al re gime, i.e. auto matic ad just ment to chang ing cir cumstan ces - lower govern ment take when pro fitabil ity is low, high er take when pro fitabil ity is high. This con cept is typical ly cal led "pro gres siv ity" and it is im p or tant to un derstand. While all fisc al tools will give the govern ment more money as prices rise, some do so bet t er than oth ers. For in stan ce, if a co unt ry only col lects a royal ty, it may get more money as
Fisc al Re gimes
the price of gold rises, but the extra money it gets will not measure up to the extra money the com p any will get. The com p any's "share" of the total re v enues will be great er as the prices rise. This is cal led a re gres sive tax. With a pro gres sive tax, the situa tion is re v er sed. Both the com p any and the govern ment will do bet t er with high er prices, but the government's share will rise fast er than the com p any's. Govern ments like this, of co ur se. One last thing to re memb er ... while each fisc al tool can be eith er pro gres sive or re gres sive, it is im p or tant to look at how they all work togeth er. A fisc al re gime can have a royal ty, and in come tax and a more pro gres sive tool, and still come out re gres sive on the whole. The devil is in the de tail.
Re sour ce Rent Tax (RRT) RRTs are the most sop histicated of the vari ous mech an isms used to cap ture rents. A typ ical RRT has three basic com p onents: (1) a thres hold rate of re turn for the min ing com p any (or sever al thres holds) above which the tax appl ies, (2) the specified tax rate(s) that apply once that thres hold has been ex ceeded, and (3) a tax base, which is typical ly cash flow from a par ticular pro ject. Whereas an in come tax appl ies to "tax able in come", RRTs will typical ly apply to cum ulative cash flow – look ing at the cash out (pay ments for capit al and equip ment, goods and ser v ices) and cash in (re v enues from sales). (In measur ing cash flows, costs and pay ments re lat ing to the fin anc ing of the pro ject are not taken into ac count). If pro fitabil ity ex ceeds the thres hold, for ex am p le 20%, a tax is paid on the ex cess. While measure ment of the rate of re turn at a given point in time sounds some what com p lex, in prac tice this is a mech an ical cal cula tion re ly ing on some of the same ele ments needed to com p ute tax able in come. There are re lative ly few ex am p les of min ing pro jects sub ject to RRTs (they are more com mon in the oil sec tor), but grow ing con sidera tion is being given to them. Those contra cts utiliz ing RRTs eith er have de tailed an nexes sett ing out the com p uta tion or refer to legis la tion.
Price-Based Tools Rath er than at tempt to measure pro fitabil ity di rect ly through the cal cula tions in an RRT, an oth er approach is to use com mod ity prices as a rough proxy for pro fitabil ity
under the as sump tion that high er miner al prices lead to high er pro fits. A slid ing scale royal ty, for in stan ce, could apply a high er royal ty rate as the be nchmark re fer ence price. In some cases co unt ries have applied “windfall” pro fit taxes when prices ex ceed cer tain levels. The windfall pro fit tax is usual ly a per cen tage of the re v enues attribut able to the dif fer ence bet ween what the in v es tor would have ear ned at the thres hold level and what the in v es tor earns at the ac tu al price. Be cause such taxes do not take ac count of costs they are only loose ly re lated to pro fits and have usual ly been im p osed for only short per iods of time.
Com mun ity De velop ment An em erg ing prac tice is for af fected com munit ies to share im mediate ly in the fin an ci al be nefits of a min ing pro ject by hav ing a de dicated re v enue stream that goes straight to them and not through the centr al tax aut hor ity first. Some times this re v enue stream is negotiated with in the fisc al pac kage bet ween the nation al govern ment and the com p any. This is the case in Guinea for ex am p le. In this sys tem, the nation al govern ment may negotiate the com mun ity de v elop ment re venue stream with the min ing com p any on be half of the com mun ity. The Guinean Min ing Code, Ar ticle 130, re q uires that 1% of the tur nov er of gold min ing com p an ies be paid into a local de v elop ment fund that will be ad minis tered at the local level. Under a dif ferent sys tem, com munit ies may negotiate with the com p any di rect ly in stead of through the sovereign. This is the case in in Canada or Australia, where in digen ous com munit ies are con sidered sovereign na tions. In Canada, for ex am p le, Fal conbrid ge, a min ing com p any, sig ned what was cal led an “Im p act and Be nefits Ag ree ment” di rect ly with the Inuit peo p le of Rag lan in northern Quebec. In the 20 years since, the com p any has made di rect pay ments to the Inuit in a model that created a pre cedent re p eated el sewhere, at Quin tette in the Yukon, for ex am p le. A similar ar range ment holds at the Kakadu uranium mine in Australia’s Northern Ter rito ry. It is im p or tant to un derstand that these ex am p les de scribe a situa tion of di rect pay ment from the com p any to the com mun ity, not simp ly an ag reed re v enue shar ing mech an ism from the centr al govern ment down to sub-national in stitu tions.
Fisc al Re gimes
O T H E R T A XE S Im port Dut ies A some times con ten ti ous and com p licated as p ect of many fisc al re gimes is the applica tion of the gener al im p ort tariff re gime to the min ing sec tor. Such dut ies are often sig nificant re v enue sour ces in low-income co unt ries; they also may be used to pro tect domes tic in dust ry. Im p ort dut ies can make a huge dif fer ence to the over all pro fitabil ity of a mine. Be cause min ing is capit al in ten sive, over all com p any pro fitabil ity de p ends a great deal on the tim ing of costs and re v enues. Heavy up-front costs are only amplified by the ad di tion of sig nificant im p ort dut ies. Moreov er, many of the goods im p or ted dur ing ex p lora tion and de v elop ment often can not be ob tained loc al ly (thus mak ing the domes tic sec tor pro tec tion ob jec tives ir relevant). In re cog ni tion of this, many co unt ries will re duce or eliminate im p ort dut ies on capit al goods or goods specifical ly in ten ded for pro ject use. If the the Bac kyard Goldmine Co. has to pay to im p ort dut ies on every earth-mover, front-end load er, and other equip ment needed to mine, it is easy to see how this could make al ready steep upfront costs that much high er. One speci al pro blem oc curs with goods like gasoline which are fun gible and can eas i ly make their way into the non-mining economy thus avoid ing the tariff. Many min ing contra cts will have specific pro v is ions such as volumet ric li mita tions, to deal with these pro blems. This is all true, but in the mean time, if the state con tinues to col lect im p ort dut ies, it will have had the im p ort duty tax re v enues much ear li er in time than it would re ceive the ad dition al in come tax re v enues. From the state’s point of view, this will be a use ful tradeoff. Con sider ing im p ort dut ies alone, if the term is a 5% im p ort duty and the contra ctor must bring in $250 mill ion of goods and equip ment, this is an ad dition al $12.5 mill ion of re v enue that will be avail able far ear li er than any in come tax pro ceeds to the state. In v es tors will seek ex emp tions from these taxes. They will argue that these taxes simp ly raise the cost of their in v est ment, which will mean that they have great er de duc tions to take in de ter min ing their in come tax, which in turn will re duce the state’s in -
come tax re v enues. Of co ur se, from the in v es tor’s view p oint, this will in crease pro ject capit al cost by $12.5 mill ion, and in a mar gin al trans ac tion, could be just en ough ad dition al cost to make the in v es tor de cide that the in v est ment would put too much of its capit al at risk.
Value Added Tax Value Added Taxes (VATs) are a com mon type of con sump tion tax, i.e., they are applied to a tax p ayer's con sump tion rath er than its in come. VATs apply to domes tic con sump tion, and thus VAT is general ly paid on im p orts and re fun ded on ex p orts. Since it is com mon for a min ing com p any to ex p ort the bulk of its miner al pro duc tion into in ter nation al mar kets, it is con sis tent with the prin ci p le of a VAT that these ex ports not bear the burd en of a VAT and are ex empted or ot herw ise re ceive a re fund of VAT paid. Be cause re fund mech an isms are frequent ly in adequate, contra cts often will ex empt min ing com p an ies from hav ing to pay VAT on their capit al im p orts or other materi als used in min ing. Similar con sidera tions are applic able to goods and ser v ices taxes where VAT is not in place. <h3 >Sur face Re nt al Pay ments An oth er ele ment of many fisc al re gimes is a sur face re nt al pay ment -- a pay ment to the centr al govern ment, or some times sub nation al govern ments. (These should be dis tin guis hed from pay ments to private lan down ers, which are not a part of the state's re v enues). Sur face re nt al pay ments will usual ly be a fixed or per acre fee and may ad just auto matical ly for in fla tion. . . They are not or dinari ly a sig nificant re v enue sour ce, but they dis courage ex ces sive land hold ings.
Fisc al Re gimes
B UIL D ING THE RE VE NUE M IX It is clear that there are a numb er of re v enue tools that can apply to a min ing pro ject. It can not be said en ough: re v enue tools ab solute ly can not be viewed or evaluated in isola tion. They must be as ses sed as a whole, as a "Fisc al Re gime" and not as in dividu al tools. One must take ac count of the dif fer ences bet ween tools. In come taxes do not begin to generate sig nificant re v enue for a numb er of years after pro duc tion be gins. Why? Be cause in come tax laws allow tax p ay ers to de duct op erat ing costs and the cost of their plant and equip ment from their sales re v enues to de ter mine tax able in come. Min ing com p an ies ac cumulate very large costs of these kinds be fore they ever see sig nificant op erat ing re v enue. Therefore, al though they may have a large cash in come once op era tions begin, they may have lit tle or no tax able in come until they have re covered their early op erat ing costs and much of their capit al costs. Royalt ies, on the other hand, have the ad v antage of pro v id ing an in come flow to a Govern ment from the be ginn ing of pro duc tion. But this ad v antage to the Govern ment is hard on the in v es tor: it is sen d ing cash to the Govern ment when it still is re-couping its costs and may even be in v est ing in mine ex p ans ion or other large in v est ments. Be cause most royalt ies take a fixed per cen tage of total in come, they have the ef fect of “squeez ing” the in v es tor. As miner al prices fall, min ing costs do not fall pro p or tionate ly, so that the mar gin bet ween min ing costs and re v enues avail able to the min ing com pany after royal ty pay ments will fall. This can lead to pre ma ture de cis ions to close a mine or to cur tail pro duc tion. Con v er se ly the pro fit spread will widen with only li mited govern ment par ticipa tion if royalt ies alone are used. Over the life of a mine, the dif ferent re v enue tools may fit togeth er to look some th ing like the di ag ram below. Of co ur se, it will de p end on which fisc al tools a co unt ry uses, among a numb er of other fac tors. This is just il lustrative of one pos sible out come in a stylized model. Figure  il lustrates how the dif ferent taxes may work togeth er over the life time of a pro ject.
An im p or tant trade off to re memb er is upfront pay ments. Upfront pay ments can be "ex p en sive" for the state. In v es tors ex p ect that many ex p lora tion ex p en di tures will go un recovered. The rate of re turn they ex p ect from suc cess ful pro jects must be en ough to com p en sate them both for the costs of that pro ject and to re cov er some of its un recovered ex p lora tion costs from other un suc cess ful pro jects. An up-front pay ment made be fore any dis cove ry will be treated by the in v es tor as a high risk ex p lora tion cost, and even a seeming ly small front end pay ment (in com p arison to the li ke ly cost of de v elop ing a com mer ci al miner al dis cove ry) may be high en ough to per suade an in ves tor that an ex p lora tion pro gram is too risky. Re sour ce rent taxes have the ad v antage of not im p act ing the in v es tor ex cept when the in v est ment has been high ly suc cess ful. They pro v ide the govern ment with a measure of as suran ce that the state will have a larg er share in pro fits when there are high re turns but do not burd en the in v es tor when re turns are lower. This may pro v ide a bet t er balan ce of the economic and polit ical in terests. These are generaliza tions about the way re v enue tools and fisc al re gimes work in gener al.
Fisc al Re gimes
How does one evaulate a par ticular fisc al re gime or re gimes in a given co unt ry? For this, a tool cal led a fin an cin al model is needed. <h2 >Fin an ci al Model ing While the tempta tion to squeeze more and more from the com p any in the form of taxes, in frastruc ture, cor p orate soci al re spon sibil ity and so on is al ways high, par ticular ly by ac tiv ists from civil society, the rea l ity is that a com p any's bud get/poc ket is not bot tomless. Al most every ac tion has a cost. How then can com p an ies be per suaded to share the de v elop ment as p ira tions of the co unt ry when de mands for con tribu tions can af fect their cash flow negative ly? The trick is to know how far govern ment can go with out putt ing their in v est ments at risk. And for this, you need a fin an ci al model. Fisc al models are rea l ly fund ament al as an in stru ment of plann ing, negotia tion and fisc al poli cy. They will tell you such th ings as : What is the trade-off of bet ween “quick money” through sig na ture bonuses and a high er share of pro fits? What is the ef ficien cy of tax in cen tives? What is the equitabil ity of the fisc al re gime for in v es tors and govern ment? If we chan ge the tax re gime, what is the im p act for the part ies? How does one fisc al re gime com p are with oth ers? What is the fair ness of the cur rent and poten ti al deals? What long term pub lic in v est ment poli cy can be fund ed and plan ned? What are the ef fects from chang ing prices? All com p an ies generate a fin an ci al model (usual ly a spreadsheet in Excel or a similar pro gram) show ing cash flows, mine op era tions and vari ous taxes under dif ferent scenarios, to con sid er their side of the fin an ci al story. When pre ssures are made on
com p an ies, the cost im p lica tions are plug ged into the model to de ter mine the ef fects or im p act on the rest of the min ing op era tions. Some de cis ions that are im p or tant for the co untry's economic de v elop ment, may have lit tle im p act on a com p any’s op era tions. Some govern ment de cis ions may make no crit ical dif fer ence for a com p any’s op era tions; and may even im p rove their cash flows. An ex am p le is power sup p ly. A com p any may de ter mine that a cer tain capit al ex p en di ture on power will be needed to en sure the mine has a re li able power sup p ly. Doing this alone, as in most cases in the past, would in v ol v e high upfront costs. Partner ing with the pub lic sec tor to pro v ide larg er sup p l ies could mean lower unit costs and even lower in iti al capit al ex p en ses. It is therefore use ful to know the com p any's fin an ci al model or to generate a proxy model in cases where the com p any will not share theirs with govern ment. This will not only give the govern ment an idea of how much vi able a de cis ion may be, but also, at which point cer tain is sues can be raised with the greatest chan ce of suc cess. The same govern ment "take" can be ar rived at using dif ferent tax in stru ments, so modell ing can help the part ies negotiate a dif ferent set of tools that will ar rive at a similar total shar ing of the re v enues over the life of a pro ject. Moreov er, the tim ing of govern ment re v enues will be sig nificant ly af fected by the choice of in stru ments. To rea l ly un derstand this in terac tion and the im p act of dif ferent tax in stru ments, it is im por tant to build fin an ci al models that forecast the re v enue/profit flows of a pro ject ac ross the life of the mine and under vari ous pos sible scenarios, tak ing into ac count the in herent un cer taint ies and es p ecial ly in fu ture mar ket prices. But it is also pos sible to get a lit tle car ried away with model ing, and to try to get models to do th ings they can not do. You have to keep in mind that a model only pre dicts out comes under a range of as sump tions (prices, costs, etc.), and that those as sump tions are just that ... as sump tions. Howev er im p or tant and use ful they are, they will sel dom if ever per fect ly pre dict rea l ity. If used to as s ist in pre dict ing re v enues (for nation al bud get ing pur p oses, etc.), they will need to be con tinual ly up dated to ad just as sump tions and ac count for past ac tiv ity.
SPECI A L CHAL L ENGES In this chapt er, we sum mar ise some of the non-numerical is sues that pre oc cupy those tas ked with sett ing and en forc ing a fisc al re gime around min ing.
YE S B U T H O W M U C H D I D YO U E A R N ? Re v enues raised by taxes de p end not only on the tax rate but also on the rules for cal culat ing the tax base. You might think this should be straightfor ward - Bac kyard Goldmine Co. de clares what it sold the gold for, what its costs were, and the state taxes the dif fer ence - the pro fit - at a given rate, and every one goes home. But there are some sig nificant ways that this crisp pic ture is blur red at the edges. Bac kyard's own fin anc ing costs may eat up a large amount of in come ("thin capitalisa tion"), and need to be evaluated. Or Bac kyard may buy many of its in p uts from, and sell much of its gold to, other com p an ies it con trols ("Bac kyard Goldmine Hold ing BV" in the Net herlands, "Bac kyard Goldmine Trad ing Inc" in the Cayman Is lands), mak ing it hard to know what the real price is (an issue of "trans f er pric ing"). Or it may have loc ked in a price ahead of time to deal with its own cash flow needs that ends up being con siderab ly more, or less, than the known mar ket price ("hedg ing"). Let's take each of those in turn.
The In terest De duc tion and De bt/Equ ity Li mita tions Min ing contra cts or legis la tion often es tablish a maxi mum ratio of debt to equ ity fin anc ing a pro ject. An ex am p le from the Li beria - Mitt al (2006) min ing contra ct (Ar ticle
14): At no time shall the ratio of Debt of the CON C ES SIONAIRE to Equ ity of the CON C ES SIONAIRE ex ceed 3:1.[. . .] For pur poses of this Sec tion 3, “Debt” shall mean the long-term debt of the CON C ES SIONAIRE and “Equ ity” shall mean the sharehold ers’ equ ity in the CON C ES SIONAIRE as de fined by stan dard ac count ing prac tices.[. . .] The contra ct pre v ents the com p any from bor row ing more than 75% of the money it needs to in v est in the pro ject. This is be cause the in terest on debt fin anc ing is al low able as a com p any cost. And that means that, given the choice, com p an ies will often pre f er to fin an ce their op era tions through debt rath er than tie up their own capit al. The Li berian contra ct addres ses that issue by capp ing the pro p or tion of debt to equ ity. An oth er approach to the same issue is not to cap the debt, just the de gree to which in terest on pay ments of it is an al low able cost, in a rule known as “thin capitaliza tion”. Below is an ex am p le of such a pro v is ion from the Mon golia - Oyu Tol goi min ing contra ct: Sec tion 2.31.1. if the In ves tor's debt to equ ity ratio ex ceeds 3:1, any in terest attribut able to the ex cess debt will not be de duc tible for Tax pur poses; 2.31.2. if the In ves tor's debt to equ ity ratio ex ceeds 3:1, any in terest attribut able to that part of the debt that does not ex ceed the ratio strict ly re mains de duc tible for Tax pur poses; 2.31.3. for the measure ment of total debt for the pur pose of the ratio, both re lated party and non-related party debt are in cluded, howev er, any noninterest-bearing li abilit ies are specifical ly ex cluded; 2.31.4. for the measure ment of total equity/ capit al for the pur pose of the ratio, both com mon shares and pre fer red shares are in cluded; and 2.31.5. any non-tax de duc tible in terest shall be de emed to be a di vidend and taxed in ac cordan ce with laws and re gula tions and applic able doub le tax
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treat ies. Any such non-tax de duc tible in terest will not be sub ject to any in terest with hold ing tax. There are other approac hes as well. Under some sys tems, in terest de duc tions are li mited to some specified per cen tage of tax able in come. This means that, even in early stages of the pro ject when the com p any might have huge debt from capit al out lays, the in terest de duc tion can never total ly eliminate tax able in come. An oth er key goal of debt-equity li mits is to en sure the com p any has a stake in the game. It has to have some of its own money at risk. But how do you check all of this stuff out? After all, the govern ment now has to an alyze sub miss ions made to it by the com p any not only about its costs and sales, but also terms of bor row ing. And if in terest pay ments are de duc tible from the over all tax bill, how does the govern ment en sure that they are rea son able? While some contra cts spec ify using be nchmark in terest rates, re lated for in stan ce to LIBOR (the Lon don In ter bank Over night Rate used by banks to bor row from each other), many more do not. This could be a par ticular ly chal leng ing issue if the com p any is bor row ing from an af filiate - as it often does. Hmm...
Trans f er Pric ing More than half of all cross-border trans ac tions around the world are hap p en ing bet ween com p an ies that are af filiated. This is equal ly the case in min ing. As it has now be come an in ter nation al op era tion, Bac kyard Goldmine Co. may buy a lot of cyanide for its op era tions - or vari ous ser v ices - from Bac kyard Goldmine In dustri al LLC in cor porated in Be rmuda, and sell a lot of its gold to Bac kyard Goldmine Trad ing SA, for mal ly in cor p orated in the small Swiss town of Baar but most ly ac tive in East Asian mar kets. The prices in such trans ac tions are known as “trans f er prices”. The ques tion is, how do we know that these prices re flect true mar ket value? The term "trans f er pric ing" or "TP" has be come syn onym ous in some cir cles with nefari ous prac tice. But it is im p or tant to un derstand that trans f er pric ing it self is a centr al in stru ment of in ter nation al glob al mar kets. Tax ac coun tants have fier ce de bates about
which TP rules are the most approp riate. OECD has a sys tem of TP guidelines. The UN has an oth er sys tem. Many co unt ries have de v eloped their own approac hes. The pro blem is if trans f er pric ing rules are ab used. How might that happ en? Well sup p ose Bac kyard Goldmine buys all its in p uts from af filiates in the Cayman Is lands, a low tax juris dic tion, and pays twice the going rate for those goods. Sup p ose it also sells the gold for a 30% dis count to world mar ket prices to an af filiate in an oth er low tax juris dic tion - one might even say "haven". Sud den ly, it would find it self with far less in come in its host co unt ry - and therefore have to pay far less tax. It might have more in come in those other co unt ries, but since those co unt ries en gage in "tax com p eti tion" and have low to no rates of cor p orate taxa tion, the tax bill is going to be low. Th ings are look ing good for Bac kyard Goldmine. How to guard against it in the contra ct? It's quite dif ficult, but there are a few th ings that can be done to help. Most tax codes or min ing ag ree ments re q uire prices in such trans ac tions to be at the same price as a com p any would ob tain in an "arm’s-length" trans ac tion. But de ter min ing the arm’s-length price and monitor ing such trans ac tions can be chal leng ing. To as s ist govern ments in this re spect some min ing ag ree ments con tain pro v is ions re q uir ing re p ort ing of such trans ac tions, documen ta tion of the basis of the arm’s-length prices used and, in some cases, a cer tifica tion from a com pany of fic er about such prices such as the fol low ing, from the Li beria - Putu contra ct: Sec tion 17.4(e). Each year’s fin an ci al state ments shall be ac companied by cer tificate of the chief fin an ci al of fic er of the Com pany to the ef fect that (i) with re spect to goods or ser vices co vered by any Pric ing Ag ree ment in ef fect dur ing the re levant per iod, the Com pany’s trans f er prices dur ing such year were com puted in ac cordan ce with the re quire ments of such Pric ing Ag ree ment and (ii) with re spect to goods or ser vices sold or pro vided in a trans ac tion bet ween the Com pany and an Af filiate or a Re lated Per son of the Com pany which are not co vered by such Pric ing Ag ree ment, the prices thereof im posed dur ing the re levant per iod were com puted in ac cordan ce with Sec tion 20.7. One crit ical part of the cost-sales dynamic is the mar ket value of the com mod ity. For royalt ies this may some times be han dled by bas ing the royal ty cal cula tion on a pub lic in ter nation al re fer ence price rath er than on the ac tu al price re ceived by the sell er (see
Speci al Chal lenges
the dis cuss ion of royalt ies). But this may not al ways be pos sible. Not all miner als in all mar kets have real-time pub lished prices, al though more "be nchmarks" for more com modit ies have be come avail able in re cent years. But Bac kyard most ly sells gold, right (al though they are doing so well they have now di v er sified into tin and rare earths). No pro blem fin d ing the mar ket price there! One small caveat: even when an in ter nation al re fer ence price is being used, there may be a qual ity dif feren ti al off that in ter nation al re fer ence price, up ward or downward, that needs to be taken into ac count. And just one more "Ex cept...". Some times the price in the ex p ort mar ket might not ac curate ly re flect a fair price for any given sour ce co unt ry. In that case a "net-back" price re lat ing the pub lic price to the price in the min ing juris dic tion could be used. This means sub tract ing all the trans p ort, in suran ce and other costs it took to get the com mod ity from the host co unt ry to mar ket. Some times an es timate of the miner als’ value in the min ing juris dic tion may be ag reed ahead of time by the govern ment and the com p any in what is cal led an "Ad v anced Pric ing Ag ree ment" (APA). Rath er than the govern ment check ing costs ship ment by ship ment (or theoretical ly check ing the costs by ship ment, which may take more re sour ces than the govern ment has), both sides agree on a met hod of doing the valua tion to save them selves the troub le of ar gu ing over it later. APAs are general ly not in cluded in the min ing contra ct it self, al though the contra ct could re q uire the com p any and govern ment to make one be fore pro duc tion starts. The com p lex ity of the sup p ly chain in the modern world is hard to over es timate. Just one ex am p le: when the govern ment of Ugan da ex er cised its right to audit an oil com pany at a very early stage in the pro ject, the com p any had al ready contra cted with over 200 other com p an ies. Lots of what it bought were ser v ices for which no ready mar ket price ex is ted. The same is true for min ing op era tions.
Hedg ing To pro tect against price fluc tua tions, com p an ies often “hedge”. For in stan ce, some lend ers may re q uire min ing com p an ies who bor row from them to re duce their ex posure to fu ture drops in com modit ies prices by sell ing some por tion of their fu ture pro duc tion at a price ag reed today. This is typical ly cal led a “fu tures contra ct”. Or it may pay a small sum now to buy the "opt ion" to sell at a given price a few months from now - which it will eith er ex erc ise or not de p end ing on mar ket prices at that time. These fin an ci al in stru ments - and many oth ers - may pro tect the com p any against a price crash (the trade-off is that they may not get the full be nefit of fu ture price in creases). Hedg ing can help a com p any negotiate volatile mar kets and en sure that pro jects re main economical ly vi able. As a side note, many think the mas sive "fin an cializa tion" of com modit ies mar kets has also hel p ed fuel the un p receden ted price rises of the last de cade, though that is not our sub ject here. But hedg ing can also mean ac tu al sales re venues of the mine com p any are quite dif ferent from what is ob ser v ed in the mar ket. For in stan ce, if Bac kyard Goldmine Co. has ag reed to sell all of its pro duc tion for the next five years at a price of $1,200 per ounce but prices in rise to $1,600 per ounce, the com p any will not be as pro fit able as it would have been with out the hedge. On the other hand, if prices in that per iod fall to $800 per ounce, it will be much more pro fit able - and its re v enues will be pro tec ted. From a host government’s per spec tive, this can have un desired con sequ ences. Most simp ly, in the case above, if the royal ty were based on the re ceived sales price (rath er than a pub lished mar ket price), the hedg ing trans ac tion could cut the royal ty the govern ment gets by 25% from what it would have been. To avoid this, some juris dic tions specifi cy that royalt ies be based on spot (pre sent) rath er than fu ture mar ket prices and specifical ly ex clude hedg ing op era tions from de ter min ing tax able in come. The com p any can still hedge, eith er through its in ter nation al op era tions or through a separate local en t ity. But state tax re v enue will be in sulated from those fin an ci al de cis ions.
Speci al Chal lenges
S T A B I L I ZA TION A sig nificant min ing pro ject and as sociated in frastruc ture can re q uire bi ll ions of dol lars of capit al. Once in place this capit al can not for the most part be rea di ly moved. As a re sult in v es tors have a strong in terest in the stabil ity of the fisc al re gime dur ing the li fetime of the pro ject - which as we have seen could be as long as 50 years. The govern ment it self may also want to rea ssure the in v es tor. This is es p ecial ly a pro blem in juris dic tions with weak er in stitu tions or with out an ex ten ded per iod of polit ical stabil ity. This issue is frequent ly re sol v ed through the use of a stabiliza tion clause in the contra ct, which can take dif ferent forms. An ex am p le from the Li beria - Putu min ing contra ct: Sec tion 14.2. The Govern ment hereby ag rees that with re spect to those items set out in this Sec tion 14.3 the rates and pro vis ions pro vided in this Ag ree ment shall be fixed as of the Ef fective Date for the Term of this Ag ree ment but not to ex ceed 15 years from the grant of the first Min ing Li cen se (which shall ex th tend to the end of the fisc al year applic able to the Com pany in which the 15 an niver sa ry of the grant of the first Min ing Li cen se oc curs to the ex tent the an niver sa ry does not fall on such date). . . For the avoidan ce of doubt, dur ing such per iod any fu ture amend ment, ad d i tions, re vis ions, modifica tions or other chan ges to any Taxes and Dut ies (or the pro vis ions or prac tice re lat ing to any Taxes and Dut ies) applic able to the Com pany or the Op era tions that would have the ef fect of im pos ing an ad dition al or high er Tax or similar char ge on the Com pany or the Op era tions shall not apply to the ex tent it would re quire the Com pany to pay such ad dition al or high er Tax or similar char ge, in clud ing any fu ture amend ment, ad d i tions, re vis ions, modifica tions or other chan ges [..] This par ticular pro v is ion has two im p or tant fea tures. First, it is li mited to specific por tions of the fisc al re gime and does not ex tend to other areas of the law such as health and safety re gula tion, em p loy ment, or en v iron ment al re gula tion. Many ear li er stabiliza tion clauses were much broad er and were high ly criticized for the negative im pact on evolv ing soci al and gener al wel fare poli cies, par ticular ly given the longduration of many min ing leases. They were some times known as "freez ing clauses" be cause they froze new law-making in broad areas of pub lic poli cy. But second ly, with in
the fisc al sphere it does op erate as an ab solute bar on apply ing high er char ges to the com p any. It freezes the fisc al law. As you can im agine, govern ments and the pub lic do not react well to the idea that their sovereignty should be in hibited for the in terests of a foreign com p any, howev er much money has been in v es ted. One al ter native more wide ly used today moves the de bate from law to money. An "economic equilib rium" clause basical ly says the state can pass any new laws it likes but calls for negotia tions bet ween the part ies if the chan ges have re duced the "economic in terest" of the pro ject to the in v es tor, or, in its strong er form, re q uires the state to com p en sate the min ing com p any to the ex tent re q uired to re store the same state of pro fitabil ity. This is an ex am p le from an oil contra ct, though similar clauses can be found in min ing contra cts: If at any time after the Ef fective Date, there is any chan ge in the legal, fisc al and/or economic framework under the Kur distan Re g ion Law . . . which de trimen tal ly af fects the Contra ctor, the terms and con d i tions of the Contra ct shall be al tered so as to re store the Contra ctor to the same over all economic posi tion as that which Contra ctor would have been in, had no such chan ge in the legal, fisc al and/or economic framework oc cur red. The li mita tion on what is sub ject to stabiliza tion and an af firma tion of the prima cy of domes tic law on gener al economic and soci al poli cies is some times specifical ly addres sed: Ex cept as ex plicit ly pro vided in this Ag ree ment and the Re venue Code, the Com pany shall be sub ject to all of the in tern al laws of Li beria as in ef fect from time to time, in clud ing with re spect to labor, en viron ment al, health and safety, cus toms and tax matt ers. Two other fea tures of stabiliza tion clauses are worth not ing. First, they may con tain socalled "one-way street” clauses that allow the in v es tor to opt into any gener al re duc tions in rates of taxa tion, with out be ar ing the burd en of any gener al rate in creases -- a ques tion able but not un com mon prac tice. Second ly, some co unt ries, for ex am p le,
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Chile and Afghanis tan, will pro v ide stabil ity but only if the in v es tor ag rees to a high er base tax rate, i.e., the in v es tor has to pay for the ad dition al as suran ce. In teres ting ly, no in v es tors in Chile have elec ted stabiliza tion. Last ly, some times in ad di tion to and other times in lieu of stabiliza tion, some contra cts in clude pro v is ions which allow eith er party to re q uest con sul ta tions with re spect to the contra ct if there have been fund ament al chan ges in cir cumstan ces. As an ex am p le Li berian min ing contra cts usual ly give the part ies rights to re q uest (but do not com p el) re v is ions where there have been “Pro found Chan ges in Cir cumstan ces." From the Li beria - Putu min ing contra ct: “Pro found Chan ges in Cir cumstan ces” means such chan ges, since the re levant base per iod under Sec tion 31.1, in the economic con d i tions of the miner al and min ing in dust ry worldwide or in Li beria, or such chan ges in the economic, polit ical or soci al cir cumstan ces ex ist ing in Li beria specifical ly or el sewhere in the world at large as to re sult in such a materi al and fund ament al al tera tion of the con d i tions, as sump tions and bases re lied upon by the part ies at such base per iod that the over all balan ce of equit ies and be nefits rea sonab ly anti cipated by them will no long er as a pract ical matt er be ac hiev able.
It is im p or tant to stress here that this is not an ob liga tion to re negotiate by eith er party. It is only an ob liga tion to sit togeth er and talk. This is a weak er ob liga tion than an ob liga tion to negotiate.
DOUB L E TAX TRE AT IE S An oth er set of poten ti al snares lie in in ter nation al treaty ob liga tions, and the way they can af fect contra cts. For in stan ce, many co unt ries have en tered into bi later al “Doub le Taxa tion Treat ies” in which two co unt ries agree on how and when each will tax ac tivit ies of the re sidents (per sons and legal en tit ies) of the other with re spect to cer tain items of in come. There are now more than 3,000 such treat ies bet ween the 200-odd juris dic tions around the world, al though the numb er of such treat ies a co unt ry is in can vary dras tical ly.
But with re spect to min ing law and contra cts, these treat ies can limit the government’s power to im p ose with hold ing taxes. Typical ly doub le tax treat ies will re duce the with hold ing rates below those im p osed by statute, some times to zero. Also, an in v es tor can shop for in ter mediate juris dic tions which offer the stron gest ad v antages from these treat ies. For ex am p le, even if the parent com p any of a local min ing en t ity is based in Co unt ry X, it may make loans to the pro ject through a re lated en t ity in Co unt ry Y if it finds that there is a tax treaty with Co unt ry Y pro v id ing for a zero with hold ing rate on in terest. Tax treat ies may also limit the host government's ab il ity to tax non-residents on capit al gains.
M OS T-FAVORE D CONTRA CTOR There is also the ques tion of treat ing all in v es tors the same. Some contra cts con tain a pro v is ion re q uir ing the govern ment to ex tend to the contra ctor any be nefits that the govern ment may ex tend to other in v es tors in the fu ture. Here is a typ ical ex am p le: In the event that the Govern ment of Co unt ry A en t ers into a contra ct or ag ree ment with a third party en gaged in the min ing or in dustri al sec tors that, based on the laws in force in Co unt ry A at the time, af fords more favor able treat ment with re spect to the stabil ity of fisc al or other tax terms than have been gran ted to Co pper C o under this Min ing Contra ct, the Part ies agree that the Min ing Contra ct shall be amen ded to apply the more favor able treat ment to Co pper C o [adap ted from un pub lished contra ct]. Whatev er the rationale for such clauses, they make it dif ficult for the govern ment to chan ge its poli cies and contra ct terms over time to meet chang ing cir cumstan ces with in the co unt ry, or to address the uni q ue is sues pre sent on a par ticular mine, or simp ly to upgrade their poli cies. Con sid er the fol low ing: A govern ment has en tered into a contra ct with Bac kyard Goldmine pro v id ing for a 3% royal ty and a 35% in come tax and in clud ing a “mostfavored com p any” clause similar to the ex am p le above. But a year later, it de cides to move in a new di rec tion and wants to em p has ize royal ty pay ments in its fisc al re gime. It en t ers into an ag ree ment with Bac kyard's com p etitor, Mot herlode Re sour ces Inc,
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call ing for a 5% royal ty and a 25% in come tax rate. It seems as though this could tri gg er the “most-favored com p any” clause, and that Mot herlode might pro test. But it is ac tual ly only pos sible to com p are the two fisc al re gimes by fin an ci al modell ing to de monstrate the ef fect over time of a high er royal ty co up led with a lower in come tax. In some scenarios, over all re v enues may go up, but in oth ers they may go down. It may also be im p os sible to make com p arisons if the mines are very dif ferent (e.g., dif ferent costs struc tures, re sour ce bases, etc.). These is sues raise the pro spect of a poten tial ly con ten ti ous de bate about the pro p er baseline to use for evaluat ing the net ef fect. It is also pos sible that Bac kyard could argue (de p end ing on how the “most-favored com p any” clause is draf ted) that is should be nefit from the re duced tax rate, but should get to keep its ag reed royal ty rate. Could Mot herlode come back and then claim that it should get the same re gime? The mere pos sibil ity highlights the pro blematic na ture of these pro v is ions, and it is easy to see how this would re sult in a gradu al “ratchet ing down” of the fisc al re gime that appl ies to com p an ies. To avoid these pro blems many contra cts do not con tain such clauses, or if in cluded they are li mited to com p an ies in sub stan tial ly similar cir cumstan ces.
TAX IN CE N TIVE S Fin al ly, a prin cip al chal lenge fac ing policymak ers and negotiators is how to cap ture an ac cept able amount of re v enue from mining—und er a variety of economic cir cumstan ces—while main tain ing a re gime that attracts the de sired type of in v es tor. One way that co unt ries have at tempted to walk this tightrope is by in stitut ing a robust gener al fisc al re gime but co upl ing it with a variety of specific tax in cen tives. One old form of such in cen tives, still seen in many contra cts, is to pro v ide tax “holidays” in which the in v es tor is freed from some or all taxes for a per iod of time. This can rea l ly slash govern ment re v enues. There have been oc cas ions in which mines were de v eloped and went into full pro duc tion while a tax holiday was still on, leav ing
the govern ment with no in come tax re v enue at all. Whoops! It is hard to im agine any govern ment seek ing that par ticular out come. Even in less ex treme cases, holidays re sult in long post p one ment of govern ment re venue, well past the ex p i ry of the tax holiday if de p recia tion and loss carry-forward rules let a com p any start writ ing off its ex p en ses after the holiday is over. Moreov er, there is very lit tle evi d ence that such holidays -- much less any in cen tive -- are ac tual ly de ter minative of the de cis ion to in v est in extra ctive in dust ries. One al ter native to the tax holiday which could also meet the in v es tor con cern of rapid re cove ry of in v est ment is ac celerated de p recia tion rules. If the in v es tor is al lowed to de duct a great er share of capit al costs early in the life of the pro ject, then there will be great er de ferr al of taxes. This type of pro v is ion at least ties the in cen tive to the ac tu al capit al in v est ment and avoids the pos sibil ity of taxes being sides tepped en tire ly (i.e. the tax is de fer red but not eliminated).
HOW (NOT) TO SPEND IT Once that state has col lec ted the money from the vari ous re v enue tools in the fisc al re gime, you can bet that how to spend it will be the burn ing ques tion to an sw er. This sec tion focuses on how the state can ob tain money from its min ing ac tivit ies. The money should en able a govern ment to pro v ide the goods and ser v ices es senti al to the pro sper ity and growth of the co unt ry. A co unt ry can in v est in state-of-the-art min ing laws, min ing contra cts and re v enue laws, but if the money flow is not used well, the ef fort could be was ted. While this book is not about how to spend the money, that too could be a book unto it self, he basic con sidera tions are clear. What govern ments seek to do is to con v ert wealth in the ground into wealth in their society. Simp ly mak ing the state's miner al re v enues avail able to citizens, thereby in creas ing li v ing stan dards, will not be sus tain able be cause the miner al re v enues will even tual ly run out when the miner als run out. This is a fac tor that drives govern ment poli cy and com p any strategy: miner als are fin ite re sour ces that will not last forev er. Even if a mine lasts 100 years, it still runs out. What this means is that govern ments have one shot at spend ing miner al re v enues well. Most peo p le who have studied the chal lenge of sus tainabil ity con clude that states should in v est as much as pos sible of their natur al re sour ce re v enues to in crease phys ical in frastruc ture, skills and labor pro duc tiv ity, and thereby bring about a sus tain able in crease in the co untry's economy and in in dividu al li v ing stan dards. In prac tice, this means be ginn ing with the fund ament als: prima ry and secon da ry educa tion,
health care, basic trans p or ta tion and, in most places, electric ity sup p ly and water sup p ly and treat ment. Some co unt ries have made di rect trans f ers of cash to citizens.Mon golia’s ex p eri ence is dis cus sed below. But attrac tive as di rect cash trans f ers may be, govern ments in co unt ries with weak ad ministra tion and high levels of il litera cy will need to con sid er the dif ficul ty of con struct ing sys tems to dis tribute that money fair ly, ef ficient ly, and with out leakage. Polit ical pre ssures may also lead to cam p aigns to sub sid ize "es senti al" con sum er purchases, like electric ity or gasoline or rice. This can im p rove li v ing stan dards, but is dan ger ous be y ond the very short run, as it can stimulate was te ful con sump tion, lead to smuggl ing (where tan gible goods are in v ol v ed), and, as ex p eri ence in many co unt ries can be very hard to re v er se.
HIG H PUB L I C E X PE C TA TIONS , L OW RE VE NUE IN FLOW When the pub lic learns of big miner al dis cove ries, or hears that a major IMC has come to their co unt ry to negotiate a min ing contra ct, pub lic ex p ec ta tions can shoot through the roof. There are many rea sons for this, but polit ical rea sons dominate. Politicians may rush to seek credit for the news and make in flated pre dic tions of the im p act. Opt imis tic in v es tor state ments aimed at poten ti al home co unt ry in v es tors leak back to the host co unt ry. Newspap ers fan the flames with bann er head lines. The rea l ity, of co ur se, is that ex cept for the oc casion al sign ing bonus and a small bump in local em p loy ment when mine de v elop ment be gins, money will not start to flow until the mine goes into op era tion, many years later. Govern ments and civil society should anti cipate this gap bet ween ex p ec ta tions and rea l ity, and should ac tive ly con trol ex p ec ta tions by keep ing the pub lic in for med as to the pro gress of the min ing sec tor, and educate the pub lic about the time frames in v ol v ed.
How (not) to spend it
This can be dif ficult to do, as it is tempt ing to take credit for each new dis cove ry and each new contra ct, and it is natur al to pre sent them as though the pot of gold at the end of the rain bow has been un v eiled. A thought ful, on-going ef fort to educate the pub lic and jour nal ists about min ing pro ject timelines and re v enue ex p ec ta tions should help. If the non-political op in ion lead ers un derstand rea l ity, the im p act of overexuberant or self-aggrandizing an noun ce ments can be re duced.
The Mon golian Ex peri ence Fol low ing a major miner al dis cove ry in Mon golia, the govern ment created a Human De v elop ment Fund that was de sig ned to func tion as a trans f er of money over time to in dividu al citizens under a struc ture that would force most of the money into in v est ments used to fund educa tion, hous ing, health and pens ion plans over time, the type of ex p en di ture needed for growth. Polit ical pre ssures, spur red by popul ist polit ical claims, re sul ted in the pro m ise of cash trans f ers to in dividu al citizens in amounts that far ex ceeded the then-existing min ing re v enue. The govern ment had to fund the shortfall in the in ter nation al debt mar kets, where it was re q uired to pled ge fu ture mine re v enues to secure the loan.
This ex p eri ence was so sober ing that Mon golia's polit ical part ies were able to agree upon a se ries of laws de sig ned to limit the ab il ity of politicians to make impossible-tofulfill pro mises. In sum ma ry form, the prin cip al com p onents of this ef fort were the fol low ing: The new Elec tion Law, adop ted in 2011, pro hibits polit ical part ies from in clud ing into their elec tion plat forms, among other th ings, pro mises of cash, pro p er ty, pro per ty rights, shares or end ow ments from pro ceeds of miner als and oil or pro mises that are of similar na ture. It also pro v ides that if an elec tion plat form de clares that the party in v ol v ed will enact a new pro gram with ex p en di ture pro p os als, the ex p en di tures pro p osed must com p ly with specific re q uire ments of the bud get stabil ity law, and the com plian ce must be verified and cer tified by the State Audit aut hor ity. (The law ison line in Mon golian and Rus sian at www.legalin fo.mn/law/, law 351.) Laws like this, while dif ficult to fol low (and which, in evitab ly, have not been strict ly fol lowed), can help to create a "cul ture of pub lic prud ence." Even in a co unt ry in which the pas sage of similar laws can be dif ficult, a de bate on the sub ject can educate peo p le to the risks of plac ing the ap p earan ce of large re v enue gains be fore op p or tunis tic mem b ers of the polit ical class.
Bot tomless Bud get: Where To Stop? A co unt ry with a re lative ly small economy and major miner al de p osits will have two dis tinct bud get ing pro blems. First, as soon as there is a major miner al dis cove ry, there will be a polit ical in stinct to start spend ing the be nefits. But dur ing the long per iod bet ween dis cove ry and op era tions, there is no cash flow. Any in creased ex p en di ture will have to be fund ed by bor row ing against the pro spect of fu ture min ing re v enues. This is al ways dan ger ous for economic stabil ity, par ticular ly when there are also pre ssures, as there were in Mon golia, to dis tribute the funds di rect ly to citizens. Mon golia tried to limit this pro blem by adopt ing a bud get stabil ity law de sig ned to limit mineral-driven de ficit spend ing. Ar ticle 6.1 pro v ides that any bud get de ficit should be li mited to 2 per cent, that bud get in creases must not ex ceed the average rate
How (not) to spend it
of growth of the non-mineral sec tor, and that govern ment debt must not ex ceed 40 per cent of GDP. (The law is on line in Mon golian and Rus sian at www.legalin fo.mn/law/, law 503.) Mon golia's ex p eri ence, fol low ing adop tion of this law, ac tual ly de monstrates that en act ing laws of this kind will be eas i er than li v ing with in their li mita tions, but they do create the basis for pub lic dis cuss ion of the is sues and af fect the tone of legis lative bud get de bates. The second bud get ing pro blem when min ing does begin is learn ing to live with the fact that miner al re v enues (and natur al re sour ce re v enues general ly) are typical ly quite cycl ical be cause of the volatil ity of com mod ity prices. This volatil ity can re sult in stop-and-go pro gram fund ing, ex ces sive ex p en di ture com mit ments at the top of the re v enue cycle and pub lic up roar when bud gets shrink at the bot tom of the re v enue cycle. Chile, with an economy very de p en dent on co p p er and molyb denum ex p orts and an ear li er his to ry of over-expenditure and boom-and-bust spend ing, tried to deal with this issue early in this cen tu ry. The core of the poli cy is the no tion of ac hiev ing "struc tur al balan ce," which, in very rough terms, re q uires es timat ing the govern ment in come that would accrue if the over all im p act of the economic cycle were levelized, and spend ing no more than would be net of that levelized amount, even when ac tu al re venues are high er. In prac tice, this re sults in a sur p lus when re v enues are up which can be used to cover de ficits when re v enues are down. Chile built a large sur p lus after the pro gram took ef fect, but then was able to use it dur ing 2009 to main tain ex p en di tures through the in ter nation al fin an ci al crisis.
Sav ings Funds A few co unt ries will be for tunate en ough to have large re v enue flows which ex ceed their ab il ity to use or “ab sorb” them in domes tic spend ing. In ad di tion some co unt ries want to hold some funds for fu ture genera tions. The most well-known re sour ce fund is that of Nor way.
Nor way's fund, based on its pet roleum in come, had rea ched over $750 bi ll ion by late 2013. It is man aged on be half of the Minist ry of Fin an ce and in v es ted out side of Nor way to avoid the in flationa ry im p act of try ing to in v est all that money in Nor way. Trans f ers from the fund to Nor way's cur rent bud get are in ten ded to be li mited by the real re turn on the fund. Nor way's fund is focused primari ly on inter-generational equ ity, en sur ing that a large por tion of its oil re v enues re main avail able to the co unt ry and its citizens after the oil runs out. This is approp riate for Nor way, which is a high ly de v eloped co unt ry with a small popula tion and a large oil sur p lus. It is not approp riate for an economy with large soci al and phys ical in frastruc ture de ficien cies ex cept, per haps, in the rare in stan ce in which the popula tion is very small in re la tion to the re sour ce re v enues.
EN V IRON M ENT A L AND SOCI AL WHAT ARE THE IS SUES US ING THE CONTRA CT TO M AN AG E THE IS SUES FIN D ING G UIDAN CE AND AN S W ERS OUT S IDE OF THE M IN ING CONTRA CT
En viron ment al and Soci al
WHAT ARE THE IS S UES Min ing has an en orm ous im p act, al most wherev er it hap p ens. This sec tion will run through some of the en v iron ment al and soci al im p acts.
EN VIRON MENT AL IS SUES Heightened aware ness of the en v iron ment has led to re q uire ments for large in v est ments to show what their ef fects on the en v iron ment are li ke ly to be. Min ing is no ex cep tion. Typ ical areas where extra ct ing the ore pro duces negative ef fects are water, eros ion, de fores ta tion, landscape, man ag ing toxic materi als and de al ing with seepage of acid to the soil, air pol lu tion and pro tec tion of bi odivers ity, noise and vib ra tions from blast ing, and re habilita tion of mined-out areas. What are the is sues and how can they be man aged? Water: this is the single most im p or tant en v iron ment al im p act in many parts of the world. There are two, al most op p osite water is sues tri ggered by min ing op era tions. In tem p erate or trop ical climates, a key issue is pre v ent ing in filtra tion of toxic ele ments into the water table (as mer cu ry for ar tisan al or il leg al min ing cases), which can re sult even from sur face min ing and pro cess ing op era tions be cause the water table is so high. This not only im p acts the water but also af fects com munit ies that use it. In many parts of the world, com munit ies draw on river water daily. If the water is pol luted, these famil ies are sus cep tible to many dis eases. In arid parts of the world it is the en -
En viron ment al and Soci al
orm ous con sump tion of water by min ing ac tivit ies that is the issue, lower ing the water table and dry ing up riv ers and lakes. The ef fect of the mine on water qual ity and availabil ity, and wheth er sur face and groundwat er will re main fit for human use and main tain native aquatic life and ter restri al wildlife, is so key that an alysis of this ques tion may de ter mine wheth er a com pany gets a min ing li cen se or not. It is no sur p r ise therefore that com p an ies like Rio Tinto and in dust ry as socia tions like ICMM have re cog nized the im p or tance of water im p acts, is su ing their own stan dards and best prac tice guidelines for re spon sible water man age ment. In ad di tion to the storage and con ser v a tion of water, upstream use, pol lu tion, and or di v ers ion by a min ing op era tion can star v e downstream com munit ies or de stroy the farm lands or the marine life on which they de p end. Ac curate anti cipa tion of such con sequ ences is a first step towards de sign ing approp riate cor rec tive mech an isms. Toxic materi als and acid drainage: min ing op era tions pro duce large quan tit ies of solid and slur ry waste. Dif ferent kinds of waste come at dif ferent stages in the pro cess. First, there is the “over burd en” and waste rock which has to be re moved be fore you can get to the materi al to be mined. While this materi al is not mineralized, or does not con tain en ough re cover able miner als to be pro ces sed, it has to be stored, typical ly on the sur face of the land but some times in ab an doned mine pits or un derground op era tions. Gett ing a han dle on the pro p or tions here is key. While iron ore typical ly con tains up wards of 30-60% iron con tent, this is ex cep tion al. Most metal lic and pre ci ous miner als con tain very small pro p or tions of the miner al (typical ly less than 2%), which means the other 98% of materi al is waste. When you con centrate the ore or extra ct the metal, you create an oth er major waste stream cal led tail ings. Tail ings are not just about volume. Be cause they are the waste pro duct of ores that have been treated, this slur ry can in clude heavy met als, cyanide and chem ical pro cess ing agents, sul fides, and sus pen ded sol ids which have to be con tained. Tail ings storage therefore needs to be in sulated, some times for de cades, often well be y ond the life of the mine to allow de com posi tion and settl ing. Bi rdlife and wildlife can die if they have free ac cess to the tail ings areas. If these facilit ies fail, the im p act can be dramatic.
What are the is sues
Air pol lu tion: tech nology has im p roved a lot but there can still be is sues with air-borne pol lu tion. Min ing op era tions can generate a lot of dust which can tri gg er re spirato ry dis eases in peo p le, and as p hyxia of flora (plants). If the mine in cludes a smelt ing plant, gas em iss ions can also be toxic and a long term risk for human health. This can be a major pro blem around the older smelt ing op era tions, such as the lead-zinc smelt ers at Brok en Hill in Australia, La Oroya in Peru, and the re cent ly closed Her culaneum smelt er in Mis souri, USA. De p end ing on the quant ity and con centra tion, these sub stan ces may con tribute to an in crease of mor tal ity or an il l ness. Bi odivers ity: min ing can im p act bi odivers ity by chang ing the re lative popula tions of spe cies in the same ecosys tem, as some spe cies are more tolerant than oth ers to land dis tur bance, loss of habitat and ex p osure to high met als and acid ex p osure. While wholesale habitat de struc tion might be re lative ly rare, therefore, there is also the issue of habitat frag menta tion. The local ef fects of noise, vib ra tions and blast ing: these can im p act the stabil ity of in frastruc tures, build ings, and homes of peo p le li v ing near min ing op era tions as well as peo p le’s peace and tran q uil ity. Re habilita tion of mined out areas: the glob al trend in min ing is towards what is cal led “pro gres sive re clama tion” mean ing that dis tur bed areas be come re claimed dur ing the life of the mine as well as after it has closed. Closure it self is now often plan ned, and mines de sig ned from pro ject start-up to make for eas i er and more suc cess ful re clama tion. The trick here is to monitor what hap p ens right from the word go (and to make sure that mech an isms are in place to en sure that the evenut al cost is adequate ly fund ed).
S OCI AL IS SUES The soci al im p act of min ing pro jects is com p lex and can be severe, par ticular ly in loc a tions where peo p le are al ready li v ing. Min ing can serious ly dis rupt com mun ity stabil ity and dis tort or damage local econom ies and li v elihoods. In sever al co unt ries, the be ginn ing of a large min ing pro ject af fects the economy of a town or com mun ity, and br ings pro blems such as pro stitu tion, drugs and crime, among oth ers. His torical ly the
En viron ment al and Soci al
costs of min ing have been borne lar ge ly by the di rect ly af fected popula tions while the be nefits have ten ded to accrue to the na tion state or the private sec tor. In the last de cade the mitiga tion of negative soci al im p acts have come to be seen as critical ly im p or tant. Pro p er ly man aged soci al im p acts can also be positive. Soci al is sues come at two levels, com mun ity and nation al. Land ac q uisi tion: this is a com mon and sig nificant cause of re sent ment and con flict as sociated with large min ing pro jects, often re lated to the amount and type of land and the way in which it is ac q uired. In many cases en tire com munit ies or sig nificant parts of them may have to be shif ted el sewhere. This in v ol v es the phys ical re loca tion of households and their real as sets, but can also lead to their “economic dis p lace ment”, that is the loss of their li v elihoods and in come sour ces, which must be re-established or re-created in their new loc a tions. Re settle ment creates chal lenges both for the re settled peo p le and the places and com munit ies which re ceive them. Al ter native ly, new purpose-built settle ments may need to be built but these might not meet needs. For ex am p le, the houses built and the lands al located may not allow for fami ly growth, or even the re stora tion of in comes or li v elihoods. Peo p le may have to chan ge their li velihoods in order to sur v ive. Par ticular ly chal leng ing can be the dis p lace ment of in digen ous peo p le that have cul tur al ties to the land, and one de fined way of mak ing their li v ing. Re settle ment is sues: may also arise along trans p ort and trans miss ion line cor ridors, as well as around new or upgraded port facilit ies needed by the mine. The major risk of re settle ment, volun ta ry or in v olun ta ry, is the poten ti al to im p overish com munit ies and leave them worse off than they were be fore the mine neces sitated their re loca tion. There are also situa tions where ar tisan al min ers, often re gar ded as barefoot pro spec tors and fin d ers of new miner al de p osits, are min ing in areas where IMCs have applied for ex p lora tion and/or min ing per mits. This often has led to con fron ta tions and con flict bet ween IMCs and ar tisan al min ers, and bet ween ar tisan al min ers and the govern ment.
What are the is sues
Com p an ies held much wider sway traditional ly on this issue. The re loca tion of popula tions has in the past been car ried out by the govern ment or the IMC with the approv al of the govern ment. But there is now a grow ing ex p ec ta tion loc al ly, national ly and in ter national ly, that these kinds of pro ces ses will be done in con sul ta tion with the af fected com munit ies and in a par ticipato ry way, and will in clude post re settle ment follow-up and on-going IMC or govern ment sup p ort to the re settled peo p le. Many IMCs now sub scribe to the IFC’s Per for mance Stan dard 5 on Land Ac q uisi tion and In volun ta ry Re settle ment, which lays out an ex p licit framework for con sul ta tion, plann ing, im p lemen ta tion and monitor ing of re settle ment, in clud ing in come re stora tion. Govern ments may also need to clar ify their own approach to and re spon sibilit ies re gard ing re settle ment, which may even need to be de fined in an In v est ment Ag ree ment. This is furth er com p licated in the case of In digen ous Peo p les, whose re settle ment is addres sed in the IFC Per for mance Stan dard 7 on In digen ous Peo p les. Uni q ue ly in this stan dard, In digen ous Peo p le can only be re settled with their con sent. The dis place ment of ar tisan al min ers, who often work areas with out legal aut hor ity, poses a dif ferent kind of chal lenge to govern ments and IMCs. Is sues re lat ing to ar tisan al min ing are in creasing ly addres sed in law, but the clash ing in terests of large-scale and small-scale min ing is a per sis tent pro blem. In ward mig ra tion: New min ing pro jects par ticular ly in economical ly de p res sed re g ions or co unt ries often lead to an in flux of new com ers from out side the area look ing for jobs on the pro ject, or to set up busines ses to pro fit from the new economic ac tiv ity. As a high value ac tiv ity, min ing generates sup p ort and ser v ice jobs, and if it tri gg ers bet t er in frastruc ture, that can be a furth er peo p le attrac tor. At a logist ical level, a sudd en in crease of popula tion can lead to pre ssure on water, land, hous ing and other re sour ces as well as ex ist ing pub lic in frastruc ture and soci al ser v ices, in clud ing sanita tion, health and educa tion ser v ices. There may be other negative boom town ef fects. Soci al co hes ion with in the com mun ity may be threatened. Dis ease, sub stan ce abuse, law and order and soci al con flict may be come major pro blems. Un control led popula tion in flux can have a pro found im p act on the origin al in habitants, and on the soci al and polit ical stabil ity of the area. The man age ment of in flux risks is now re cog nized as a major chal lenge for re spon sible mine de -
En viron ment al and Soci al
velop ment. Here too, for ward think ing IMCs will de v elop and im p le ment workfor ce re cruit ment and hous ing strateg ies that minim ize this risk, and de v elop other poli cies and pro cedures in col labora tion with local govern ment and nation al aut horit ies to keep in-migration under con trol. Li v elihoods: Peo p les’ li v elihoods can be af fected in a variety of ways both positive ly and negative ly. If the peo p le in the area de p end on local natur al re sour ces for their sub sist ence (hunt ing, fish ing, farm ing, or peasant min ing), ex p lora tion ac tivit ies and later site pre p ara tion, mine and plant con struc tion, in frastruc ture de v elop ment and mine op era tions, may in ter rupt, in ter fere with or pre v ent them from ac cess ing these re sour ces and con tinu ing their ways of sup p ort ing them selves and their famil ies. This has been re fer red to above as “economic dis p lace ment” which can occur even when com munit ies and households do not have to be shif ted. The main com p en sato ry measures that IMC’s and govern ments can take are to en sure the crea tion of al ter native li v elihood and em p loy ment op p or tunit ies for famil ies and in dividu als. This has often in v ol v ed pre feren ti al train ing and hir ing poli cies as well as in v est ment in local busi ness de v elop ment and the sourc ing of cer tain goods and sup pl ies that may be avail able loc al ly. His torical ly, govern ments have built pre feren ti al nation al hir ing and pro cure ment pro v is ions into their Min ing Ag ree ments, but these have not neces sari ly fil tered down to the local level. This is now be ginn ing to happ en as many com p an ies and govern ments re cogn ize the need to en sure secure and sus tain able com munit ies in the min ing area, and are now de sign ing and im p lement ing local em p loy ment and pro cure ment poli cies and pro cedures. Cul tur al Heritage and Sac red Sites: Land ac q uisi tion, earthmov ing ac tivit ies, and popula tion in flux can all threat en ac cess to and the pro tec tion and pre ser v a tion of cul tur al sites, wheth er of archeolog ical or spiritu al sig nifican ce. Where cul tur al sites are pre sent, IMCs often ob ligated by nation al laws un der take sur v eys, and where needed, im p le ment pro tec tive measures and man age ment sys tems. This issue may also be addres sed in the Min ing In v est ment Ag ree ment. Phys ical and soci al in frastruc ture: one of the poten ti al be nefits of a mine’s pre s ence is its in v est ment in the im p rove ment of local in frastruc ture and ser v ices. IMCs will re s ist re p lac ing the role of govern ment in pro v id ing basic ser v ices to its citizens, but often
What are the is sues
have and will con tinue to step up to the plate in the ab s ence of a sig nificant govern ment pre s ence and re sour ces to as s ist local com munit ies to meet basic needs and even im p rove qual ity of life. This often leads to an IMC tak ing a strategic approach to social/com mun ity in v est ment, and their in terest in pro mot ing public-private partnerships for local de v elop ment, which may in v ol v e dif ferent levels of govern ment, com munit ies and nation al NGOs as partn ers along with some multi- or bi-lateral aid agen cy fund ing, when avail able. Howev er, the roles and re spon sibilit ies, as well as the ex p ec ta tion of all part ies to the In v est ment Ag ree ment in this domain should be made clear dur ing ag ree ment negotia tions and com mun ity con sul ta tion when they occur, and for malized with in the Ag reement(s). Fin an ci al be nefit shar ing: since im p acts are un equal ly borne, there is an in creas ing ex pec ta tion that the peo p le and com munit ies most di rect ly af fected will share in the be nefits generated by the pre s ence of a min ing op era tion. These be nefits may not be li mited to em p loy ment and busi ness op p or tunit ies, im p roved in frastruc ture and ser vices, but may also re late to fin an ci al be nefit shar ing, for ex am p le, a re turn of a por tion of nation al govern ment royalt ies to the local municip al or re gion al aut horit ies. This is an issue that is also being addres sed in con tem p ora ry ag ree ments, which may man date fin an ci al con tribu tions by the IMC di rect ly or by the centr al govern ment back to the local aut horit ies. Equ ity is sues: a major chal lenge is in re duc ing the risk of creat ing new di v is ions, soci al or economic clas ses of peo p le with in the af fected com munit ies. The mine will have dif feren ti al im p acts on dif ferent groups with in the com mun ity, and the be nefits of em ploy ment or busi ness may not be even ly dis tributed. Con sul ta tion pro ces ses may not be in clusive and as a re sult, com mun ity in v est ment de cis ions and partnerships may even favor select groups. Dis p arit ies can be widened and power and soci al re lationships with in a com mun ity dis tor ted or chan ged to the dis ad v antage of cer tain groups. The burd en falls lar ge ly on the IMC to un derstand the risks of in ad v ertent ly pro mot ing or con tribut ing to what may be negative soci al chan ge with in af fected com munit ies. Un for tunate ly, this is not an issue that can be addres sed in Min ing In v est ment Ag ree ments or even with in the legal frameworks.
En viron ment al and Soci al
USING THE CONTRA C T TO MAN A GE THE IS S UES Min ing pro jects have dif ferent en v iron ment al and soci al im p acts at dif ferent phases in their life cyc les, and dif ferent parts of the contra ct can af fect those im p acts - for bet t er or worse. If you look at an older contra ct and see noth ing about the en v iron ment, don't be sur prised. Min ing contra cts traditional ly were lar ge ly silent on en v iron ment al and soci al pro v is ions. These is sues were sub ject to less scrutiny and un derstand ing in the past. But today most contra cts di rect ly address the issue, often by re fer ence to in ter nation al stan dards.
En viron ment al and Soci al
This sec tion pro v ides ex am p les of how contra cts can address these im p acts. These ex am p les de scribe ob liga tions placed upon the min ing com p any. Does this mean govern ments get a free pass? Far from it. These tools pro v ide the govern ment with in for ma tion. It is then the ob liga tion of the govern ment to use such in for ma tion to man age and con trol en v iron ment al and soci al is sues.
THE HE ART OF THE M ATT ER: EN VIRON MENT AL AND S OCI AL IM PACT AS SESS M E NT ( E S IA) AND M AN AG E M E NT PL ANS ( E M P) The plann ing phase is the most im p or tant phase for in fluenc ing what a min ing pro ject will look like. As plans for ex p lora tion, ex p loita tion, and closure and de v eloped (and re v ised), there is a cruci al op p or tun ity for tak ing stock of en v iron ment al and soci al
Using the Contra ct to Man age the Is sues
risks, figur ing out how to avoid or mitigate pro blems, and de sign ing the pro ject and op era tions ac cording ly. This pro cess is the "en v iron ment al im p act as sess ment" which may be more ac curate ly charac terized now as an "en v iron ment al and soci al im p act as sess ment" (ESIA). ESIAs are fund ament al pre-project plann ing tools used to make sure a wide range of poten ti al en v iron ment al and soci al im p lica tions are con sidered be fore the pro ject is for mal ly approved. They pro v ide an op p or tun ity to mold or even halt pro jects based on their fin d ings. Traditional ly, these as sess ments had an alyzed the en v iron ment al fea tures of a project-affected area and the poten ti al im p act of that pro ject, in clud ing an as sess ment of and im p acts on plants, an im als, air qual ity, water use and water availabil ity. But they in creasing ly take an even broad er look at mining-related is sues, and re q uire con sidera tion not only of the en v iron ment, but also of im p acts on com munit ies and socioeconomic is sues through ob jec tive an alysis and ex ten sive con sul ta tion. In Australia, for ex am p le, the state of Queensland re cent ly pas sed re gula tions re q uir ing more ex ten sive soci al baseline work and soci al im p act man age ment plann ing in ad v ance of per mit approv als. Data should be gat hered on cat ego ries such as com mun ity his to ry and cul ture, in come and cost of li v ing, popula tion, soci al in frastruc ture, workfor ce par ticipa tion, em p loy ment and di v ers ity pro file, hous ing and ac commoda tion, educa tion and train ing, trans p or ta tion and ac cess. Every th ing from the price of houses and mortgages, to the na ture of local labor mar kets to pub lic trans p ort could be re levant to these im p acts as sess ment. An ESIA often de scribes al ter native forms of the pro ject (in clud ing even a "no pro ject" al ter native), and lists dif ferent opt ions for avoid ing or mitigat ing pos sible negative im pacts. The level of de tail re q uired in EIAs often de p ends on the na ture of the pro p osed pro jects. Given their heavy footprint, EIAs for extra ctive in dust ries pro jects are most ly done to the most de mand ing stan dards. If a com p any is re q uired to secure re levant approv als and per mits under domes tic law be fore pro ceed ing with a min ing pro ject, pre p ar ing an ESIA and gett ing a govern ment
En viron ment al and Soci al
go-ahead can be a pre requisite to start ing op era tions, even if the contra ct does not in clude a specific re fer ence to them. But when they are in cluded, ESIA pro v is ions in contra cts can clear ly en sure that con duct ing ESIAs are a fund ament al part of the deal. The ESIA pro cess can con tain vari ous phases, in clud ing: pre p ara tion of a draft EIA (which may be done by the pro ject de v elop er, re levant government al aut hor ity, and/or in depen dent firm ); con sul ta tion with the com mun ity in the draft ing of the EIA a per iod in which the pub lic can re v iew and com ment on the draft; re v is ion of the EIA based on the com ments by stakehold ers in clud ing the pub lic and com p any; pre p ara tion of the final EIA; selec tion of a pro ject plan with a co ur se of ac tion and strateg ies for avoid ing or mitigat ing harm. In some juris dic tions citizens then have the ab il ity to chal lenge the EIA and re sult ing de cis ions in court.
Using the Contra ct to Man age the Is sues
These fea tures of an ESIA are vital for de ter min ing wheth er, to what ex tent, and how en v iron ment al and soci al im p acts are anti cipated and - to the ex tent pos sible avoided. If the pro cess is easy, done with out checks-and-balances, and not in teg rated with in any meaning ful decision-making prac tice, the ESIA can be just a form al docu ment. If a com p any is re q uired to secure re levant approv als and per mits under domes tic law be fore pro ceed ing with a min ing pro ject, pre p ar ing an ESIA and gett ing a govern ment go-ahead can be a pre requisite to start ing op era tions, even if the contra ct does not in clude a specific re fer ence to them. But when they are in cluded, ESIA pro v is ions in contra cts can clear ly en sure that con duct ing ESIAs are a fund ament al part of the deal. On the issue of pre p ara tion, some ag ree ments, like Guinea's with Zogota, give that re spon sibil ity to the com p any: Mon golia's ag ree ment with Ivan hoe Mines Mon golia, Ivan hoe Mines and Rio Tinto, on the other hand specif ies (6.1) that the com p any "shall ob tain de tailed en v iron ment al im p act as sess ment re p orts ... in ac cordan ce with the Law on En v iron ment al Im p act As sess ment pre p ared by a com p etent, in depen dent, pro fes sion al firm.” Some min ing contra cts in dicate that the govern ment must approve ESIAs, but are often less specific re gard ing the re q uire ments for scope or pro cedures for approv al.
L I NK ING AS SESS M E NT, PL ANN ING AND M AN AG E MENT: THE EN VIRON MENT AL M AN AG E M E NT PL AN As sess ment means noth ing if the in for ma tion is gat hered but not ac tual ly used in the plann ing of the pro ject, de cis ions that are made, and strateg ies that are adop ted are not ac tual ly im p lemen ted. This is where en v iron ment al (and soci al) man age ment plans come in (re fer red to here as "EMPs" for short). These plans can a full er pic ture of how the re lationship bet ween the pro ject, the en v iron ment, and sur round ing com munit ies is being han dled through the life of the pro ject from ex p lora tion through mine closure.
En viron ment al and Soci al
In com p arison with ESIAs, EMPs focus less on the plann ing or de sign phase and more on man age ment of en v iron ment al im p acts and com p lian ce with re levant per mits and approv als. In some cases, EMPs re q uire com p lian ce with fin d ings of an ESIA. In other cases, howev er, the pre c ise re lationship bet ween the ESIA and EMP is less clear. Im por tant ques tions the contra ct might an sw er are wheth er the EMP has to take into ac count all cat ego ries of is sues co v ered in the EIA, or wheth er it re q uires the com p any and/or the govern ment to mitigate (at any cost) the risks iden tified in the ESIA. The Mon golian ag ree ment with Ivan hoe and Rio Tinto, for ex am p le, re q uires the in v es tor to im p le ment an "en v iron ment al pro tec tion plan ('EPP') and en v iron ment al monitor ing and an alysis pro gram," but does not link it ex p ress ly with the re q uired en viron ment al im p act as sess ment. It states: 6.4. The In v es tor shall meet all costs for each year of im p lement ing an en v iron ment al pro tec tion plan ("EPP") and en v iron ment al monitor ing and an alysis pro gram, in con nec tion with im p lemen ta tion of the OT Pro ject and shall pro v ide to the State centr al ad ministrative aut hor ity in char ge of en v iron ment a re p ort, pre p ared by a cer tified, in depen dent, pro fes sion al firm, on address ing the In v es tor's im p lemen ta tion of the measures specified in the EPP every 3 (three) years. While the Mon golian ag ree ment sees the as sess ment and the plan as two separate docu ments, some ag ree ments as sume that the EIA it self sets out an ac tion plan that the com p any must com p ly with. For in stan ce, Ecuador's ag ree ment with Ecuacor rien te states (12.2): El Con cesionario Minario tomara las pre cauciones necesarias, y es tablecidas en el EIA ap robado, para pre v enir, con trolar, mitigar, re habilitar, re mediar y com p en sar los im pac tos negativos que sus ac tividades mineras puedan tener sobre el am bien te y la com unidad. The Min ing Con ces sionaire will take the neces sa ry pre cau tions, es tablis hed in the approved EIA to pre v ent, con trol, mitigate, re habilitate, re mediate and com p en sate for the negative im p act that its min ing ac tivit ies can have on the en v iron ment and the com mun ity.
Using the Contra ct to Man age the Is sues
Similar ly, Afghanis tan's Kara Zag han ag ree ment (Ar ticle 1.10) de fines the gold min ing pro ject's En v iron ment al and Soci al Man age ment Plan as a: ... plan pro p osed by [the com p any], and which must be ac cepted by [the Minist ry of Mines], which de tails the measures to be taken to minim ize or al leviate the En v iron ment al and Soci al fac tors applic able to the Qara Zag han Gold Pro ject which are iden tified and de tailed in the En v iron ment al and Soci al Im p act As sess ment. The 2012 Model Mine De v elop ment Ag ree ment of Sier ra Leone pro v ides yet an oth er ex am p le and, as com p ared to the ag ree ments quoted above, is re lative ly specific re gard ing what it must con tain and what the com p any is sup p osed to do. It states (Art. 2.6.1(a)): The Com p any, prior to com menc ing con struc tion, shall have an En v iron ment al Man age ment Plan pre p ared (and up dated prior to any major chan ge to the mine plan) by an in depen dent third-party (and if pre p ared by the Com p any, verified by an In depen dent Sole Ex p ert) on the basis of sound en gineer ing and economic prin ci p les in ac cordan ce with Good In dust ry Prac tice. The ob jec tive of the En v iron ment al Man age ment Plan is to pre v ent any un neces sa ry and undue de grada tion of the en v iron ment by the Min ing Op era tions; to pro tect pub lic health and safety, par ticular ly for com munit ies in the Min ing Area; to pre ser v e water quant ity and qual ity; to en sure that im pacts with in the Min ing Area are con tained in that area; to stabil ize the site physical ly and chemical ly at the end of min ing op era tions to pre v ent of fsite im p acts; and to en sure that the Min ing Area may be safe ly and be neficial ly used by fu ture genera tions. The En v iron ment al Man age ment Plan shall upon re q uest by GoSL, be made pub lic ly avail able in a lan guage and in a form that is ac cessib le to af fected com munit ies in the Min ing Area, and shall be placed in the docu ment files iden tified in Sec tion 35.1(e) of this Ag ree ment. The ag ree ment also in cludes a list of topics that must be co v ered in the En v iron ment al Man age ment Plan, and specif ies what is re q uired in order to com p ly with "Good In dust ry Prac tice". This, the ag ree ment ex p lains, is (Art. 1.4): … the ex erc ise of that de gree of skill, di lig ence, prud ence and foresight which would rea sonab ly and or dinari ly be ex p ec ted to be applied by a skil led and ex p erien ced per -
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son en gaged in the in ter nation al min ing in dust ry and in cludes but is not li mited to the guidan ce pro v ided by the In ter nation al Co un cil on Min ing and Met als, the In ter nation al Fin an ce Cor p oration’s] Per for mance Stan dard 1 (Soci al and En v iron ment al As sess ment and Man age ment Sys tems), Stan dard 3 (Pol lu tion Pre v en tion and Ab ate ment), and Stan dard 6 (Bi odivers ity Con ser v a tion and Sus tain able Natur al Re sour ce Man age ment), by ISO 140001 stan dards. These tools (the ESIA pro cess) and plans (the EMP) are centr al to de ter min ing the ex tent to which a min ing pro ject will facilitate long term sus tain able de v elop ment, or leave the co unt ry to with a lega cy of soci al and en v iron ment al pro blems.
DRIL L ING DOWN ON S PE CIFIC IS S UE S : AC CE S S TO RE S OUR C E S , W O R K P L A C E S A F E T Y, S E C U R I T Y, C U L TUR AL HE RITAG E , M INE CL OS URE , AND L I AB IL ITY While it is vital for the ESIA and EMP to be as com p rehen sive as pos sible, there may be cer tain is sues that the contra ct ing part ies want to give speci al at ten tion. Ex p eri ences have shown that min ing pro jects give rise to tens ions over ac cess to and use of re sour ces, is sues re gard ing workplace safety, con flicts bet ween com munit ies and secur ity for ces, and con cerns re gard ing en sur ing that - if some th ing does go wrong - the pro blem can be sol v ed at the approp riate party's ex p en se. There is also in creased aware ness of the op p or tunit ies that mine de v elop ment can pre sent for com mun ity de v elop ment. Some contra cts con tain speci al pro v is ions on these topics in order to make clear what the part ies' rights and ob liga tions are; and some do this in order to en sure that a breach of the ob liga tion also con stitutes a breach of the contra ct with real con sequ ences for the part ies. This sec tion pro v ides ex am p les of some of those pro v is ions.
AC CE S S TO L AND, WATE R AND OTHE R RE S OUR CE S One crit ical early-project issue re lates to ac cess to re sour ces. To ac cess miner als you must have ac cess to land and water. This can have sig nificant im p acts on sur round ing
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ecosys tems. Some contra cts state ex p licit ly, or imply through their sil ence, that a com p any's ab il ity to ac cess and im p act land, water, and other re sour ces will be gover ned by gener al background prin ci p les of law re gard ing miner al rights, water rights, land rights, and en v iron ment al pro tec tion. Under these contra cts, the com p any will have to secure re levant ac cess and approv als con sis tent with those laws - a pro cess that in many juris dic tions is often cited as being lengthy, com p lex and co st ly. Some contra cts seek to bypass those pro ces ses and con straints by facilitat ing min ing com p an ies' ab ilit ies to use or im p act water, land or other natur al re sour ces. In some contra cts, govern ments pro m ise com p an ies that they are able to use and im p act the land, water, timb er and other re sour ces neces sa ry for their op era tions. At one ex treme, a govern ment may grant a com p any these rights in broad if not ab solute terms. Other contra cts take a more re strained approach by im p os ing ob liga tions such as fees, and/or re stric tions on the amount or scope of use. Re gard ing water use, for ex am p le, the 2010 contra ct bet ween Li beria, Putu Iron Ore Min ing, Inc. and Mano River Iron Ore, Ltd., states in Ar ticle 19.5: The Com p any shall have the right to ac cess (in clud ing by means of extra c tion) such water sup p l ies as are rea sonab ly re q uired by it for the pur p oses of car ry ing out its [ex plora tion, de v elop ment, pro duc tion, and other op era tions] sub ject to the pay ment by the Com p any of the char ges re q uired by applic able Law for the use of water and pro vided that such ac cess by the Com p any does not af fect the water sup p l ies used by the sur round ing popula tion or, to the ex tent that it does so af fect water sup p l ies, the Com pany pro v ides an al ter native sour ce of water sup p ly to the af fected popula tion. That 2010 pro v is ion il lustrates how a contra ct can im p ose cer tain li mits on the com pany's use of water in order to take into ac count other users, uses and in terests. But it also shows how contra cts leave a numb er of en v iron ment al and soci al is sues un resol ved. It does not, for ex am p le, place any li mits on the use of water im p act ing the en viron ment; nor does it clear ly address who is the "sur round ing" popula tion who may be en tit led to re ceive "al ter native" sour ces of water sup p ly. Ad ministrative or re gulato -
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ry pro ces ses are re q uired to de ter mine specific ob liga tions when con flict arises in their de ter mina tion. Is sues around land ac cess can be just as con ten ti ous. The award of rights to ac cess land to the min ing com p any by the govern ment may not take ac count of cus toma ry land rights as per ceived by local com munit ies. One of the most sen sitive is sues is when es tablish ment of a mine re q uires local re sidents to make way for op era tions. Re q uire ments as to the han dl ing of re settle ment are in creasing ly li ke ly to be found in min ing contra cts. The Sier ra Leone 2008 Rutile contra ct has a long sec tion de al ing with this issue. But it does not cat egorical ly state one way or the other if re sidents have a right to re fuse to move. (Ar ticle 10.b.v) If at any point a re settle ment of the local popula tion ap p ears to be ab solute ly es senti al, the Com p any shall move with ut most cau tion, with the con sent of the Govern ment and in con sul ta tion with local aut horit ies in per suad ing the local popula tion to re settle and pro v ide a fully adequate re settle ment pro gram in ac cordan ce with the di rec tions of the re spon sible Minist er. So what hap p ens if, de spite pro ceed ing with "ut most cau tion" and of fer ing a "fully adequate re settle ment pro gram", the local popula tion re fuses to move? The Sier ra Leone contra ct clear ly specif ies the centr al govern ment has the final say in ad judicat ing bet ween a com p any and an in dividu al lan down er for use of the land. So does Li beria's contra ct with Putu Iron Ore Min ing, which states (Ar ticle 7.3.a): If no other sur face rights are rea sonab ly avail able to the Com p any for such pur p oses the Govern ment will use its pow ers of em inent domain to ob tain such rights from an un will ing third party. In Guinea's contra ct with Al lian ce Min ing Com modit ies for the bauxite mine at Koum bia, it is as sumed that the com p any will be able to move re sidents if it has to. The ag ree ment simp ly lays down con di tions (Ar ticle 15.8) for how it must do so. Si la Societe juge la pre s ence d'Utilisateurs et/our Oc cupants Fon ci ers in com p atib le avec ses Op era tions Minieres sous la Con cess ion Miniere, elle est tenue d'in demnis er
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ces Utilisateurs et/ou Oc cupants Fon ci ers avant la date de sig na ture de la Con v en tion et de les aider a se re localis er. La Societe doit vers er une in dem nite a ces Utilisateurs et/ou Oc cupanbts Fon ci ers, pour toute re localisa tion ou pour toute perte d'usage, titre fon ci er, habita tion et re col tes. L'in demnisa tion sus men tionee doit cor res p ondre au mon tant neces saire a la re localisa tion et a la re instal la tion des dits Utilisateurs et/ou Oc cupants Fon ci ers... (et) doit com p rendre la juste valeur marchan de de toute perte. If the Com p any jud ges the pre s ence of Users in com p atib le with its min ing op era tions under the Min ing Con cess ion, it must in demn ify these Users be fore the date of sig na ture of the ag ree ment and to help them re locate. The Com p any must dis bur se an in demn ity to the Users for every re settle ment or for every loss of use, habita tion and crops. The above men tioned in demn ity must cor res p ond to the amount neces sa ry to re locate and re install the said Users and must en com p ass the fair mar ket value of every loss.
OC CUPATION AL HE AL TH AND S AFE TY Contra ctu al terms de tail ing min ing com p any re spon sibilit ies for oc cupation al health and safety around min ing op era tions are re lative ly com mon. Health and safety is sues are co v ered in legis la tion in most co unt ries, and many min ing contra cts will simp ly note that the min ing com p any is bound to pro v ide adequate pro tec tions in line with the law and with in ter nation al stan dards. For ex am p le, the 2011 contra ct bet ween the Govern ment of Li beria and Wes tern Clust er Li mited / Sesa Goa Li mited / Bloom Foun tain Li mited / Elenil to Miner als & Min ing LLC notes that the Com p any: Shall prac tice such modern health and safety pro cedures and pre cau tions (in clud ing re gular safety train ing in struc tion for its em p loyees) as are in ac cordan ce with applic able Law and In ter nation al Min ing Stan dards. The 2012 Model Mine De v elop ment Ag ree ment of Sier ra Leone similar ly re q uires the com p any to ad here to “good in dust ry prac tice” re gard ing labor, health, and safety (Art. 16.5 & 16.6).
En viron ment al and Soci al
S E CUR ITY Secur ity is an im p or tant and sen sitive issue. The mine needs secur ity for its per son nel and op era tions. The issue is who has re spon sibil ity for secur ity; what are the rights of the mine with re spect to its own secur ity for ces; what pro tec tions are there against ab uses. There are a numb er of dif ferent re solu tions. In some cases mines may be en tit led to main tain secur ity for ces but must im medieate ly turn over any de tained per son nel to the aut horit ies. In other cases, mines are not per mit ted to main tain armed secur ity per son nel, and the govern ment takes on the ob liga tions of pro v id ing in tern al securith. One Li berian ag ree ment sig ned with Af rica Aura Re sour ces in 2004, notes that the pro ject is not con sidered to have star ted until a joint visit by the govern ment and com pany of fici als has de ter mined that the site is safe. It even specif ies (Art. 27) that the com p any should be “under the guidan ce” of the Uni ted Na tions of fice in Mon rovia and says the com p any shall make “all rea son able ef forts to ac cept a 'safe to op erate in' de clara tion”. But an oth er Li berian contra ct, with China Union in 2005, goes much furth er in giv ing the com p any power. It ex p licit ly al lows (Art. 9.2) the com p any to form its own secur ity force to op erate on the min ing con cess ion areas and “the im mediate vicin ity”. Those mem b ers of the Con ces sionaire's (or such contra ctor's) secur ity force cer tified by name by the Con ces sionaire to the Minist ry of Just ice as being lit erate, as hav ing re ceived adequate full-time train ing in police and law en for ce ment pro cedures given by an out side train er satis facto ry to the Minist ry of Just ice and as hav ing been pro vided with op erat ing manu als approved by the Minist ry of Just ice shall have en for ce ment pow ers with in the areas de scribed in the pre ced ing sen t ence, al ways being sub ject to applic able Law. These pow ers in clude search and ar rest, though the ag ree ment specif ies the com pany's secur ity force must not ify the police with in 24 hours of any de ten tions. In ad di tion to these rights, the min ing com p any can also be ob ligated to util ize them sen sitive ly, in re cog ni tion of com mun ity and basic human rights. It is un usu al to see this spel led out in a contra ct, but as in ter nation al norms on busi ness and human rights
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have shif ted, there are now some ex am p les. Sec tion 9.2 of the 2011 ag ree ment bet ween the Li berian govern ment and Wes tern Clust er Li mited / Sesa Goa Li mited / Bloom Foun tain Li mited / Elenil to Miner als & Min ing LLC specif ies that the firm’s secur ity force is sub ject to both applic able law and the Volun ta ry Prin ci p les on Secur ity and Human Rights (see the next chapt er for more de tails on the Volun ta ry Prin ci p les).
M INE CL OS URE What hap p ens when the contra ct ter minates? Will the co unt ry be left with an un us able and poten tial ly hazard ous was teland? In order to avoid that out come, co unt ries can in clude specific ob liga tions re lated to mine closure in their contra cts. The min ing com p any will be asked to pro v ide plans and cost es timates for re habilita tion of the mine site – usual ly built in to the EMP. Some contra cts may re q uire ad dition al guaran tees of fin anc ing that will be avail able if there are major en v iron ment al pro blems that re q uire clean up. These may be one of sever al “parent al guaran tees” re q uir ing the com p any to de monstrate it can mobil ize ad dition al fund ing as needed. For ex am p le, the Govern ment of Li beria’s Model Miner al De v elop ment Ag ree ment (2008) states: The closure man age ment plan must also set forth the means by which the Com p any pro p oses to en sure the availabil ity of funds to fin an ce its en v iron ment al re stora tion and re media tion ob liga tions under Sec tions 8.2 and 8.3 of the Min ing Law so that the cost of closure will be borne by the Com p any and not the pub lic or the Govern ment. If the Com p any does not agree in writ ing with the Govern ment to a “pay-as-you-go” fund ing scheme, then a fund ing guaran tee rea sonab ly satis facto ry to the Minist er of Fin an ce from a third party fin an ci al in stitu tion with a long-term credit rat ing of at least A (or its equivalent) from at least two in ter national ly re cog nized credit-rating agen cies with pro v is ion rea sonab ly ac cept able to the Minist er of Fin an ce and the Minist er for re deter mina tion of es timated closure costs at least tri en nial ly and ad just ments in the amount of the fund ing guaran tee will nor mal ly be ac cept able. It is im p or tant to re memb er that some en v iron ment al is sues such as tail ings ponds will have to be man aged years after the mine may close so that some per manent fund ing sour ce may be re q uired.
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COM MUN ITY DE VE L OP MENT Contra cts in creasing ly re q uire com p an ies to pro v ide ser v ices to af fected com munit ies, in part due to broad er re cog ni tion of the economic and soci al dis rup tion that a mine can create al ongside economic op p or tunit ies. These typical ly take the form of terms de tail ing com mit ments to sup p ort com mun ity de v elop ment, at least on the part of the min ing com p any. These may be as sim p le as stat ing fin an ci al com p en sa tion to be pro v ided. The contra ct for the Qara Zag han Gold Pro ject in Afghanis tan is straight for ward. It simp ly states that the com p any spend a mini mum US$50,000 for “im p lemen ta tion of soci al pro grams as per the Soci al De velop ment Plan” (Ar ticle 31). Who de cides the use of such funds? Some times it is specified. Some times it is left am bigu ous. The 2002 Sier ra Rutile Ag ree ment is re lative ly ex p licit. It notes that the com pany shall pay into an Ag ricul tur al De v elop ment Fund the high er of US$ 75,000 and 0.1% of gross sales. The fund is to be used “for the de v elop ment of ag ricul ture in the af fected areas and shall be con trol led by re p resen tatives of the Govern ment, Chief dom re p resen tatives and the Com p any’s re p resen tatives.” But even where contra cts ac hieve some de gree of specific ity, there may be ques tions among af fected com munit ies as to who can legal ly and credib ly act as their agent. Some contra cts do con tain much broad er com mun ity de v elop ment re lated com mit ments. Often these are in teg rated with pro v is ions re lated to local economic de v elop ment and cor p orate soci al re spon sibil ity. The Mon golia In v est ment Ag ree ment with Ivan hoe and Rio Tinto is wide rang ing in its co v erage of such is sues (Art. 4). The govern ment com mits to es tablish ing a multi-stakeholder “Sout hern Gobi Re gion al De velop ment Co un cil” to help deal with local gover nance, mig ra tion, in frastruc ture, train ing, soci al ser v ice pro v is ion and capac ity build ing. The in v es tor is re q uired to be a mem b er of this Co un cil’s govern ing board and sup p ort its ac tivit ies. The ag ree ment also im p oses re q uire ments on how the in v es tor en gages with other stakehold ers, such as ob liga tions to con duct all its “socio-economic de v elop ment pro grams and ac tivit ies based on prin ci p les of trans p aren cy, ac coun tabil ity and pub lic
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par ticipa tion” and to main tain “pro duc tive work ing re lationships … with nongovernmental or ganiza tions, civic groups, civil co un cils and other stakehold ers.” A contra ct may also re q uire the min ing com p any to go the extra step of negotiat ing a com mun ity de v elop ment ag ree ment, or af firm that such a re q uire ment ex ists under the law. Such ag ree ments, which are dis cus sed in de tail in the next chapt er, usual ly out line the size and na ture of cor p orate con tribu tions to local li v elihoods and pro v ide a framework for man ag ing such con tribu tions and for on go ing di alogue. Again, the Mon golia ag ree ment with Ivan hoe and Rio Tinto states: The In v es tor shall es tablish co opera tion ag ree ments with local ad ministrative or ganiza tions in ac cordan ce with Ar ticle 42 of the Miner als Law and these ag ree ments may in clude the es tablish ment of local de v elop ment and par ticipa tion funds, local par ticipa tion com mit tees and local en v iron ment al monitor ing com mit tees.
CUL TUR AL HE RITAG E Min ing neces sari ly dis turbs the ground. Not only does this mean dis rup tion of cur rent or poten ti al uses of the land, but ex p os ing the lega cy of past uses. There is the risk of dis cover ing or dis turb ing cul tural ly sig nificant ar tifacts. How will the average miner re cogn ize what might be sig nificant? What do they do? These are the types of is sues now co v ered under in dust ry good prac tice guidelines, such as the In ter nation al Fin an ce Cor p oration’s Per for mance Stan dards and In ter nation al Co un cil of Min ing and Met als prin ci p les (see the next chapt er for more de tails). It is not com mon to find pro v is ions de al ing with these is sues in the contra cts them selves, but there are ex am p les. The 2011 contra ct bet ween and Afghanis tan and the Afghan Krys tan Natur al Re sour ces Com p any anti cipates this (Art. 28), and tries to en sure the govern ment is quick ly notified of any issue: If, dur ing pro spect ing, ex p lora tion, and min ing, any his tor ical or cul tur al ar tifacts, monu ments, buried treasures and (noble met als and non-noble met als) are found;
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these his toric items and works (ac cord ing to the applic able laws of Afghanis tan) will be long to the govern ment. If AKNR, dur ing its op era tions be comes aware of the ex ist ence of this kind of treasure or monu ments, AKNR is bound to in form the Minist ry of Mines and Minist ry of Cul ture with in 24 hours. The 2002 contra ct bet ween Guinea and SIMF ER S.A. pro v ides more de tailed in struc tion to the com p any re gard ing what it can and can not do after it dis cov ers an archeolog ical site (Art. 37.4): En cas de découver te d’un site archéologique, la phase d’exploita tion devra être précédé aux frais de SIMF ER S.A. et en ac cord avec l’Etat, par des études approp riées menées par les ser v ices compétents a l’in terieur du Périmet re d’Exploita tion. S’il venait à être mis a jour des ele ments du pat rimonie cul turel nation al, meub les ou im meub les, au cours des ac tivités de re cherche, SIMF ER S.A. s’en gage à ne pas de p lac er ces ob jets, et à in form er sans délais les auto rités ad ministratives. SIMF ER S.A. s’en gage à par ticip er aux frais de sauvetage raisonn ables. If an archaeolog ical site is dis covered, the ex p lora tion phase must be pre ceded, at the ex p en se of SIMF ER S.A. and by the ag ree ment of the State, by approp riate stud ies led by com p etent agen cies with in the per imet er of ex p loita tion. If ele ments of cul tur al pat rimony come to light, wheth er fixed or mov able, dur ing the co ur se of re search, SIMF ER S.A. com mits to not dis p lac ing ob jects and to in form ing the ad ministrative aut horit ies. SIMF ER S.A. com mits to shar ing in rea son able sal v age costs.
WHE N TH ING S G O WRONG - CO VER ING L I AB IL ITY FOR HARM Th ings can and some times do go wrong in min ing op era tions. En v iron ment al and soci al ob liga tions may be knowing ly or neg ligent ly breac hed; un known and un forese en im p acts and chal lengs may arise; plans may chan ge; and ex p ec ta tions may be dis ap poin ted. All of these cir cumstan ces can cause harms to an in dividu al, com mun ity,
Using the Contra ct to Man age the Is sues
and/or the en v iron ment, and these harms, in turn, can generate legal ac tion and grievan ces. Contra cts general ly at tempt to address these is sues in ad v ance by de ter min ing who will be re spon sible for what. In terms of en v iron ment al pro blems, as noted above in con nec tion with mine closure, contra cts typical ly re q uire fin an ci al guaran tees to cover neces sa ry clean up. One variant of such guaran tees is to re q uire the min ing com p any to post an en v iron ment al bond, where they set aside funds up front that are held in escrow ex p licit ly for re habilita tion. They are only drawn upon if needed. If not, they are re tur ned to the min ing com p any upon com p le tion of the pro ject. In the contra ct bet ween Mon golia and Ivan hoe Mines, the part ies use this type of advance-payment sys tem in order to help en sure that there are funds avail able for en viron ment al man age ment and clean-up. It states (Arts. 6.6-6.8): The In v es tor shall de p osit funds equivalent to 50% (fifty per cent) of its en v iron ment al pro tec tion cost for the par ticular year, prior to the start of that year into a bank ac count es tablis hed by the State centr al ad ministrative aut hor ity in char ge of en v iron ment. The com p any will use that money if neces sa ry to com p ly with its en v iron ment al man age ment ob liga tions. If the money runs out and the com p any still has work to do, en viron ment al ex p erts can re q uire the com p any to do or pay more. (Art. 6.12). In the event of a sig nificant or cat astrop hic en v iron ment al mis hap or ac cident, the crit ical issue will be how to make sure there is money to fix the pro blem. How can the contra ct help en sure that costs of mitiga tion, re media tion and re stora tion are met? That in ju ries are com p en sated? In ad di tion to re q uir ing com p an ies to post bonds or pay de p osits into de dicated funds, some contra cts con tain pro v is ions re q uir ing com pan ies to ob tain in suran ce for en v iron ment al or, more typical ly, gener al li abilit ies. An oth er strategy is to re q uire a com p any to secure a form al guaran tee from its parent com p any or from a fin an ci al in stitu tion. In clud ing these ob liga tions -- and en sur ing they are com p lied with -- can be par ticular ly im p or tant to pro tect the govern ment in
En viron ment al and Soci al
cases where the com p any that is party to the contra ct lacks sig nificant as sets or balan ce sheet strength.
WHE N TH ING S G O WRONG - L I AB IL ITY FOR HARM S TO NON-PARTIE S As noted above and in other chapt ers [re fer ence economic de v elop ment], some contra cts re q uire com p an ies to do, or not do th ings, in order to shape their im p acts on the en v iron ment, sur round ing com munit ies, and other non-parties to the contra ct such as in dividu al em p loyees. The pro v is ion in the Liberia-Putu contra ct ing re q uir ing the com p any to limit its use or pro v ide al ter native water to sur round ing com munit ies is an ex am p le. Under some co unt ries’ laws, that type of re q uire ment can create “third party” rights en abl ing non-parties to the contra ct to en for ce those ob liga tions: If the com p any fails to limit its use or pro v ide the com mun ity adequate water sup p l ies, com mun ity mem b ers may be able to take them to court or pur sue other legal re lief. Apart from the govern ment, the Com p any and the sharehold er … no Per son shall have any rights under this Ag ree ment. This does not mean that the com munit ies have no pro tec tion. Citizens can still sue for damages under tort law or gener al legis la tion and citizens have all of the or dina ry re med ies avail able against cor p ora tions and per sons. What the pro v is ion cuts off is a right to sue under the contra ct and where the right exist only in the contra ct in dividu als must de p end upon the govern ment to en for ce the ob liga tion. When a non-party to the contra ct (e.g., an em p loyee or near by farm er) is har med as a re sult of min ing op era tions, and sues the govern ment and/or com p any for re lief, the contra ct also often specif ies who will wind up ul timate ly pay ing for any com p en sa tion. These are cal led "in dem nifica tion" clauses, and are used by contra ct ing part ies to de cide how to al locate li abil ity bet ween them selves.
Using the Contra ct to Man age the Is sues
HOW TO HAN DL E E VOL V ING E N VIRON MENT AL AND S OCI AL L AWS AND RE G UL A TIONS ? The en v iron ment al and soci al im p act of a mine at one point in time will not neces sari ly be the same ten, fif te en, or twen ty years later. Laws chan ge over time, and those chan ges can apply to pro jects to upgrade their per for mance on any numb er of is sues. But are min ing com p an ies al ways re q uired to track such chan ges and en sure their com p lian ce with re levant amend ments? The an sw er to that ques tion can de ter mine wheth er a co unt ry will have a mine that op erates in ac cordan ce with best prac tices, or one that com p l ies with out dated stan dards. Some contra ct pro v is ions ac tual ly might hind er im p rove ments in soci al and en v iron ment al per for mance. These are known as "stabiliza tion clauses" -- pro v is ions stat ing that the govern ment will not re q uire com p an ies to com p ly with new en v iron ment al, soci al, or other laws as they are amen ded from time to time. This can freeze the en viron ment al and soci al re gula tion of a min ing pro ject, hin der ing govern ments' ab ilit ies to take into ac count new in for ma tion, tech nolog ies, and best prac tices. Other stabiliza tion clauses do not "freeze" the law, but re q uire the govern ment to cover the com p any's costs re lated to com p lian ce with any new re q uire ments. This al lows the govern ment to upgrade its en v iron ment al and soci al re gula tion of min ing pro jects, but can dis courage it from doing so in prac tice. Cer tain stabiliza tion clauses give the min ing com p any the choice of wheth er to be gover ned by new laws or re gula tions. This is the case with a stabiliza tion pro v is ion con tained in the 2005 contra ct bet ween Li beria and Mitt al Steel for de v elop ment of iron ore in the co unt ry. It stated in ar ticle XIX: ... In par ticular, any modifica tions that could be made in the fu ture to the Law as in ef fect on the Ef fective Date shall not apply to the CON CES SIONAIRE and its As sociates with out their prior writt en con sent, but the CON CES SIONAIRE and its As sociates may at any time elect to be gover ned by the legal and re gulato ry pro v is ions re sult ing from chan ges made at any time in the Law as in ef fect on the Ef fective Date. In the event of any con flict bet ween this Ag ree ment or the rights, ob liga tions and dut ies of a Party
En viron ment al and Soci al
under this Ag ree ment, and any other Law, in clud ing ad ministrative rules and pro cedures and matt ers re lat ing to pro cedure, and applic able in ter nation al law, then this Ag ree ment shall govern the rights, ob liga tions and dut ies of the Part ies. Be cause stabiliza tion clauses can limit the government's ab il ity to pre v ent en v iron ment al and soci al harms, or to en sure ef fective re med ies exist for those harms, they have attrac ted strong critic ism from civil society among oth ers. Some ex p erts argue they are bad poli cy and may even violate domes tic law and/or in ter nation al human rights law. The trend in prac tice is to limit stabiliza tion where it ex ists to iden tified fisc al and close ly re lated pro v is ions and to ex p licit ly ex empt soci al and economic poli cies from stabiliza tion.
FIN D I NG GUIDAN C E AND AN S W E RS OUT S IDE THE MIN I NG CONTRA CT In the pre v i ous chapt er, we de scribed the kinds of soci al and en v iron ment al pro v is ions li ke ly to be found in con tem p ora ry min ing contra cts and noted a numb er of specific is sues that may (or may not) be dealt with in a min ing contra ct. We also noted that no con tem p ora ry contra ct is li ke ly to con tain all applic able soci al and en v iron ment al re quire ments. As a re sult an y one who wants a com p rehen sive pic ture of the soci al and en v iron ment al re q uire ments applic able under a pro p osed min ing contra ct for her co unt ry will al ways find it neces sa ry to look at the contra ct togeth er with her co untry's applic able law and re gula tions. Most co unt ries today have com p rehen sive en v iron ment al pro tec tion laws and re gula tions, togeth er with an en v iron ment al pro tec tion agen cy ad minis ter ing them. The law may have de v eloped so much that the contra ct will do lit tle more than refer to it. On soci al is sues, basic re q uire ments applic able to em p loy er and em p loyee re lationships exist. Many, but far from all, juris dic tions have adop ted laws around land ac q uisi tion and re loca tion. More re cent rules go far in the di rec tion of re q uir ing the min ing com p any to negotiate the terms and con di tions of dis p lace ment and re loca tion with af fected local com munit ies.
En viron ment al and Soci al
The area most li ke ly to be be reft of any guid ing law or re gula tion is soci al ser v ices like health and education al facilit ies, or basic in frastruc ture and hous ing for their work ers and for those who mig rate to the mine area to par ticipate in the em p loy ment that will in evitab ly spr ing up around a new mine. When the un der ly ing min ing re gula tions, if any, or the contra ct do not con tain applic able re q uire ments, the curi ous ob serv er is li ke ly to have to seek guidan ce in the sour ces de scribed towards the end of this chapt er. In ad di tion to re ferenc ing applic able laws, a contra ct may re q uire the com p any to fol low a non-governmental set of stan dards, such as the IFC's "Per for mance Stan dards on En v iron ment al and Soci al Sus tainabil ity." More often, the contra ct will re q uire the min ing com p any to fol low "good in dust ry prac tice" or "ac cepted in dust ry prac tice", which are bare ly stan dards at all, since they ob v ious ly cover wide ran ges of pos sible be havior, and pro v ide no guidan ce as to how "good" or "ac cepted" prac tice is to be de ter mined. (So-called "best prac tice" re q uire ments nar row the room for dis p ute, but they are un like ly to nar row it suf ficient ly to be com fort able that dis p ute will be avoided.) De ter min ing what is con sidered good prac tice is com p licated by the re cent pro lifera tion of com p et ing in dust ry stan dards, some of which are men tioned later in this chapt er. These are often hard to en for ce legal ly, but their re levan ce is in creasing ly re cog nized by key stakehold ers. If local citizens are try ing to de ter mine wheth er a pro p osed contra ct is in con form ity with applic able legal re q uire ments, it may be help ful to try to find out (1) what in ter nation al in stitu tions (in clud ing in ter nation al banks and even large IMCs) are sup p ort ing or en courag ing the contra ct pro cess, and (2) to look at their web sites to see what stan dards, if any, they claim to be apply ing to the ac tivit ies they are sup p ort ing or spon sor ing. It would not be sur p ris ing to find that ele ments of a pro ject being spon sored by a large com mer ci al bank, a state ex p ort credit bank, or even an in ter nation al or ganiza tion like the IFC are not in full com p lian ce with the stan dards the in stitu tion has said it would apply to min ing pro jects. (Even large in stitu tions can be careless or dis trac ted by other con sidera tions.) Howev er, in some in stan ces what con stitutes good prac tice (or ac cepted prac tice, or any similar term) is not tied to any specific set of rules and is simp ly left open to in terpreta tion. This kind of pro v is ion is an in v ita tion to dis p ute dur ing the contra ct im -
Fin d ing Guidan ce and An sw ers Out side the Min ing Contra ct
plemen ta tion phase. It is also worth keep ing in mind that dif fer ences of op in ion are li ke ly to be come more acute with the pro lifera tion of new in dust ry play ers op erat ing around the world from co unt ries like China, Rus sia and India, with out ex p eri ence in the op era tion of many of these of fici al and quasi-official stan dards. Their as sump tions as to "stan dard prac tice" may born of their ex p eri ence op erat ing in their domes tic con texts.
AP PE ARAN CE AND ROL E OF COM MUN ITY DE VE L OP M E NT AG REE M E NTS ( CDAS ) It has been com mon in re cent years for min ing contra cts to re q uire the min ing com pany to in v est in and sup p ort the local com mun ity that will in evitab ly arise and the mine, and, often, to pro v ide train ing of local re sidents for em p loy ment in semi-skilled and per haps even skil led labor posi tions at the mine or re lated facilit ies. Today's min ing ag ree ments may con tain similar co v enants, but often address broad er is sues, such as local busi ness de v elop ment, local pro cure ment re q uire ments, soci al baseline and as sess ment work, and com mun ity in v est ment. Over the past few years, major IMCs have begun to es tablish as a matt er of co ur se com mun ity li aison or re lationship build ing func tions at pro ject loc a tions. These op era tions are typical ly re spon sible for such matt ers as gener al com mun ity con sul ta tion and en gage ment, over sight of soci al baseline and im p act as sess ment work, de v elop ment of soci al im p act man age ment plans, plann ing and im p lement ing com mun ity in v est ment strateg ies, the de sign of com mun ity capac ity build ing pro jects, an de al ing with in dividu al and com mun ity re q uests for as sis tance and grievan ces. These de v elop ments have some what in evitab ly be come more for malized as com munit ies have begun to ex p ress their needs in a more or ganized fash ion and min ing com p an ies have rea lized that a wide range of sup p ort ac tivit ies can not con tinue to be ad minis tered with out some kind of a plan to set priorit ies and make clear the li mits of the com p any un der tak ings. This pro cess ap p ears to be most ad v anced in Australia and Canada, where be nchmark ag ree ments were negotiated and sig ned in the 1990s bet ween IMCs and semi-sovereign ab origin al groups. While cer tain pro v is ions have
En viron ment al and Soci al
re q uired ad just ment over time and in light of ac cumulated ex p eri ence, they have general ly with stood the pas sage of time. There is now seri ous dis cuss ion about ex p and ing and for maliz ing companycommunity un derstand ings in other co unt ry en v iron ments that are un related to in digen ous status. A numb er of co unt ries are en courag ing or re q uir ing com p an ies to negotiate such ag ree ments, now cus tomari ly known as com mun ity de v elop ment ag ree ments (CDAs) in ad v ance of or as part of pro ject de v elop ment. Each of Papua New Guinea, Mon golia and Nigeria now has a pro v is ion in its min ing law re q uir ing the min ing li cen se or contra ct hold ers to negotiate and enter into CDAs to facilitate the trans f er of soci al and economic be nefits to local com munit ies. The in creas ing frequen cy of CDAs re flects in creas ing pre ssures on min ing com p an ies by com munit ies and civil society groups to im p rove the ab il ity of local com munit ies to be nefit from min ing op era tions, and also re sponds to glob al pre ssures for ac coun tabil ity. Ef fective CDAs can help de fine the re lationship and ob liga tions of min ing com p an ies with im p ac ted com munit ies, in clud ing the roles of local and nation al govern ments and non government al or ganiza tions. They are often an ex p ress ion of a min ing com pany’s com mit ment to cor p orate soci al re spon sibil ity. The crea tion of a CDA may also flow from cor p orate re spon se to sig nificant con flict with and local com munit ies. When BHP Bi lliton ac q uired the Tin taya Co p p er Mine in 1996, it ran into widespread com mun ity dis con tent re lat ing to the land ac q uisi tion pro cess and un favor able treat ment of the local com mun ity when the mine was under State ow nership. The Tin taya Di alogue Table was created to pro v ide a forum for address ing these grievan ces and an ag ree ment was fin al ly rea ched with the five com munit ies in 2004, co v er ing is sues of com p en sa tion and monitor ing and es tablish ing a com mun ity de v elop ment fund.
Fin d ing Guidan ce and An sw ers Out side the Min ing Contra ct
WHAT IS IN A CDA? CDAs vary in co v erage but primari ly focus on those is sues most per tinent to im p ac ted com munit ies: These typical ly in clude em p loy ment and economic de v elop ment, land use, ser v ices, in frastruc ture and pro ces ses for bring ing grievan ces. They may in clude com p any em p loy ment com mit ments, specific local in frastruc ture com mit ments, or specific soci al ser v ices. A care ful CDA will pro bab ly spec ify the tim ing of con tribu tions, the use to which each con tribu tion is to be put (or the pro cess for al locat ing con tribu tions unds to specific uses) and a vehic le for the man age ment of the con tributed funds. They also pro v ide a framework for com mun ity in terac tions with the min ing com p any (and poten tial ly local govern ment agen cies also) ac ross the whole range of matt ers that may con cern the local com mun ity. By bring ing the play ers togeth er on a re gular basis, they can build re lationships bet ween the play ers and thus es tablish an at mosphere of mutu al trust and re spect. In many cases this pro cess may be as im p or tant as the de tails of the ag ree ment it self.
En viron ment al and Soci al
A com p rehen sive CDA would cover most of the matt ers set forth below. Ac tu al ag ree ments may dif f er from this in re spon se to local cir cumstan ces and the dynamics of negotia tion the ob jec tives of the ag ree ment
Fin d ing Guidan ce and An sw ers Out side the Min ing Contra ct
who re p resents the com p any who re p resents the com mun ity, how the ag ree ment is ad minis tered (meet ings, meet ing pro cedures, etc.) how com mun ity mem b ers par ticipate in de cis ion mak ing and CDA ad ministra tion, re p resen ta tion of in terests of women and sub-communities, un der tak ings with re spect to the soci al and economic con tribu tions of the pro ject to the com mun ity, re levant timelines as sis tance in creat ing self-sustaining, income-generating ac tivit ies, con sul ta tion on mine closure measures, par ticipa tion in en v iron ment al monitor ing pro grams fund ing re q uire ments and qualify ing ex p en ses, dis bur se ment re q uire ments, man age ment, ac coun tabil ity, and trans p aren cy of funds, mech an isms for monitor ing the ac hieve ment of stated goals or miles tones, and re lated pro gress and ac hieve ment re p ort ing re q uire ments grievan ce and dis p ute re solu tion mech an isms CDAs are not with out risks. Re q uir ing com munit ies to enter such form al ag ree ments can be co un terproduc tive. At the out set, there are iden tifica tion is sues - who is in cluded in the com mun ity and who is em p owered to re p resent it - highlight ing the ex ist ence of com p et ing in terests with in the com mun ity. Form al ag ree ments can also give rise to per cep tions that a com mun ity has been mis led or co er ced, or that a “backroom deal” has been struck with selec ted in terests. They may also en courage de p end ence on com p any pro v is ion of ser v ices when that might be more approp riate ly the role of
En viron ment al and Soci al
local govern ment. Moreov er, there ap p ear to be in stan ces in which min ing com p an ies have gone into com munit ies to work out the de tails of a CDA, and have left the im press ion that their of f ers of as sis tance are out of the good ness of their hearts, leav ing a rath er bad taste in the mouths of the com mun ity lead ers when they have found out that the min ing com p any has been a hard negotiator with re spect to be nefits it was by contra ct or by law ob ligated to pro v ide. Care ful com mun ity lead ers will want to know the de tails of the min ing com p any's com mun ity ob liga tions be fore negotia tions begin.
LOOK ING FOR HE L P IN THE AC R O N YM S O U P The first part of this chapt er dis cus sed the sour ces of en v iron ment al and soci al guidelines and re q uire ments applic able to min ing op era tions, and noted the re cent pro lifera tion of volun ta ry and semi-voluntary stan dards aris ing with quasigovernmental and in dust ry sour ces. These new stan dards have in troduced new ways of un derstand ing and address ing en v iron ment al and soci al is sues, of re p ort ing com pany and govern ment con duct and per for mance, and of han dl ing and address ing com mun ity con cerns and grievan ces. This can be be wil der ing for com p an ies and govern ments alike. While most are volun ta ry in itiatives, they are in creasing ly shap ing what is con sidered re spon sible soci al and en v iron ment al stan dard prac tice and serv ing as a basis for guid ing and evaluat ing IMC and govern ment per for mance in these areas. Some of the more in fluen ti al volun ta ry in itiatives are de tailed here, but our list is far from ex clusive. The In ter nation al Co un cil on Min ing and Met als (ICMM) was set up in 2001 in Lon don by a numb er of major play ers in the in ter nation al min ing and met als in dust ry to sup port sus tain able de v elop ment in con nec tion with min ing pro jects. Mem b er com p an ies com mit to im p le ment and measure their per for mance against 10 sus tain able de v elop ment prin ci p les co v er ing soci al, en v iron ment al, economic and eth ical di mens ions of op era tion. These are re in forced by clarify ing posi tion state ments and guidan ce. A numb er of nation al and pro duc er as socia tions have de v eloped their own codes of con duct and sus tainabil ity frameworks, like the Miner al Co un cil of Australia's End ur ing
Fin d ing Guidan ce and An sw ers Out side the Min ing Contra ct
Value, and the Min ing As socia tion of Canada's Towards Sus tain able Min ing, which also address soci al, en v iron ment al and health and safety is sues. These main ly apply to Australian and Canadian based op era tions, but the con duct of Australia's and Canada's more junior ex p lora tion and min ing com p an ies op erat ing ab road have be come nation al is sues. Both co unt ries are look ing at ways of pro mot ing more re spon sible soci al and en v iron ment al prac tice by their nation al com p an ies op erat ing ab road. Out side of the min ing sec tor, the In ter nation al Or ganiza tion for Stan dardiza tion (ISO) has de v eloped stan dards for man ag ing en v iron ment al im p acts and im p rov ing en viron ment al per for mance (ISO 14000). Min ing com p an ies com mon ly seek such cer tifica tion and are sub ject to re gular third party audits of com p lian ce at their min ing sites. ISO has also de v eloped guidan ce on soci al re spon sibil ity (ISO 26000), which at this point is set up as a volun ta ry un der tak ing with out any cer tifica tion mech an ism. Dur ing the past de cade a numb er of In ter nation al Fin an ci al In stitu tions, like the World Bank, Inter-American De v elop ment Bank, Asian De v elop ment Bank, Af rican De v elop ment Bank, the European Bank for Re construc tion and De v elop ment and the In ter nation al Moneta ry Fund have strengthened their en v iron ment al and soci al safeguard poli cies. These poli cies nor mal ly apply only to pro jects sup p or ted by them, but they could be use ful to some one try ing to un derstand what such poli cies should cover. The IFC Per for mance Stan dards were first for malized in 2006 and up dated and approved in 2012. They can eas i ly be found on line, along with IFC's "Guidan ce Notes," by Googl ing "IFC Per for mance Stan dards." The 79 fin an ci al in stitu tions who have sig ned the "Equator Prin ci p les", OPIC and EDC have now all li nked their pro ject fin anc ing stan dards to the IFC Per for mance Stan dards, so that busines ses that ob tain fund ing from any of these in stitu tions are ex p ec ted to com p ly with those stan dards. The stan dards cover soci al and en v iron ment al baseline and im p act as sess ments, en v iron ment al man age ment plans, safeguards for in digen ous peo p les and their cul tur al heritage, con trol of en v iron ment al con taminants and pol lu tion, land ac q uisi tion and re settle ment, and pro tec tions for the health, safety and secur ity of com munit ies. In ad di tion, many IMCs, es p ecial ly the larg er ones, have sub scribed to specific in dividu al stan dards, most com mon ly Per for mance Stan dard 5 on Land Ac q uisi tion and In v olun ta ry Re settle ment.
En viron ment al and Soci al
For is sues of cor p orate re spon sibil ity more general ly, the OECD Guidelines for Multi nation al En terprises can also be re feren ced. OECD co unt ries are ex p ec ted to en courage busi ness based in their co unt ries to op erate in ac cordan ce with these Guidelines. Each of the co unt ries main tains a "Nation al Con tact Point", which may re ceive and re v iew any com p laints brought against busines ses based in the co unt ry but op erat ing over seas. The Guidelines are per iodical ly up dated to take into ac count new or em erg ing think ing and ex p ec ta tions. The Extra ctive In dust ries Trans p aren cy In itiative (EITI) is an in ter nation al in itiative foun ded on the no tion that in creased trans p aren cy of the re v enues flow ing from min ing and pet roleum com p an ies to host govern ments is a key chan nel for en sur ing im proved gover nance in the sec tors. In ad di tion to re v enue dis closure and the pub lica tion of de tailed re p orts co v er ing many as p ects of the extra ctive sec tor in a given co unt ry, the EITI pro cess re q uires the es tablish ment of a multi-stakeholder group con sist ing of govern ment, com p any and civil society re p resen tatives, which is in ten ded to serve as a plat form for di alogue around all as p ects of the extra ctive in dust ries in a co unt ry. At the time of pub lica tion of the first edi tion of this book, 41 co unt ries were de emed eith er "com p liant" or "can didates" under the EITI stan dard. In 2000, the Govern ments of the UK and the US in troduced a set of Volun ta ry Prin ci ples on Secur ity and Human Rights (some times re fer red to as the VPs). This is or ganized as a "multi-stakeholder in itiative (MSI) in v olv ing govern ments, com p an ies, and non government al or ganiza tions" to pro mote the im p lemen ta tion of a set of prin ci ples that would guide oil, gas, and min ing com p an ies on "pro v id ing secur ity for their op era tions in a man n er that re spects human rights." More re cent ly, in 2007, the Uni ted Na tions Gener al As semb ly end or sed the UN De clara tion on the Rights of In digen ous Peo p les, which was over 25 years in the mak ing. It was end or sed by 143 co unt ries with 45 ab sent or ab stain ing and 4 ob ject ing. A numb er of the hold-out co unt ries have since end or sed the De clara tion. Of par ticular in terest to local com munit ies and min ing com p an ies is Ar ticle 32(2), which states that: “States shall con sult and co operate in good faith with the in digen ous peo p les con cer ned through their own re p resen tative in stitu tions in order to ob tain their free and in for med con sent prior to the approv al of any pro ject af fect ing their lands or ter rito ries
Fin d ing Guidan ce and An sw ers Out side the Min ing Contra ct
and other re sour ces, par ticular ly in con nec tion with the de v elop ment, utiliza tion or ex ploita tion of miner al, water or other re sour ces.”
IS THE RE A L INK TO IN TER NATION AL L AW? In ad di tion to the in stitution al and in dust ry stan dards out lined above, there is also a re levant body of in ter nation al law. In ter nation al law governs the ac tivit ies of states – and not the ac tivit ies or con duct of private ac tors such as com p an ies. But im p or tant ly, ob liga tions on states under in ter nation al law also af fect what they can pro m ise to com pan ies in in v est ment contra cts or ag ree ments, and what dut ies they owe to their popula tions even when a contra ct is silent or contra v enes these dut ies. To list all re levant in ter nation al law sour ces is im p ract ical, but ex am p les can be given for specific is sues. As noted in sam p le in stan ces below, this body of in ter nation al law may pro v ide op p or tunit ies to bring suit against contra ct ing part ies for grievan ces re lated to en v iron ment al and soci al im p acts of min ing op era tions. Human rights law – which is made up of a numb er of in ter nation al and re gion al treat ies and rules – is es p ecial ly im p or tant. States have the legal ob liga tion to re spect, pro tect and ful fill the human rights set out in the in ter nation al human rights treat ies they rat ify. This in cludes a duty to pro tect those rights against in frin ge ment by third part ies such as cor p ora tions. Major in ter nation al human rights in stru ments are the 1948 Uni vers al De clara tion of Human Rights, the 1966 In ter nation al Co v enant on Civil and Polit ical Rights (167 state part ies) and the 1966 In ter nation al Co v enant on Economic, Soci al and Cul tur al Rights (161 state part ies). Co p ies of these docu ments are rea di ly ac cessib le on line by Googl ing their re spec tive tit les. Re gard ing human rights for work ers, the In ter nation al Labor Or ganization’s (ILO) De clara tion on Fund ament al Prin ci p les and Rights at Work com mits all its mem b er states to four cat ego ries of prin ci p les and rights: freedom of as socia tion and the right to col lec tive bar gain ing; the elimina tion of com p ul so ry labor; the ab oli tion of child labor; and the elimina tion of dis crimina tion in re spect of em p loy ment and oc cupa tion. There is also ILO Con v en tion 169, de al ing with In digen ous and Tri b al Peo p les, which re cog -
En viron ment al and Soci al
nizes the right of in digen ous peo p les to par ticipate through their tradition al or ganiza tions in all govern ment de cis ions af fect ing them. A numb er of re gion al human rights treat ies also exist that also govern states con duct when contra ct ing with private in v es tors. These in clude the 1981 Af rican Chart er on Human and Peo p les Rights; the 2003 Pro tocol to the Af rican Chart er on Human and Peo p les’ Rights on the Rights of Women in Af rica; the 1969 American Con v en tion on Human Rights; the 1988 Ad dition al Pro tocol to the American Con v en tion on Human Rights in the Area of Economic, Soci al and Cul tur al Rights; the 1950 European Con v en tion on Human Rights; and the 1961 European Soci al Chart er. In ter nation al human rights law also has some teeth as cer tain treat ies also pro v ide citizens judici al or quasi-judicial mech an isms to bring claims against states be fore co urts, tri bun als and other bod ies. In the 2001 Awas Tingni case, an in digen ous com mun ity suc cessful ly brought suit against the Nicaraguan govern ment for fail ing to en sure an ef fective con sul ta tion pro cess be fore grant ing a logg ing con cess ion on their land. The Inter-American Court of Human Rights de ter mined that Nicaragua violated the American Con v en tion on Human Rights by fail ing to pro tect the com munity’s cus toma ry tenure and col lec tive land and re sour ce rights. Since that de cis ion, much work has been done to furth er de scribe what in ter nation al human rights law re q uires of govern ments when contra ct ing with private com p an ies for min ing and other pro jects. Among those ef forts, in 2011 the Uni ted Na tions Human Rights Co un cil adop ted a re p ort con tain ing prin ci p les on re spon sible contra ct ing that guide govern ment and state negotiators in how to address human rights in their deals.
ECONOMIC LI N KAGES IN TRODUC TION M IN ING AND L OCAL CON TENT M IN ING AND IN FRAS TRUC TURE
Economic Liâ€‹ n kages
IN T RODUC T ION For the host govern ment, min ing used to be about money, first and foremost. The tradition al way of doing th ings would be that a com p any like Bac kyard Goldmine would shut it self off from its sur round ings as much as pos sible. Think gated com munit ies, spaci ous hous ing and well-manicured lawns with their own shops stock ing im p orts. An en camp ment would have well sup p lied clinics and some times its own airstrip, which could ferry ex ecutives in and out with out ever sett ing foot in a city. In teg ra tion with the rest of the economy was minim al. A few loc als rose to top man age ment but the major ity were foreign ers. But that was then. The aim now is to in teg rate the mines into the heart of economic growth. For ex am p le, the Heads of Af rican States have de v eloped the Af rican Min ing Vis ion. This re cog nises that miner als can spur economic growth and drive economic di ver sifica tion. But un like the past where this oc cur red sol e ly through the genera tion of re v enue, there is gener al re cog ni tion that min ing op era tions should be in teg rated as much as pos sible into economy of the co unt ry. Laud able goals, but the chal lenge is how to put this into prac tice. An oth er lead ing Af rican in stitu tion, the Af rica Pro gress Panel, led by Kofi Annan, is sued a major re p ort in 2013 warn ing that GDP growth figures ac ross the con tinent were mis lead ing be cause many co unt ries were ex p erienc ing "job less growth". The min ing sec tor can play a cruci al role in de��� v elop ment. It br ings bi ll ions of dol lars of in v est ment, builds its own in frastruc ture, and generates all kind of economic ac tivites by its mere pre s ence. Ex p loita tion of a co untry’s re sour ce base can create de v elop -
Economic Li n kages
ment, if it is used to an chor more gener al pur p ose in frastruc ture; and can create li nkages to local and re gion al econom ies. But the ex tent to which such de v elop ment will be ac hieved de p ends on the host co untry's vis ion and in stitution al strength. This Sec tion de scribes dif ferent opt ions that a host govern ment can negotiate with a min ing com p any to help en sure that the min ing pro ject generates li nkages with and in teg ra tion into the economy. The first Chapt er deals with what is com mon ly cal led "local con tent" and the second dis cus ses in frastruc ture li nkage.
MIN I NG AND LOCAL CON TENT Local con tent re q uire ments in contra cts are in ten ded to en sure that host co untry's citizens get jobs and train ing, and local firms get sup p ly contra cts. Mech an isms such as ob jec tives for local em p loy ment or sup p li ers, pre fer ence schemes for local busines ses, in dust ry or human capit al de v elop ment sup p ort from the govern ment, or giv ing local busines ses great er ac cess to fin an ce, are all met hods of ac hiev ing local con tent goals. A variety of de fini tions are used to de ter mine what is "local". De p end ing on the con text, for ex am p le, a com p any may be de emed local based on its re gistra tion, ow nership, workfor ce, and value-added in terms of local pro duc tion. A major ity foreignowned com p any can even qual ify as “local” in some cases, as long as a local firm has a mini mum per cen tage stake.
M IN ING AND L OCAL CON TENT Many min ing contra cts have local con tent pro v is ions aim ing to maxim ize the economic op p or tunit ies from min ing in v est ment and bet t er en sure that be nefits re main in the co unt ry. The aim of these pro v is ions is to har ness min ing ac tiv ity for sus tain able growth and de v elop ment. These add to what might also be found out side the contra ct in co unt ries' laws, prac tices and poli cies, as well as in com mun ity de v elop ment ag ree ments (for more on these, see the En v iron ment al, Health and Soci al Sec tion).
Economic Li n kages
Ac hiev ing the ob jec tives that local con tent pro v is ions aim at, howev er, can be dif ficult as it in v ol v es co or dinat ing poli cy and contra ctu al in stru ments in light of nation al, re gion al, local, and cross-border con sidera tions. When used pro p er ly, these poli cies and in stru ments boost skills and economic op p or tunit ies. They can also serve the min ing com p any well, as loc al ly sour ced work ers and pro duc tion can be less ex p en sive, more pre dict able, and help embed the com p any in the host co unt ry, strengthen ing con nec tions bet ween the firm and a broad range of stakehold ers. Yet too often, local con tent suf f ers two re lated ills – poor ly craf ted local con tent pro v is ions, and weak en for ce ment.
WHAT ROL E DOE S THE CONTRA C T P L A Y? Sett ing Out the Re quire ments As noted above, min ing contra cts in creasing ly in clude local con tent re q uire ments co ver ing such is sues as em p loy ment, sup p ly chain pro cure ment, train ing, skills build ing and know ledge trans f er. The 2002 Guinea - Simf er contra ct is a fair ly typ ical ex am p le, de mand ing that the firm: sour ce Guinean pro ducts and ser v ices to the ex tent pos sible, priorit ize hir ing of Guinean nation als for manu al labor as well as for skil led labor (sub ject to ex p eri ence and qualifica tions), and create a train ing pro gram for Guinean per son nel. The Li beria - Putu (2005) contra ct (Ar ticle 10.1) is much blunt er, simp ly stat ing “The Op erator shall not em p loy foreign un skil led labor. To the maxi mum ex tent feasib le, the Op erator shall em p loy Li berian citizens at all levels.” The 2007 Australia - McArthur River Pro ject ag ree ment (Ar ticle 13(1)) is an oth er ex am ple. It re q uires the com p any to use local labor and ser v ices with in Northern Ter rito ry of Australia, but states that the com p any can look el sewhere for labor and ser v ices pro -
Min ing and Local Con tent
vid ers if it can de monstrate that com p ly ing with those re q uire ments "is im p ract ical for com mer ci al, tech n ical or other rea sons."
De velop ing and Strengthen ing Upstream and Downstream Di ver sifica tion Local con tent pro v is ions are often used to de v elop and strength en "upstream" li nkages - con nec tions in teg rat ing local in dividu als and en tit ies into the min ing com p any's sup p ly chain. But pro v is ions can also be used to generate "downstream" li nkages that en courage in creased value-added ac tivit ies. While it is rare for the contra ct to in clude re fer ences to downstream re q uire ments, some contra ct terms do highlight such di v er sifica tion strateg ies. The Australia - McArthur River Pro ject ag ree ment, for ex am p le, states in its ar ticle on "Downstream Pro cess ing" (Ar ticle 12): (1) Hav ing re gard to the Ter ritory's in ten tion to have es tablis hed downstream pro cess ing with in the Northern Ter rito ry, the Com pany shall in ac cordan ce with this clause, un less ot herw ise ag reed in writ ing by the Minist er, in ves tigate downstream pro cess ing of zinc, lead and silv er with in the Northern Ter rito ry. (2) The Com pany shall with in 7 years of the date of this Ag ree ment and every 5 years thereaft er pro vide to the Minist er, un less ot herw ise ag reed in writ ing, a writt en re port sett ing out the tech n ical and economic feasibil ity of downstream pro cess ing of zinc, lead and silv er. (3) The Com pany shall use its best end eavours to en courage and sup port downstream pro cess ing of zinc, lead and silv er with in the Northern Ter rito ry if it is tech nical ly feasib le and com mer cial ly sound... Similar ly, the Mon golia - Oyu Tol goi ag ree ment states: 3.19 With in 3 (three) years after the Com men ce ment of Pro duc tion, the In ves tor will, if re ques ted in writ ing by the Govern ment, pre pare a re search re port on the economic viabil ity of con struct ing and op erat ing a co pp er smelt er in
Economic Li n kages
Mon golia to pro cess miner al con centrate Pro ducts de rived from Core Op era tions into metal (the "Smelt er")... 3.20. If the Govern ment eith er alone or in con junc tion with oth ers or a third party plans for the con struc tion of a Smelt er in Mon golia, the In ves tor will, if re ques ted in writ ing by the Govern ment, pro vide on ag reed terms, with pre feren ti al ac cess, Rio Tinto's (or its Af filiates) Pro prieta ry Tech nolog ies held in joint ven ture with Outokum pu, for the op era tion of the Smelt er. 3.23. If the In ves tor con structs a Smelt er in con nec tion with im plemen ta tion of the OT Pro ject that Smelt er will be loc ated in Mon golia. Both of these pro v is ions aim to en courage de v elop ment of downstream ac tivit ies but, it is im p or tant to note, also re cogn ize that it might not be economical ly vi able. This highlights the point that poli cies for en courag ing local con tent must be careful ly de sig ned. In sist ing on downstream pro cess ing can be an il lusive re q uire ment for many rea sons. Downstream pro cess ing can be a very capital-intensive and a low mar gin busi ness. If the co unt ry doesn't pre sent the right com p arative ad v antage (e.g., it doesn't have in ex p ensive en er gy, pro xim ity to the mar ket for the fin is hed pro duct, skil led labor, or st able cur ren cy), it might not be suf ficient ly com p etitive for downstream in v est ment. The co unt ry is often bet t er off spend ing its negotiat ing capit al and re sour ces creat ing an in dustri al strategy that will facilitate the de v elop of "upstream" (sup p ly chain) li nkages for the mine.
Flexib le or Fixed Re quire ments? Local con tent clauses tend to fall into two camps: those that set specific mini mum tar gets or those that set more flexib le ob jec tives. The Afghanis tan - Qara Zag han contra ct is an ex am p le of a more flexib le approach, stat ing that the in v es tor Afghan Kryst al Natur al Re sour ces Com p any “shall em p loy Afghan per son nel, to the ex tent prac tic able in all clas sifica tions of em p loy ment, for its Gold Pro duc tion Facilit ies con struc tion and op era tions in Afghanis tan.”
Min ing and Local Con tent
In contra st, Ar ticle 11.1 (a) of the Li beria - China Union contra ct pro v ides more fixed tar gets, stat ing that the "part ies shall agree on pro gres sive im p lemen ta tion of an em p loy ment schedule so as to cause citizens of Li beria to hold at least 30% of its ten most sen ior posi tions with in five years of its ten most sen ior posi tions, with in ten years of such date." Similar ly, the Mon golia - Oyu Tol goi ag ree ment lays out fixed tar gets for em p loyees hired by the min ing com p any, mak ing clear that, "[i]n ac cordan ce with Ar ticle 43.1 of the Miner als Law, not less than 90% (ninety per cent) of the In v es tor’s em p loyees will be citizens of Mon golia.” With re spect to sub contract ing, howev er, the contra ct is more flexib le, stat ing that the com p any is to use its "best ef forts" when sub contract ing in order to en sure that at least 60% of con struc tion em p loyees and 75% of mining-related em p loyees are Mon golian citizens. (Ar ticles 8.4 and 8.5). En forc ing the Re q uire ments It is one thing to have local con tent re q uire ments in the contra ct. It is an oth er to en for ce them. There are three fac tors that can make en for ce ment par ticular ly dif ficult: One is vague contra ct lan guage; a second is the chal lenge of monitor ing com p lian ce; and a third is re lated to the con sequ ences of breach. The issue of vague contra ct lan guage can be seen in the Guinea - Simf er, Li beria - Putu (2005), and Australia - McArthur River ag ree ments quoted above. Com p an ies may want more flexib le stan dards as they can be eas i er to in cor p orate with in their busi ness op era tions and strateg ies. But with flexibil ity come ques tions of in terpreta tion. When com p an ies are only re q uired to com p ly with local con tent rules "to the ex tent pos sible" to the "ex tent feasib le", or "if pract ical", who de ter mines what is pos sible, feasib le, or pract ical, and how is that done? When contra cts spec ify that domes tic citizens are to make up a cer tain numb er of posi tions of sen ior posi tions, who de ter mines what is a "sen ior" posi tion? And when com p an ies are to use their "best ef forts," what ex act ly does that mean? These types of ques tions com mon ly arise, and can make it dif ficult for govern ments to en for ce local con tent ob liga tions.
Economic Li n kages
The second en for ce ment chal lenge is monitor ing. After negotiat ing for local con tent com mit ments, how can govern ments make sure that they are fol lowed? Some contra cts help address this issue. The 2007 Australia - McArthur River pro ject contra ct, for ex am p le, states that the Minist er for En er gy and Mines may an nual ly re q uest, and the com p any must then pro vide, "a writt en re p ort con cern ing [its] com p lian ce with and im p lemen ta tion of the" contra ct's local con tent re q uire ments. (Ar ticle 13.2). But then there is the ques tion of con sequ ences. Sup p ose the Australian govern ment has a re p ort from the com p any which shows non-compliance. If there is no penal ty for breach, why would the com p any com p ly? Some contra cts in clude fines.The Mon golia - Oyu Tol goi ag ree ment re q uires the com pany to pay a penal ty if it hires too many foreign em p loyees (Ar ticle 8.7): If the In ves tor em ploys more foreign nation als than the specified per cen tage set forth in Clause 8.4, the In ves tor shall pay a month ly fee of 10 (ten) times the mini mum month ly sala ry for each foreign nation al in ex cess of the specified per cen tage. But contra cts may also ef fective ly minim ize the sanc tions as sociated with noncompliance. That same Mon golian ag ree ment il lustrates this when it says a breach of local hir ing re q uire ments will not con stitute a breach of the over all ag ree ment and may not be used by the govern ment as a ground for termnat ing the contra ct. (Ar ticle 8.9).
LOOK ING B E YON D T H E CON T R A CT It can be a mis take to con sid er the contra ct as the sole sour ce of ob liga tions. Legis la tion, poli cies, re q uire ments built into com mun ity ag ree ments, and com p rehen sive in dust ry poli cies and in itiatives, are all tools that can also sup p ort local con tent.
Legal and Re gulato ry Framework
Min ing and Local Con tent
A contra ct, rath er than creat ing project-specific local con tent re q uire ments, could in stead re q uire the in v es tor to fol low the applic able law and re gula tions. The numb er of govern ments that have broad local con tent legis la tion, howev er, is li mited. In donesia, South Af rica and Zim babwe are amongst those co unt ries that have miningrelated nation al legis la tion. In donesia’s 2009 min ing law states that com p an ies must give prior ity to local em ployees and domes tic goods and ser v ices in ac cordan ce with the applic able laws and re gula tions. It also has a pro v is ion re lat ing to a di v est ment ob liga tion for foreign sharehold ings to local com p an ies. Ac cord ing to that law, after five years of pro duc tion: Com pan ies must di vest part of [their] s foreign sharehold ing (if any) to the Govern ment, Re gion al Govern ment, State Owned Busi ness En t ity (Badan Usaha Milik Negara or BUMN), Re gion al Owned Busi ness En t ity (Badan Usaha Milik Daerah or BUMD) or (iii) Private Owned Busi ness En t ity (Badan Usaha Milik Swas ta or BUMS). In 2013, the govern ment is sued re gula tions clarify ing what com p an ies need to do in order to com p ly with that law. The 2009 law also in cludes pro v is ions to en courage local de v elop ment "downstream", ob lig ing com p an ies “to pro cess and re fine min ing pro ducts in In donesia, and the ex tent of the re q uired local pro cess ing and re fin ing are to be specified in the im p lement ing re gula tions.” (Ar ticles 95-112 and 128-133). More co unt ries, in clud ing South Af rica, the Philip p ines and Australia, have tightened their project-approval and re gulato ry pro ces ses in order to pro mote li nkages. Min ing com p an ies can be re q uired to pro duce local con tent plans that in clude en terprises and workfor ce par ticipa tion in the min ing area and that are in teg rated into re gion al economic de v elop ment plans in order to move for ward with their op era tions. Some of these ef forts re flect uni q ue co unt ry dynamics. For ex am p le the Soci al and Labor Plan re fer red to in South Af rica’s Miner al and Pet roleum Re sour ces De v elop ment Re gula tion (2002, Ch. 2, Part 2) re flects the broad er push in that co unt ry for black economic em p ower ment. A soci al and labor plan, which is a re q uire ment for
Economic Li n kages
miner al or pro duc tion rights, must in clude em p loy ment statis tics and the mine’s plan to en sure with in a specified time frame that 10 per cent of the em p loyees are women and 40 per cent of man age ment are his torical ly dis ad v antaged South Af ricans (HDSAs). The plan must also set out a local economic de v elop ment pro gram that aims to in crease pro cure ment from HDSA com p an ies.
Local De velop ment Ag ree ments In ad di tion to en ter ing into ag ree ments with the nation al govern ment, min ing com pan ies may also negotiate ag ree ments di rect ly with local com munit ies. These are general ly cal led com mun ity de v elop ment ag ree ments (also re fer red to in the En v iron ment al, Health and Soci al Sec tion). Ag ree ments negotiated with the In digen ous Peo p les of Canada pro v ide par ticular ly good ex am p les. Among them, one is the Benefits-Impact Ag ree ment bet ween Di avik Di amond Mines Inc., Rio Tinto and five neighbor ing ab origin al groups in Northwest Ter rito ries. The ag ree ment re q uires that contra cts bet ween the min ing com p any and local groups with in the op era tion area re main in force for the life of the mine. In legal terms, they are “ever greened,” which means that, sub ject to satis facto ry per for mance, the ab origin al contra ctor will have the work as long as the mine is in pro duc tion. The Rag lan ag ree ment bet ween the Inuit in Canada and the min ing com p any is an oth er ex am p le. It sets forth those goods and ser v ices which must be the sub ject of "di rect contra ct negotia tions sol e ly with an Inuit En terpr ise". The contra ct iden tif ies such work and ser v ices as air trans p ort, cat er ing and hotel le ry, road main tenan ce, di amond drill ing, ground trans p or ta tion of sup p l ies, truck ing of con centrate, fuel trans p or ta tion, han dl ing, dis tribu tion, en v iron ment al re search monitor ing, and baseline stud ies and on-site pre p ara tion of ex p losives.
Com pany Poli cy, In dust ry In itiatives, and other Col laborative Ef forts Even where there are no legal re q uire ments to priorit ize the re cruit ment of local work ers or the use of local busines ses, many firms have im p lemen ted their own local con tent poli cies.
Min ing and Local Con tent
Com p an ies are in teres ted in strengthen ing the skills base of the co unt ries where they in v est. The World Busi ness Co un cil for Sus tain able De v elop ment (WBCSD) Nation al Mar ket Par ticipa tion In itiative en gages local in v es tors and govern ments in a di alogue to ident ify shared in terests, and to in crease the com p etitive ness of local com p an ies rath er than focus on ob liga tions. Im p rov ing skills and en trep reneuri al capac ity is also an in creas ing prior ity for de v elop ment agen cies and in ter government al or ganiza tions. Joint in itiatives are em erg ing, such as the Af rican Miner al Skills In itiative, a private-public partnership in clud ing the Uni ted Na tions Economic Com miss ion for Af rica (UNECA), An gloGold As han ti and AusAID. This in itiative seeks to create and sup p ort new sol u tions to fill iden tified miner als skills gaps. In deed, in im p lement ing local con tent, the most suc ces ful co unt ries may be those which create a col laborative en v iron ment with in v es tors. Just lay ing down the law may not align with the in terests of eith er busi ness of the local capabilit ies. In contra st, through col laborative approac hes, govern ments and com p an ies sit togeth er to es tablish a rea lis tic timeline for em p loy ment, pro cure ment and train ing. This hap p ened in Chile. An NGO there con v in ced the 12 lar gest min ing com p an ies to or gan ize a train ing pro gram to train fu ture min ers. The govern ment then com p lemen ted the in v est ment with $30 mill ion in pub lic funds. Co p p er com p an ies in Chile have since de sig ned a sup p li er de v elop ment pro gram which has generated a net work of in ter national ly com p etitive small and medium en terpr ise sup p li ers for the min ing sec tor.
A VIOL A TION OF IN TER NATION AL L AW? Local con tent pro v is ions also need to be re con ciled with in ter nation al trade law. Trade li beraliza tion ef forts often op p ose local con tent re q uire ments as anti-trade. Mem b ers of the World Trade Or ganiza tion (WTO) are bound by the Ag ree ment on Trade Re lated In v est ment Measures (TRIMS Ag ree ment) that li mits "per for mance re q uire ments" such as re q uire ments to:
Economic Li n kages
ac hieve a cer tain level of local con tent; pro duce loc al ly; ex p ort a given level/per centage of goods; balan ce the amount/per centage of im p orts with the amount/per centage of ex ports; trans f er tech nology or pro p rieta ry busi ness in for ma tion to local per sons; and balan ce foreign ex chan ge in flows and outflows. In v est ment treat ies can also go farth er in pro hibit ing states from im p os ing per for mance re q uire ments on foreign com p an ies, in clud ing re q uire ments to form joint ven tures, pro cure local goods or ser v ices, in v est in re search and de v elop ment, and trans f er tech nology. The Uni ted States' 2012 Model BIT pro v ides an ex am p le of these types of re stric tions, which can also be found in in v est ment treat ies con cluded by the Uni ted States, Canada, Japan, and other co unt ries. Uni nten ded and Un wan ted Con sequ ences Local con tent pro v is ions are typical ly well in ten ded, but can pro duce un wan ted out comes. These in clude: In fla tion of the price of the goods and ser v ices sud den ly pro cured loc al ly and be nefit ing from the min ing de mand; Dis p utes and tens ions aris ing from per cep tions that cer tain in terests are being favored; En han ced cor rup tion risks as sociated, for ex am p le, with hav ing local con tent de cis ions al ig ned to in v es tor or govern ment in terests, or local contra ctors fal sify ing capabilit ies so as to be able to meet qualifica tion tar gets to bid, or even brib ing of fici als to gain cer tifica tion; and
Min ing and Local Con tent
Crea tion of de p en den cy on min ing de mand that can be come pro blematic when the mine closes.
Economic Liâ€‹ n kages
MIN I NG AND IN FRASTRUC T URE Mine de v elop ment re q uires good in frastruc ture. Ther is need to bring in heavy equip ment, sup p l ies and peo p le. Pwer and water are needed. Ore needs to be trans p or ted for pro cess ing and/or ex p ort. De v elop ment of such in frastruc ture is capit al in ten sive. It forms an ever more sig nificant out lay for min ing com p an ies. Mining-related in frastruc ture cost as a share of min ing de v elop ment cost has gone from 40% to 80% in the last 12 years. Min ing con ces sionaires have his torical ly re sor ted to an “en clave approach” to in frastruc ture de v elop ment, pro v id ing their own power, water, in for ma tion and com munica tion tech nolog ies (ICT), and trans p or ta tion ser v ices to en sure re li able in frastruc ture for their op era tions. Contra cts typical ly as sured min ing com p an ies of the rights of ac cess and to con struct all neces sa ry in frastruc ture. Given min ing com p any con trol of those de v elop ments, large in v est ments in phys ical in frastruc ture are often un coor dinated with any nation al in frastruc ture de v elop ment plans. A co unt ry can therefore miss the op p or tun ity to build on min ing in frastruc ture to sup p ort more broad-based economic de v elop ment. Poten tial ly, port, road and rail in v est ments for min ing can cat alyze sup p ort ing and an cil la ry economic ac tiv ity. Hence the con cept of "re sour ce cor ridors" de v elop ing al ongside mining-related in frastruc ture. As out lined below, some contra cts bet ween
Economic Li n kages
govern ments and in v es tors now in clude opt ions and re q uire ments that sup p ort poten ti al third party uses of such in frastruc ture.
A Case for Shared In frastruc ture If done well, min ing in v est ment can con tribute to de v elop ment of shared in frastruc ture with both miner al and non-mineral users that will be be nefici al for sus tain able economic growth.
Min ing and In frastruc ture
"Shared use" can en tail two dif ferent opt ions. First is multi-user, mean ing sever al min ing com p an ies in a re g ion de v elop /use com mon in frastruc ture. Second is multipurpose, where non-mining users share the in frastruc ture with the min ing com p any (for ex am p le a forest ry con cess ion ac cess ing the mining-related power in frastruc ture, or pas seng ers being trans p or ted along a min ing com p any rail road). Both can offer be nefits. The form er may lead to econom ies of scale among the min ers, thereby in creas ing tax re v enues to the govern ment. The latt er may lead to eas i er and more cost-efficient ac cess to water, en er gy, trans p or ta tion, and telecom munica tions ser v ices – all build ing blocks for economic de v elop ment in a re g ion. Op en ing up mining-related rails and ports can mean im p roved and often cheap er ac cess to mar kets, both local and in ter nation al. The de v elop ment of hy dropow er, where feasib le, can be a cost-effective sour ce of en er gy to sup p ort the heavy en er gy de mand for min ing op era tions while en sur ing that ex cess power can be made avail able via im proved and af ford able ac cess to electric ity for com munit ies and na tions. Water treat ment facilit ies de v eloped to serve the water needs of the mine can be de sig ned with sur p lus capac ity to serve sur round ing com munit ies with no pre v i ous re li able ac cess to pot able water. Govern ments and the private sec tor can also capital ize on civil works for road and rail ways to in stall fiber optic cabl ing to offer telecom munica tion ser v ices. Of co ur se, these con sidera tions are more re levant in the con text of de v elop ing co unt ries where basic in frastruc ture is often eith er mis s ing, of li mited capac ity, or in poor con di tion.
Ow nership and Ac cess The op p or tunit ies for "shared use" of the mining-related in frastruc ture will de p end on the ow nership model of this in frastruc ture. If mines in herit ex ist ing in frastruc ture on the con cess ion, or are aut horized to build and own re levant in frastruc ture, they will general ly pre f er not to share it. This is es p ecial ly true for in frastruc ture, such as rail and ports, that are strategic to the min ing op era tion and for which im p lement ing shared use can con strain capac ity or bring a high cost of co or dina tion.
Economic Li n kages
In v es tors tend to be more flexib le in con sider ing shared use of non- or less-strategic in frastruc ture (power, water, roads, and ICT). In fact the busi ness case for shared use can be more straightfor ward due to ob v i ous econom ies of scale and scope or a need to re in force their soci al li cen se to op erate. Just im agine being a mine with ac cess to electric ity and pot able water sur roun ded by a com mun ity li v ing in the dark and drink ing pol luted water. This situa tion will not be sus tain able and will li ke ly re sult in soci al un rest soon er or later. In the al ter native ow nership model, where the in frastruc ture is owned by a third party or a state-owned com p any, the govern ment will li ke ly find it eas i er to limit ex clusive ac cess for the min ing com p any. Howev er, al low ing other uses in v ol v es trade-offs as well. Typical ly, min ing in v es tors will leverage their ex p ert ise and ac cess to capit al to build key in frastruc ture fast er and more cheap ly than if de v eloped by oth ers. So li mit ing their con trol of in frastruc ture de v elop ment can delay a pro ject or un der mine its poten ti al ef ficien cy. Plus, ac commodat ing govern ment de mands for open ac cess to in frastruc ture will often come at the ex p en se of negotia tions around fisc al terms. Foregone re v enues need to be just ified as a price worth pay ing.
The Need for In teg rated Plann ing Ideal ly, de cis ions on in frastruc ture usage, in clud ing negotiated com mit ments in contra cts, should be made in the con text of a com p rehen sive plann ing framework that con sid ers a range of key fac tors. Each min ing pro ject pre sents dif ferent op p or tunit ies to build economic li nkages to com munit ies, the re g ion and the co unt ry, de p end ing on the size of the pro ject, the type of com mod ity, pre sent and fu ture min ing de mand for in frastruc ture, pre sent and fu ture non-mining de mand for in frastruc ture, and the pre sent and fu ture re gulato ry capac ity avail able to en sure open ac cess of the miningrelated in frastruc ture. Some ex am p les: bulky com modit ies such as iron-ore and coal will re q uire de v elop ment of rail ways, whereas gold extra c tion only needs roads or some times just helicopt ers. Con v er se ly, gold extra c tion will re q uire large ac cess to water sour ces, whereas iron-ore and coal mines could rely on re cyc led water. In terms of en er gy de mand, in ad di tion to the com mod ity type, what will make a dif fer ence is the de gree of pro cess ing:
Min ing and In frastruc ture
a crus hed coal op era tion will re q uire 500 times less power than a smel ted al uminum op era tion (measured by kwh/ ton nes of pro duct). Only when this pic ture is clear ly de fined can co unt ries negotiate the best contra ctu al in frastruc ture pro v is ions with com p an ies. What if third party ac cess on rails is re quired, but there is not suf ficient pro jec ted de mand for rail ac cess? Similar ly, what if the con struc tion of a mini-grid for the com mun ity is negotiated, but the com mun ity has no wil ling ness to pay, and no com p etent in stitu tion is in place to en sure op era tions and main tenan ce? Once the govern ment is con v in ced that shared use will be be nefici al to the co unt ry, and is ready to incur the re lated plann ing and re gulato ry costs, contra ctu al terms need to be negotiated with close care.
Co verage in the Contra ct Min ing contra cts typical ly spec ify rights to ac cess and con struct re lated in frastruc ture. Where there is re fer ence to third party ac cess, it typical ly comes with many caveats, for ex am p le that ac cess only be pro v ided when "the com p any con firms that ex cess capac ity ex ists and third party use of such ex cess capac ity does not in ter fere with op era tions." This leaves room for in terpreta tion, op p or tun ism and as y m met ry of in for ma tion - mak ing it re lative ly easy for an op erator to just ify de ny ing such ac cess. It is still rare for a contra ct to make strong de mands of in v es tors in terms of third party usage (cur rent or fu ture). Mis sed op p or tunit ies for govern ments, may therefore in clude: - al low ing min ing com p an ies to de v elop power plants with out re q uir ing the genera tion of extra electric ity to be sold back to the grid. This is a mis sed op p or tun ity for the co unt ry, given that for com p an ies the mar gin al cost of extra electric ity is very low. - fail ing to re tain govern ment ow nership of the right of way of any lon gitudin al in frastruc ture such as power lines, slur ry pipelines, rails, or roads. This is a mis sed op p or tun ity for the govern ment to "monet ize" the right of way for multi-purpose use.
Economic Li n kages
- fail ing to in clude a Build Op erat ing and Trans f er model or opt ion that en ables the in frastruc ture to re v ert back to the govern ment after a set per iod, by which time other in dustri al and non-industrial de mands may have in creased and when there may be a vi able opt ion to bid out to third-party in frastruc ture con ces sionaires. Few co unt ries have man aged so far to avoid such pit falls, but the Li beria - Putu (2010) contra ct has in terest ing clauses that could serve as models in similar situa tions. They are un usu al in the level of de tail they pro v ide and scope of the pac kage of clauses co ver ing ac cess to electric ity, to water, to build utilit ies and facilit ies in teg rated with com pany in frastruc ture (such as to build telep hone lines with in the con cess ion area), and to the port and rail road. For ex am p le, the contra ct re q uires the power plant for the mine to "be de sig ned to generate a quant ity of electric en er gy in ex cess of the electric en er gy re quired by the Com pany for Op era tions to sup p ly third party users loc ated with in a 10 km radius thereof on a 7 days per week, 24 hours per days basis in ac cordan ce with third party user de mand from time to time" and "be de sig ned and con struc ted so that it can be ex pan ded on a com mer cial ly feasib le basis to have twice the electric ity generat ing capac ity neces sa ry to ser vice Op era tions." Ar ticle 19.3) The contra ct ad ditional ly pro v ides the com p any ac cess to water on con di tion that it "does not af fect the water sup p l ies used by the sur round ing popula tion or, to the ex tent it does so af fect water sup p l ies, the Com pany pro vides an al ter native sour ce of water sup p ly to the af fected popula tion." Ar ticle 19.5) The contra ct also states that port and rail in frastruc ture must be de v eloped in line with the ag reed De v elop ment Plan. In the case of rail this re q uires that "The Rail road shall be de sig ned so that it can be ex pan ded on a com mer cial ly feasib le basis to carry on a con tinu ing basis twice as much traf fic as is con templated by the pre ced ing sen t ence but the Com pany shall not be under any ob liga tion to build such ad dition al capac ity ex cept as it may elect pur suant to Sec tion 6.7(k). Sub ject to Sec tion 6.7(k), the Govern ment or any third-party may elect to have the capac ity of the Rail road ex pan ded to ser vice the re quire ments of the Govern ment or such third-party, the costs of such ex pans ion to be borne by the Govern ment or such third party, as applic able." (Ar ticle 6.7.a)
Min ing and In frastruc ture
In terms of the port, the contra ct states that, "The De velop ment Plan also shall pro vide for the con struc tion by the Com pany of the Port, with the capac ity to allow for li mited gener al petroleum-handling and gener al cargo and con tain er be rth ing spac ing, as well as specialized bulk facilit ies re quired by the Com pany’s busi ness. The Port shall be de sig ned and con struc ted such that it can be ex pan ded on a com mer cial ly feasib le basis to han dle twice as much capac ity as is con templated by the pre ced ing sen t ence. Such ex pans ion capac ity shall in clude the pos sible con struc tion of an ad dition al 50 met ers on the Iron Ore jetty and the driv ing of iron ore jetty piles at least 5 met ers de ep er. The Port basin shall be de sig ned to facilitate furth er large scale de velop ment con sis tent with any ex pans ion of the rail road (e.g., lengthen ing of prima ry wharf, room for ad d i tion of ad dition al wharf, or adequate pro tec ted an chorage)." (Ar ticle 6.7.d)
Resource-for-Infrastructure Swaps The deals dis cus sed above have focused on balanc ing de mands for ac cess to in frastruc ture with in the broad er negotiated pac kage of fisc al de mands. Howev er, there is an al ter native model out there, where govern ments give ac cess to natur al re sour ces in re turn for con struc tion of key in frastruc ture (non-mining re lated). Such "resourcefor-infrastructure" deals have gained a lot of at ten tion re cent ly. A numb er of such contra cts have been con cluded in dif ferent parts of the world, though far fewer have rea ched im p lemen ta tion stage. Resource-for-infrastructure swaps are most com mon ly as sociated with deals done by Chinese com p an ies op erat ing in Af rica. China’s de mand for re sour ces has been grow ing fast – it is the world’s lar gest con sum er of key miner als, in clud ing iron ore, lead and zinc. Af rica, in turn, has both a large end ow ment of under-exploited miner al re sour ces and very im mediate in frastruc ture needs. In such case, both sides could be nefit. China gains ac cess to much needed re sour ces to sus tain its economy, while Af rican na tions get much needed major in frastruc ture in a com p arative ly short per iod of time. Yet these deals also give rise to not able risks. Above all, it is dif ficult to adequate ly de ter mine the value of the ex chan ge. Es timates for both the in frastruc ture and the miner als can vary sig nificant ly. In one in stan ce in Li beria, re sour ce es timates have gone up 10-fold in 5 years from the start of negotia tions. Even more chal leng ing is de ter min ing the economic value of the pro p osed in frastruc ture, es p ecial ly be cause it is
Economic Li n kages
not sub ject to any open com p etitive pro cess. The bot tom line is that it is even hard er to as sess fair ness of a resource-for-instrastructure deal than for a con v en tion al resourcefor-revenue ag ree ment. In ad di tion, the contra ctu al ar range ments for resource-for-infrastructure swaps are high ly com p lex – in v olv ing min ing as well as con struc tion com p an ies. Where there is com p lex ity, there is room for con fus ion and poten tial ly more avenues for cor rup tion. There is no clear contra ctu al model as yet to guide part ies. Local con tent re q uire ments are typical ly not at tached to these deals – in fact the in vest ing com p any’s guaran tee to pro v ide the in frastruc ture is often de p en dent on its as sump tion of bring ing in foreign ex p ert ise, equip ment, ser v ices and even labor. In such in stan ces, the co unt ry may not have ac hieved opt im al value for its re sour ces.
LEGAL AND NEGOTIA T ION CON S IDERA T IONS S O YO U T H I N K YO U N E E D H E L P A F T E R A L L 1 7 0 YE A R S A T T H E T A B L E : C O N FESS IONS OF A NE G OTIATOR DIS PUTE AVOIDAN CE AND RE S OLU TION PL ANN ING FOR TROUB LE TO PUB L IS H OR NOT TO PUB L IS H
Legal and Negotia tion Con sidera tions
SO YOU THINK YOU NEED HELP AFTER ALL Both part ies to a poten ti al pro ject, wheth er govern ments or com p an ies, will need a range of tech n ical help. When you are negotiat ing over as sets which could trans form the fu ture of your com p any - or co unt ry - you want to know every th ing you can. You want to know the best guess for the size and qual ity of the asset, the li ke ly costs in v ol ved, what vari ous fisc al struc tures pre dict in terms of how much money eith er side gets - and when. You will want guidan ce through the whole jumble of legal thic kets in volv ing the dozens of is sues raised in this book: de al ing with mar ket volatil ity, local buy-in, en v iron ment al fall-out, hir ing of local firms, and more. While we hope you love this book, please don't rely on it alone! It can help you think about the is sues but, if you want to negotiate a min ing deal, get pro fes sion al help! Al though both sides are fac ing the same in for mation al pro blem, they start from fair ly dif ferent per spec tives. A large IMC will have its own geolog ists, numb er crunch ers, man ag ers and peo p le with cur rent mar ket savvy. It may well have in-house lawy ers, as well as de al ing re gular ly with a range of legal ex p ert ise all over the world. A govern ment, on the other hand, typical ly has less of every th ing. It has less in-house sup p ort and its bud get will be li mited. Moreov er, it is bound by civil ser v ice codes and pub lic ser v ice ethos, which means it has a hard time pay ing high fees for in ter nation al help even if the money is there. The choice of what out side help you bring in can make or break the deal.
Legal and Negotia tion Con sidera tions
DOING DUE DI L IG E NCE The first area where you will li ke ly want sup p ort is to do due di lig ence on the the other side. The term "due di lig ence" general ly re f ers to an in v es tiga tion car ried out by a party to learn and ver ify the full background, his to ry and cur rent situa tion of the other party(ies) with which it may contra ct. Due di lig ence takes time and is ex p en sive. But thorough due di lig ence will pre v ent and/or mitigate bad sur p rises down the road. It is an es senti al tool in the de cis ion mak ing pro cess of any in v es tor, fin an ci al in stitu tion or govern ment. Poten ti al miner al in v es tors will do due di lig ence on govern ments, to as cer tain the stabil ity of the govern ment, and its polit ical in stitu tions to de ter mine the polit ical and economic risk of doing busi ness in the co unt ry. In v es tors will also look at the stabil ity and in depend ence of the judici al sys tem, the economic (debt) situa tion, the elec tor al situa tion, the human rights situa tion, and any other is sues that could af fect thep rofitabil ity of an in v est ment and the re p uta tion of the in v es tor. Govern ments should do similar due di lig ence of poten ti al in v es tors in their miner al re sour ces to as cer tain fin an ci al stabil ity, ex p ert ise, ex p eri ence, track re cord on human rights prac tices and the like. Not all in v es tors are equal. One would ex p ect a govern ment to do much less due di lig ence on well-known in ter nation al com p any with pub lic fin an ci al state ments and a long track re cord than it would on a lit tle known, private ly held com p any. Some due di lig ence of poten ti al miner al in v es tors can be done by govern ments inhouse, but there are many specialized firms that will help govern ments ver ify the "health" and "charact er" of a poten ti al miner al in v es tor. Doing so com p rehen sive ly can in v ol v e en tire in v es tigative teams com p ris ing lawy ers, ac coun tants, fisc al and tax ex perts, human rights special ists, human re la tions ex p erts, en v iron ment al special ists, ex p erts in cor p orate soci al re spon sibil ity and more. Their job is to ver ify com p lian ce with applic able laws, poli cies, treat ies and re gula tions, as well to find any "red flag" items that could cause pro blems, im mediate ly or later dur ing the dif ferent stages of the min ing pro ject.
So You Think You Need Help After All
More specifical ly, the in v es tigators will look for poten ti al risks which could af fect the com p any’s or the government’s ab il ity to per form its/their ob liga tions, such as the com p any’s fin an ci al capac ity to fund the min ing pro ject, its level of ex p ert ise and ex peri ence and its/their capac ity to re im burse fin anc ing. Red flag items could be large un fun ded re ser v es for poten ti al los ses, outstand ing mass lit iga tion, such as as bes tos or other pro duct li abil ity is sues, on go ing crimin al in v es tiga tions con cern ing cor rup tion, money laun der ing or other al leged crimes or ab uses, such as al lega tions of human rights ab uses, as well as other re p utation al or fin an ci al or legal is sues. If a red flag issue is iden tified, per miss ion will often be re q ues ted to in ter v iew the com p any man age ment, auditors and lawy ers. Once the in v es tigators feel that they have com p leted the in v es tiga tion (or have run out of time and/or money), they will draft a due di lig ence re p ort de scrib ing the scope of the in v es tiga tion and the fin d ings. The final due di lig ence re p ort should be an im por tant ele ment in de cid ing wheth er to en trust a por tion of the co untry's miner al re sour ces to that in v es tor. Due di lig ence re p orts are con sidered high ly con fiden ti al and are sel dom shared.
CHOOS I N G T H E R I G H T L A W Y ER For ac tu al negotia tions, the ob v i ous first port of call is for lawy ers. Most govern ments and IMCs will choose in ter nation al law firms be cause they have a good re p uta tion and seem ex p erien ced. But even big firms are only as good as the peo ple as sig ned to the team. Small er firms with good ex p eri ence in in ter nation al in v est ment contra cts could be just as cap able, and per haps more suit able - more specialized, cheap er and more avail able. They are not balanc ing a di v er se client base and are less li ke ly to have con flict of in terest is sues. When en ter ing into the pro cess of choos ing lawy ers, it is use ful to draft a nar row mis s ion state ment with a break down of tasks (three negotia tion meet ings, com ments on first draft of the Min ing De v elop ment Ag ree ment or Con cess ion Ag ree ment, etc.) and as sign bud get numb ers to each task in light of what the client thinks the work is worth
Legal and Negotia tion Con sidera tions
and their over all bud get en v elope. Giv ing the law firm a broad man date such as, “to negotiate the min ing pro ject with staff ing as neces sa ry,” is a blank check best avoided. Be fore meet ing with any law firm, the mis s ion state ment should be sent to all of the can didates. In ter v iews should be set up with not only the partn er who will man age the deal (and who will be charm ing and in tel ligent) but with as many as pos sible mem b ers of the pro p osed team, in clud ing the junior mem b ers who may be doing most of the work. The client is en tit led to not like cer tain lawy ers and to evaluate in depen dent ly the skill level of each mem b er of the team. Lan guage skills should also be verified. If the partn er speaks French or Spanish, but none of the mid-level as sociates do, that lan guage skill will be come very ex p en sive. Govern ments can also re q uest foreign firms to partn er with local or nation al firms to train local lawy ers. Big firms are general ly ex p en sive firms. Small firms can be just as co st ly per hour (or, in fact, per six minutes, the basic unit of legal bi ll ing) but will general ly put fewer lawy ers on the team, so the client may still get bet t er value for its money. In eith er case, it is im por tant for govern ments to un derstand how their work will be staf fed. They should not be af raid to in s ist on know ing the skill level of and the char ges for each mem b er of the law firm's pro p osed team, and to know why each per son is in cluded on the team. Some times law firms offer to work for a fixed fee, This may seem de sire able to a govern ment, but in those cases, the work in v ol v ed is nor mal ly fair ly careful ly de scribed in the lawyer's fee lett er, which can lead to bud get over uns when the deal moves in un an ticipated ways. And of co ur se, the lawy er needs to un derstand the client's con straints. It is no good hav ing a bril liant brain in the room that can't re late. The most suc cess ful govern ment negotiators are those who have for med a co herent and co or dinated team with a lead li aison per son who re p orts di rect ly to the prime minist er or pre sident. It is help ful if the per son who heads the team is ap p oin ted di rect ly by the pre sident or prime minist er and can ob tain guidan ce when re q uired. Some times there can be a dis con nect. A govern ment might have chos en a firm be cause of a meet ing with the man ag ing partn er, but he or she is far away from the deal
So You Think You Need Help After All
and not pay ing the neces sa ry at ten tion to the deal. This is a par ticular risk if the law firm is work ing on a fixed bud get or negotiated bi ll ing rates. No client should keep a law firm on a job if it is not happy with the work.
A R E L A W Y ERS EN OUG H? But it is im p or tant also to un derstand that lawy ers are not the only help needed. Some govern ment negotiators be lieve they may have ended up with ad v erse re sults in past negotia tions be cause there was too much con centra tion on lawy ers at the ex p en se of other ex p ert ise. For ex am p le, many govern ments have only re cent ly star ted to look for help in creat ing fin an ci al models that will en able them to evaluate pro p osed terms and al ter native pro p os als. It can be dif ficult to find the neces sa ry as sis tance, as these skills tend to con gregate in con sult ing or in v est ment bank ing firms that are nor mal ly not much less ex p en sive than the lawy ers. Govern ment teams also often feel they lack ex p ert ise in mine op era tion and man age ment, and in the op era tion of world miner al mar kets. For ex am p le, a govern ment negotiator may know that the contra ct should re q uire pric ing for royal ty and in come tax pur p oses to be done on the basis of arm’s length deals, but have no idea how to what pric ing met hods to use if the in v es tor is pro duc ing primari ly for its own use el sewhere. Which of the many trans f er pric ing mech an isms is most approp riate? How can the govern ment avoid being blind-sided by cus toma ry pric ing prac tices that, for ex am p le, lead to the ap p earan ce of un ex p ected "dis counts“ in royal ty com p uta tions. ? Fin al ly, the govern ment should have ac cess to peo p le who track in dust ry de v elop ments on a cur rent basis. Some times negotia tions can be af fected by some th ing as sim p le as failure to keep up with the in dust ry press. One negotiator re memb ers how he suc ceeded in gett ing his govern ment to with draw an offer to one com p any after fin d ing out some th ing they had done in an oth er co unt ry in the re g ion.
IS THE RIG HT S UP PORT AVAIL AB L E ?
Legal and Negotia tion Con sidera tions
Sup p ort may be avail able through soci al net works and word of mouth. There are a small numb er of peo p le who rea l ly know about any given special ty. Also, govern ments tend to value ex p erts who them selves have some kind of pub lic sec tor background, who un derstand how govern ments work and think. Money might not be the prime motiva tion for such peo p le. Many of the world's lead ing ex p erts in this or that have made whatev er kind of pile they need, and are no long er motivated so much by money. From the government's point of view, they can be lured more by a deal that will en han ce their re p uta tion, or simp ly make them feel good. These are not neg ligib le motives in this game. There has been a surge of in terest among in ter nation al in stitu tions in re cent years in pro v id ing sup p ort on the govern ment side, in re cog ni tion of the fact that there are high stakes for economic de v elop ment and even polit ical gover nance. On the govern ment side, these in itiatives are wel come, and have hel p ed to forge a new layer of net works bet ween govern ment negotiators and in ter nation al ex p erts. But there are li mita tions on the na ture of their sup p ort, and ac cess ing their sup p ort can take time. Two years is often quoted as a norm al per iod to get even re gular con sul tan cy de livered co ur tesy of a re gion al de v elop ment bank or in ter nation al fin an ci al in stitu tion. It should also be noted that some of the pro ces ses of govern ment have a dis tinct im pact on how help is hired. Most size able pieces of work will natural ly pass through pub lic pro cure ment pro cedures, which will most li ke ly re strict bi dd ers to com p an ies of a cer tain size. And then there is al ways the ques tion of cost. Minist ers in a de v elop ing co unt ry might earn less in a month than some of the ex p erts pro v id ing sup p ort char ge for a day’s work - this can create an en v iron ment in which pro fes sion al fees are seen as pro hibitive, even if they would ac tual ly send mill ions of extra dol lars roll ing in to the Treasu ry. Similar ly it is hard to im agine ag ree ing to hire lawy ers on a “boun ty hunt er” model under which the lawy er re ceives a per cen tage of any negotiated gain and risks hav ing to walk away empty-handed. “No win, no fee” just won't fly in a pub lic gover nance sett ing.
170 YEARS AT THE TAB LE: CON F ESS I ONS OF A NEGOTIATOR Some of the aut hors of this book have spent more time negotiat ing than they often care to admit. About 170 years in fact (no, rea l ly, though we are not going to di v ul ge how we added that up). This chapt er runs through some tips that have been hard won out of hundreds of hours fac ing off, di gg ing in, nudg ing and co ax ing, and general ly gett ing too lit tle sleep.
THE DIF FER E NCE B E T WE E N POS I TIONS AND IN TERESTS Negotiators too often state their posi tions as op p osed to their in terests. For ex am p le, an IMC will state that it will not pay in come tax above a cer tain rate and it will not agree to a cap of de duc tible costs. Meanwhile the Govern ment will state that a large frontend pay ment is man dato ry and that taxes are pay able on the date of a com mer ci al dis cove ry. If they were talk ing about their re spec tive in terests, the IMC would ex p lain that it needs a minim al In tern al Rate of Re turn (IRR) on its capit al to get approv al from its Board of Di rec tors, fail ing which its in v est ment com mit tee will not approve the pro ject. The govern ment would state that it needs in come as fast as pos sible, or it could fall. In -
Legal and Negotia tion Con sidera tions
terests are the whys be hind the posi tions. When in terests are clear ly ex p res sed, it is eas i er to see where the part ies can com p rom ise.
WHE RE IT HAP PE NS CO UNTS At some stage "negotia tions" need to happ en face to face, and here too there is a variety of prac tice. Some times govern ments have the com p an ies come to them. Oth ers choose a neutr al (al beit en joy able) city - but this can be both a fin an ci al and psyc holog ical burd en for the govern ment negotiators. They might be in a great city, with plush re staurants, but they are not on familar ground in the city, and are in the of fices of a foreign law firm. There are even times when sub stan tive is sues are af fected by the need to catch a plane. Also, lawy ers speak their own lan guage, legalese, and some times don't make that many con cess ions to non-native speak ers. On the other hand, govern ment negotiators may be able to give the negotia tions their full at ten tion if they are taken out of their home co unt ry and norm al work flow. At home, the lead negotiator might get a phone call from the Top (like, You Know Who), and just need to step out for "15 minutes". Then you don't see her again for the rest of the day. To avoid the ap p earan ce of favor ing one party or an oth er, the part ies may agree in ad vance to rotate the negotia tions among dif ferent loc a tions.
TIM ING AND PACE Tim ing and pace are al ways im p or tant but never more so than at the face-to-face stage, when one or both part ies might have travel led half way round the planet. The part ies should set up a schedule ahead of time which al lows for any in tern al con sul ta tions. There is a natur al ten den cy to treat and de scribe every th ing as ur gent. But if you give in to that urge, it be comes hard er to know which de cis ion in the negotia tion is im por tant for what rea son. Part ies will often say they do not have the aut hor ity to make a cer tain de cis ion. Some times that's true, some times it is only a ploy to gain time to con sult.
170 Years at the Table: Con fess ions of a Negotiator
If the way each side's de cis ions need to be made is not dis cus sed up front, it can lead to frustra tion. IMCs often feel govern ment de cis ion mak ing is too slow. On the other hand they may not fully un derstand how many stages of con sen sus build ing govern ment re p resen tatives have to go through. If it is ex p lained, at least the com p any re p resen tatives un derstand the rea sons for the delay and can some times help, by of fer ing to move to other ques tions while wait ing for a re spon se on a par ticular issue. Li kew ise, when the govern ment negotiators don't un derstand IMC pro ces ses, such as re q uire ments for Board of Di rec tors or in v est ment com mit tee de cis ions, they can start to mis trust the IMCs in ten tions. Maybe the IMC has de v eloped cold feet but just isn't say ing so? Maybe it has de cided to look for a bet t er asset down the road?
B AL ANC ING COS T AND B E NE FITS / TRADE OFFS AND COM PROM IS E S When should you com p rom ise? When should you hold firm? These are im p os sible con undrums to an sw er in the round. But if you are clear about your time schedule and priorit ies, it be comes a lot eas i er to find places to offer com p rom ise with out yield ing the is sues that are im p or tant to you. Be fore a negotia tion sess ion, it is valu able to have a list of the is sues ex p ec ted to come up, and to make sure that the mem b ers of the negotiat ing team are ag reed on the posi tions to be taken and on the al ter natives, if any, that might be of fered to reach ag ree ment. Creat ing a chart of is sues and al ter natives will keep the team focused on the negotia tions and on point. It may also avoid in dividu al mem b ers of the negotiat ing team going off on an un desired frolic and de tour. Some times, though, con sen sus it self can be a pro blem. When the seven peo p le in the team in the room all need to agree on every th ing, th ings can take a while, par ticular ly when a new point, not on the chart, drops on the table. . Peo p le em p loy all dif ferent kinds of tech niques. Al though a popular image, tireless ly pro moted by Hol lywood, is of tough guy stand-offs, all great negotiators li st en careful ly and usual ly re spectful ly to what their co un terparts are say ing even if there are sharp dis ag ree ments. In terms of tim ing and tech nique, some pre f er not to move on from any
Legal and Negotia tion Con sidera tions
given area until every point in it has been ag reed. Oth ers will try to pick off the easy ones, and leave more time to focus on the dif ficult ones. Oth ers seek out some nonessential points to con cede early in order to gain the trust and con fid ence of the other party. Negotia tions can also be isolated by groups of re lated sub ject matt ers, such as fisc al is sues, per mit tim ing, local de v elop ment re q uire ments, or re p ort ing re q uire ments. Whatev er the met hod, it should be ag reed to, or at least ex p lained to, all the mem b ers of the team, and con sis tent ly applied. This will en able oth ers who join the team to un derstand the negotiat ing tech nique.
GETT ING PAS T ROADB L OCK S In evitab ly, at some stage the part ies will find them selves at an im p as se. There are a numb er of ways to get out of it. At the be ginn ing, though, it is crit ical not to spend too long ar gu ing about the point once the na ture and mag nitude of the dis ag ree ment is clear. Peo p le can be come so em otional ly com mit ted to the point that they can not bring them selves to back down. If at all pos sible, leave the issue for a while and con tinue negotiat ing other points. Most block ing points are re sol v ed by trad ing off com p romises on dif ferent parts of the min ing ag ree ment. If the part ies are bloc ked on, say, the royal ty, they might con sid er trad ing a com mun ity de v elop ment un der tak ing. Or, if they are bloc ked on the tim ing of per mits, and dura tion, they could trade off on fisc al measures. An oth er approach is to leave block ing points until the end so as not to get stuck and lose con fid ence dur ing the pro cess. If no com p rom ise can be found, each party can kick the issue upstairs. Some times there are even pre-existing separate negotia tion teams com p rised of high level of fic ers in the Govern ment and in the IMC man dated to find com p romises to block ing points.
170 Years at the Table: Con fess ions of a Negotiator
WHO IS AT THE TAB L E The best out comes usual ly in v ol v e a mat rix of ac tors which in clude both local and nation al of fici als, local popula tions, NGOs and the IMC con cer ned. But this doesn't mean every one can be at the table. Govern ments have the de licate task of negotiat ing in an ef fective man n er while pro v id ing suf ficient in for ma tion to domes tic ac tors to make them feel that their in terests are not being ig nored. Here and there a govern ment has toyed with the idea of bring ing civil society di rect ly to the table, but as far as we are aware, it has not hap p ened to date. Sec re cy of negotia tions of co ur se is a sen sitive issue in terms of trans p aren cy. As you will know by now, the aut hors of this book sup p ort the con cept of contra ct trans p aren cy. And we have out lined how, if it was the top prior ity, govern ments could ac tual ly avoid negotiat ing by using a strict li cens ing sys tem and de fin ing all terms in nonnegotiable law. There might be big trade-offs, of co ur se, but it would be pos sible. It is hard to see how, from a strict ly logist ical point of view, negotia tions can pro ceed with total, real-time trans p aren cy. Every seasoned negotiator has an in stan ce or two of how leaks at cruci al stages im p act a side's negotiat ing posi tion - usual ly for the worse. In one case, a govern ment har dened its fisc al de mands after one of its team pic ked up a home co unt ry com p any press re lease, pre sumab ly di rec ted at poten ti al in v es tors, de tail ing just how pro mis ing the asset was. On the govern ment side, polit ical lead ers some times grandstand around single is sues, which then pus hes their negotiat ing teams into a cor n er. It seems as though a cer tain amount of con fiden tial ity, for a cer tain time, is what al lows negotiators to negotiate. Last ly, there is no such thing as too much in for ma tion and know ledge. Big IMCs are well-financed know ledge mac hines with rigor ous stan dards of ex cell ence ac ross a wide range of dis cip lines. Govern ments are often at a re sour ce - and therefore a know ledge - dis ad v antage, even when they have statuto ry ac cess to much of the same in for ma tion. For ex am p le, even though a government's geolog ical sur v ey might have the right to ob tain and ac cess sur v eys car ried out by the IMC, they may have less capac ity to in terpret the data they see, or to con nect it to the latest trends in world mar kets.
Legal and Negotia tion Con sidera tions
DIS P UTE AVOIDAN C E AND RE S OLU T ION Min ing contra cts - like any other legal bond - can fall apart. The part ies, the pro ject, the economy, and other for ces and fac tors can turn a once-happy mar riage into a strained re lationship and even wind up in di v or ce. Dis p utes can arise on many as p ects, but are most often re lated to per for mance ob liga tion failures, failures to meet soci al or en v iron ment al ob liga tions dur ing the de v elop ment phase, and in terpreta tion of is sues re lat ing to mine closure. How do the govern ment and min ing com p any han dle dis p utes? There are a variety of contra ct tools avail able to help keep th ings runn ing smooth ly.
TAL K IT OUT – AL L OW ING FOR RE VIE WS AND CON SUL TA TION One opt ion is to in s ist on "ob ligato ry" per iodic contra ct re v iews that force the part ies togeth er to deal with chan ged cir cumstan ces. If there is dis satis fac tion, the part ies can negotiate to mod ify the fin an ci al and other terms of the deal in order to main tain the balan ce the part ies had in ten ded. Hav ing scheduled con sul ta tions can minim ize frustra tion and ease tens ions if one of the part ies feels that the deal is no long er fair, pre v ent ing rash judg ments that might lead a com p any to pull out of a co unt ry or a govern ment to national ize a mine.
Legal and Negotia tion Con sidera tions
As an ex am p le, Ar ticle 31 of the 2010 Miner al De v elop ment Ag ree ment bet ween Li beria, Putu Iron Ore Min ing, Inc., and Mano River Iron Ore Ltd. states that the Govern ment and com p any ‘shall meet once every five (5) years after the date hereof or ear li er, if one party rea sonab ly con sid ers a Pro found Chan ges in Cir cumstan ces to have oc cur red, to es tablish wheth er or not a Pro found Chan ges in Cir cumstan ces has oc cur red.’ Some contra cts con tain other forms of negotia tion and media tion ob liga tions that bring the part ies to the table when dis ag ree ments arise. They en courage the part ies to hash their is sues out - eith er alone or with the as sis tance of a neutr al mediator – and so avoid the need to es calate the dis p ute. Ar ticle 32 of the Qara Zag han Gold Pro ject Contra ct bet ween Afghan Kryst al Nation al Re sour ces Com p any (AKNR) and the Minist ry of Mines of the Is lamic Re p ub lic of Af ganis tan, dated Janua ry 10, 2011, states: Eith er party to the contra ct should try to man age and re sol v e con flicts aris ing from dis ag ree ment in the in terpreta tion of the contra ct, via negotia tions, mutu al ag ree ment and other non-confrontational means. Both sides should re sol v e their con flict with in sixty (60) days after re ceiv ing writt en notice of an issue re lated to the contra ct.
WHE N TAL K ING FAIL S - FORM AL M E AS URE S FOR RE S OLV ING CONTRA CT DIS PUTE S What hap p ens when more in form al measures do not work? Contra cts pro v ide for that by de tail ing form al met hods of dis p ute re solu tion. Dis p ute re solu tion con tains two parts: the law that will govern the dis p ute and the met hod of re solv ing the dis p utes. The law govern ing the min ing ag ree ments can be total ly in depen dent from the met hod used to re sol v e dis p utes. There are two major ways to for mal ly re sol v e a dis p ute: eith er sub mit it to the co urts or send it to ar bitra tion.
Dis pute Avoidan ce and Re solu tion
Which Law Appl ies? The issue of applic able or govern ing law can be huge ly im p or tant. The fol low ing scenarios help il lustrate why: Scenario One - a contra ct re q uires the govern ment to en sure that the con ces sionaire has ac cess to land neces sa ry for its op era tions. After the govern ment starts tak ing ac tion to re move in digen ous peo p le from the land, those af fected com munit ies pur sue legal ac tion in domes tic court, which rules that the government's contra ct pro m ise violates domes tic and in ter nation al human rights law, and bars the govern ment from tak ing furth er steps to make way for the min ing pro ject. The com p any sues the govern ment for breach ing its ob liga tion to secure ac cess to the land. Under applic able law, is the govern ment ex cused from hav ing to com p ly with its contra ct pro m ise? Scenario Two - a contra ct in cludes an en v iron ment al "freez ing" pro v is ion. The govern ment has amen ded its en v iron ment al law, pro v id ing private citizens with new rights to sue com p an ies, and strengthen ing pol lu tion stan dards. As a re sult of the new law, the com p any has been or dered to pay sig nificant sums to local com munit ies. The com pany ar gues that by en act ing the new law, the govern ment has breac hed the contra ct, and now owes the com p any damages amount ing to its lit iga tion fees and the sums owed to the private part ies. The govern ment de fends it self by ar gu ing that the broad stabiliza tion pro v is ion in the contra ct is void and un en force able under domes tic contra ct law be cause it is in con sistent with pub lic poli cy and un constitution al. Under applic able law, will the govern ment be bound by its pro m ise? These ex am p les show why govern ments general ly want their law to be the one that governs all as p ects of a min ing pro ject, as it will give them the greatest con trol over the shape the pro ject, the contra ct, and the part ies' rights and ob liga tions under it. For min ing contra cts where the loc a tion of the in v est ment is cruci al and im mov able, and can pose major op p or tunt ies and chal lenges for the govern ment, co unt ries natural ly want to leave as lit tle to chan ce as pos sible. Re flect ing this con cern, many contra cts state that the law of the co unt ry host ing the mine will govern op era tion of the pro ject, in terpreta tion and applica tion of the contra ct, and the part ies' rights and ob liga tions. For ex am p le, Ar ticle 39 of the AKNR-Afghanistan contra ct very clear ly states:
Legal and Negotia tion Con sidera tions
This contra ct is sub ject and gover ned by all applic able Laws and Re gula tions of the Govern ment of Af ganis tan. While states gain cer tain ty by using these types of pro v is ions, they may cause an equal measure of un cer tain ty among in v es tors nerv ous about being at the mercy of the host state's law - par ticular ly if re la tions bet ween the part ies even tual ly sour. Con cerns about cor rup tion or a lack of jud ical in depend ence can in tens ify an in v es tor's de sire to find a de cis ion maker that is in sulated from domes tic pre ssures. In order to ease those con cerns, in v es tors some times get the govern ment to agree to re sol v e dis p utes in the co urts of the in v es tor's home co unt ry, or they push for ar bitra tion. But if the co unt ry has an ef ficient and in depen dent judicia ry, it may be dif ficult to in s ist on ar bitra tion and/or shift ing the lit iga tion over seas. Even when it is ag reed that nation al law does apply, in v es tors have cer tain legal tools at their dis p os al to pro tect them selves against govern ment ac tion. While fall ing out side the contra ct, in v est ment treat ies can be used to de fin ing the part ies' rights and ob liga tions under the deal. These are dis cus sed at the end of this chapt er.
Ar bitra tion ver sus Lit iga tion Once it is clear what law appl ies, there is then the ques tion of wheth er to pur sue the path of ar bitra tion or lit iga tion in the co urts. This choice of pro cedure is im p or tant. There are a numb er of major dif fer ences bet ween ar bitra tion and lit iga tion. These re late to the ident ity of the de cision mak er, the pow ers of the de cision mak er, the loc a tion of the pro ceed ings, the pro cedures and rules of evi d ence that apply, the eth ical rules that will apply to the at torneys and the de cision mak er, the op en ness of the pro ceed ings and the ab il ity of non-parties to ac cess and par ticipate in them, the speed and cost of the pro ceed ings, and the fin al ity and en for ceabil ity of awards or jud ge ments. Ar bitra tion pro ceed ings have many fea tures that part ies may see as ad v antage ous. Such pro ceed ings are typical ly con fiden ti al. There are many good in ter nation al ar bitrators to choose from, as op p osed to tak ing chan ces be fore a judge who may or may not be know ledge able, in depen dent or honest. And there are speci al rules of fin al ity and en for ceabil ity in ar bitra tion rules, domes tic laws, and in ter nation al treat ies (dis -
Dis pute Avoidan ce and Re solu tion
cus sed furth er below) that are de sig ned to both speed the pro cess of gett ing a final award and en sure that, once that award is is sued, the vic tori ous party can en for ce it. But there are some dis ad v antages. They are ex p en sive, are not as speedy as some would think, and their fin al ity can be a dis ad v antage given that the part ies only have one chan ce to get it right be fore the ar bitr al tri bun al. The grounds for ap p e al or to re quest a state not to ex ecute an ar bitr al award are par ticular ly nar row. Moreov er, the closed na ture of the pro ceed ings - and some times their out comes -- are often criticized as being in con sistent with prin ci p les of good gover nance, ac coun tabil ity, and trans paren cy. If co urts are used, the rules and pro cedures re gard ing which par ticular court will take the case and how it will han dle it are general ly spel led out in the law. In contra st, in ar bitra tion the part ies and the ar bitrator(s) have much more freedom to de cide just how they want to do th ings. Contra cts - in ten tional ly or in ad v ertent ly some times leave those is sues open. This means that the part ies will have to re sol ve them when they are al ready em broiled in their dis p ute. Some contra cts do at leat try to settle as many ques tions in ad v ance as pos sible by specify ing the set of pro cedur al rules that will apply and the "seat" of the ar bitra tion.
The Path of Ar bitra tion There are vari ous sets of pre-established pro cedur al rules for ar bitra tion, in clud ing those of the Lon don Court of In ter nation al Ar bitra tion (LCIA), the Uni ted Na tions Com miss ion on In ter nation al Trade Law (UN CITR A L), the World Bank's In ter nation al Centre for Settle ment of In v est ment Dis p utes (ICSID), the In ter nation al Chamb er of Com mer ce (ICC), and Stockholm Chamb er of Com mer ce (SCC). These con tain pro v is ions on a host of is sues in clud ing the qualifica tions of the ar bitrators, the numb er of ar bitrators that will re sol v e dis p utes, the met hods of ap p oint ing ar bitrators, the pow ers of ar bitrators, the con duct of the pro ceed ings, the con fiden tial ity or trans p aren cy of the dis p ute and its out come, the type of re lief or com p en sa tion that can be awar ded, the force of awards, and the fees and costs of the ar bitra tions. If a contra ct specif ies one of these sets of rules, the part ies will get that pac kage. A de fin ing fea ture of ar bitra tion, howev er, is that the part ies to the dis p ute general ly re tain a lot of freedom
Legal and Negotia tion Con sidera tions
be fore or dur ing the dis p ute to agree to mod ify the rules and shape the pro ceed ings as they see fit. As an ex am p le of an ar bitra tion clause, the Afghan ag ree ment cited above states: If un able to reach a sol u tion, as per the Miner al Laws then both sides hereby agree to refer their dis ag ree ment to ar bitra tion which shall be the In ter nation al Court of Ar bitra tion as the in depen dent ar bitrator. In this case, the re fer ence to the In ter nation al Court of Ar bitra tion is not very clear as there are sever al In ter nation al Co urts of Ar bitra tion (Lon don, Paris etc), each of which has its own rules of pro cedure. It seems to imply that the part ies only want one ar bitrator (as op p osed to three, which is more typ ical under many rules), but this too is not very clear. The ag ree ment bet ween Li beria, Putu Iron Ore Min ing, Inc., and Mano River Iron Ore Ltd. (Art. 27) is more specific on these is sues, stat ing: Where the mediator’s re com mendation(s) are re jec ted by eith er of the part ies and it is evi dent that furth er di rect negotia tions will not re sol v e or settle the dis p ute, con trover sy or claim, the matt er shall be sub mit ted to ar bitra tion pur suant to Sec tion 27.2.... Any Dis p ute bet ween the Govern ment and the Com p any not settled pur suant to Sec tion 27.1 shall be re fer red to and fin al ly re sol v ed by ar bitra tion con duc ted in ac cordan ce with the UN CITR A L Rules. Any such ar bitra tion shall be ad minis tered by the LCIA. Some contra cts then add even more de tail about the exact pro cedures and pow ers of the ar bitrators, wheth er doing so in order to bet t er set the applic able rules in stone, or to mod ify those rules so as to best suit their needs.
Dis pute Avoidan ce and Re solu tion
The "Seat" of the Ar bitra tion Ar bitra tion is often de scribed as being "de-localized" mean ing that it is a pro ceed ing that can be lar ge ly di v or ced from and in depen dent of background prin ci p les of law that might ot herw ise apply to the pro ceed ings. If, for ex am p le, the contra ct states that UN CITR A L rules of ar bitra tion will apply in a dis p ute, those rules will govern ir res pective of wheth er the ar bitra tion hear ing hap p ens in San tiago, Nairobi, Lon don, Paris, or New York. That said, the govern ing law of the "seat" of ar bitra tion is im p or tant. The "seat" has a speci al mean ing. While the term "seat" im p l ies that it is the place of the ar bitra tion, as noted above, it is not neces sari ly the ac tu al place where the ar bitra tion is con duc ted. It is en tire ly pos sible for ar bitrators to hold hear ings in Sin gapore but for the ar bitra tion to have its "seat" in the Net herlands. The "seat" is im p or tant be cause the law of the seat will fill in gaps left by ar bitr al rules, im p act the role of co urts with re gard to the role of ar bitrators, and might even over ride cer tain ar bitra tion rules. The law of the seat can even in flu ence the ul timate en for ceabil ity of any re sult ing award. Be cause of the im p or tance of the "seat", many contra cts spec ify what it will be. While the govern ment will often want its juris dic tion to play that role, a foreign in v es tor will frequent ly have other ideas. The ag ree ment bet ween Mon golia, Ivan hoe Mines Mon golia Inc LLC, Ivan hoe Mines Ltd and Rio Tinto In ter nation al Hold ings Ltd il lustrates the levels of specific ity now frequent ly pro v ided. In Ar ticle 14.2 it clarifes that UN CITR A L Rules will apply in case of ar bitra tion, that there shall be 3 ar bitrators, the lan guage of ar bitra tion shall be En glish, the ar bitrators will apply laws and re gula tions of Mon golia to in tep reta tion of the ag ree ment, but the place of ar bitra tion shall be Lon don, and the ar bitr al pro ceed ings ad minis tered under UN CITR A L Rules by the Lon don Court of In ter nation al Ar bitra tion.
En for ce ment Once ar bitrators issue an award, the winn ing party can take it to court to col lect its winn ings. And as re fer red to above, two treat ies make this re lative ly easy for vic tors by nar row ing the grounds for chal leng ing or re sist ing en for ce ment of any award. These treat ies are the 1958 Con v en tion on the Re cog ni tion and En for ce ment of Foreign Ar bitr -
Legal and Negotia tion Con sidera tions
al Awards (the "New York Con v en tion") and the 1965 Con v en tion on the Settle ment of In v est ment Dis p utes bet ween States and Nation als of Other States (the "ICSID Con ven tion"). Each has rough ly 150 mem b er states. One key dif fer ence bet ween the two treat ies is that the New York Con v en tion per mits awards to be chal lenged if they are in con sistent with pub lic poli cy. The ICSID Con v en tion does not. There is cur rent ly no similar multi later al treaty that makes for easy en for ce ment of judici al awards.
Extra-Contractual Pro tec tions for In ves tors and Re stric tions on State Power: The Role of In vest ment Treat ies Per haps the most im p or tant extra-contractual legal pro tec tion for foreign min ing com pan ies is what is known as an "in v est ment treaty". In v est ment treat ies are ag ree ments bet ween states in which each state party pro mises to pro v ide cer tain types of treat ment to in v es tors from the other state party. States com mit to treat foreign com p an ies "fair ly and equitab ly"; to pay com p en sa tion if the govern ment ex p rop riates any foreign com p any's pro p er ty; to treat foreign com p an ies as well as domes tic com p an ies and com p an ies from other co unt ries; to pro v ide com p an ies' in v est ments "full pro tec tion and secur ity"; and to per mit foreign com p an ies to free ly trans f er money in and out of the co unt ry. Some in v est ment treat ies also con tain pro v is ions re strict ing govern ments' ab ilit ies to im p ose con di tions and re q uire ments on foreign com p an ies, such as joint ven ture re q uire ments, re q uire ments to pro cure goods or ser v ices loc al ly, and re quire ments to trans f er tech nology. Im p or tant ly, in ad di tion to pro v id ing these pro tec tions for foreign com p an ies, in v est ment treat ies give foreign com p an ies a strong pro cedur al tool: the ab il ity to en for ce those pro tec tions. With few ex cep tions (e.g., in cer tain human rights treat ies), most types of treat ies only allow states to in itiate dis p utes and seek re med ies for breach of treaty. But in a not able de p ar ture from that pat tern, in v est ment treat ies allow foreign com p an ies to sue their host govern ments di rect ly and seek com p en sa tion for harms they have suf fered as a re sult of the treaty breach. The cases are de cided in ar bitra tion. If a foreign in v es tor is co v ered by one of these treates - of which there are now over 3000 worldwide - it thus gets an extra layer of pro tec tion.
Dis pute Avoidan ce and Re solu tion
To show what this means: If a govern ment pas ses a law ex p rop riat ing the mine, and a local court de ter mines that the govern ment does not need to pay the com p any any com p en sa tion for that "tak ing", the com p any could poten tial ly use the in v est ment treaty to sue the state and seek com p en sa tion from the govern ment for an ex p rop ria tion. To date, com p an ies have used in v est ment treat ies to chal lenge a numb er of govern ment ac tions and in ac tions, many of which re late to dis p utes aris ing in min ing and other extra ctives pro jects. These in clude cases ar gu ing that the govern ment ex p rop riated a com p any's pro p er ty when it re v oked the com pany's op erat ing per mit; the govern ment ex p rop riated a com p any's pro p er ty and failed to treat it "fair ly and equitab ly" when it sought to re q uire backfill ing of the mine; the govern ment im p osed im p er missib le "per for mance re q uire ments" on a com pany when it re q uired it to in v est in re search and de v elop ment; the govern ment dis criminated against a com p any when it took en for ce ment ac tion against it for viola tion of en v iron ment al re q uire ments but did not take similar ac tion against other com p an ies; the govern ment violated the "full pro tec tion and secur ity" ob liga tion be cause it failed to pro tect the in v est ment from los ses and dis rup tions caused by local citizens; and the govern ment ex p rop riated a com p any through a law re q uir ing min ing com pan ies to sell equ ity in terests to his torical ly dis ad v antaged groups. Com p lian ce with domes tic law is not a de fen se to a breach of an in v est ment treaty (or in ter nation al law more general ly). Even if the government's ac tion is en tire ly con sis tent with its own law, it may still be in con sistent with the in v est ment treaty.
Legal and Negotia tion Con sidera tions
PLANN I NG FOR TROUB LE A host of tri cky legal is sues can arise dur ing li fetime of a pro ject. Contra cts tend to try and ac count for such even tualit ies through a variety of re lative ly stan dard clauses. This chapt er tries to brief ly ex p lain some of these clauses and what to look for.
TRANS FER / AS S IG N M E NT OF RIG HTS AND OB L IG ATIONS / CHAN G E OF CON TROL The contra ct needs to address which party can trans f er its rights and ob liga tions to whom and under what con di tions. Do you need the other part ies’ prior approv al? Prior Notice Only? Veto Right? First of right re fus al? Part ies that “for get” or can not agree and therefore de cide not to in clude a pro v is ion for this type of clause could find them selves stuck with a partn er they do not know and do not like (for ration al or ir ration al rea sons). In ad di tion, the part ies should de cide if a chan ge in con trol of one of the part ies will be con sidered to be an as sign ment or trans f er of the rights and ob liga tions re q uir ing notice to or con sent of the other party. Fin al ly, it is im p or tant to look down the road when draft ing these pro v is ions to as sure that the part ies en v is ion who will own which as sets at what tri gg er date. The as signment/transf er of rights pro v is ions should take into con sidera tion is sues aris ing out of op era tions and the use of as sets.
Legal and Negotia tion Con sidera tions
AC COUNT ING , AUDIT AND RE PORT ING OB L IG A TIONS A min ing contra ct pro v ides for many dif ferent type of pay ment to be made over a long per iod of time. And in co unt ries that have yet to de v elop com p rehen sive min ing re gulato ry re gimes, the min ing contra ct may also set forth com p rehen sive re p ort ing re quire ments. It is im p or tant that the contra ct set forth clear ly the terms -- when, where, how, and how much -- applic able to pay ments to be made under the contra ct, and that it be clear about the con tent and tim ing of re q uired re p orts. A care ful govern ment will nor mal ly seek re gular op erat ing re p orts giv ing quan tative in for ma tion as to the pro gress of its op era tions, plus quar ter ly fin an ci al state ments and audited an nu al fin an ci al state ments. If the parent IMC is not a pub lic com p any with rea di ly avail able fin an ci al in for ma tion, the govern ment may want to re q uire its fin an ci al state ments as well, par ticular ly if it is a guaran tor of the ob liga tions of its local sub sidia ry. The contra ct should also have pro v is ions that give the govern ment the right to re v iew data un der ly ing pay ment com p uta tions or op erat ing re p orts. Fin al ly, in re cent years govern ments have be come in creasing ly con cer ned about with whom they are de al ing with both in itial ly and dur ing the life of the contra ct. Many co unt ries now re q uire the op erat ing com p any to in form the govern ment of any chan ges in the ow nership of the op erat ing com p any, wheth er they occur di rect ly or through chan ges of ow nership of the com p an ies that own the op erat ing com p any. More re cent ly, some govern ments are also re q uir ing in for ma tion about be nefici al ow nership up the chain. This is both an anti-corruption measure and an as sis tance in de tect ing and as sert ing tax ob liga tions when off-shore gains are taxed.
TER M INA TION When part ies sign a min ing ag ree ment, they are in a sense gett ing mar ried. Those that marry should be able to di v or ce. Thus, the min ing ag ree ments should spec ify which part ies can ter minate the min ing ag ree ments under what cir cumstan ces. There is al ways a pro v is ion that per mits ter mina tion by one party if the other party is in de fault in the per for mance of its ob liga -
Plann ing for Troub le
tions under the contra ct, al though that is often heavi ly qualified by vari ous pro v is ions re q uir ing the de fault ing party to be given notice of the de fault and an op p or tun ity to cure the de fault. But some times the part ies fail to con sid er the con sequ ences of a de fault ter mina tion: who owes what to whom, and what hap p ens to the mine as sets, if any, al ready in place. The part ies may also agree on the situa tions in which a party may it self ter minate the contra ct and walk away -- in a sense, a no-fault di v or ce. In this case they still need to spec ify what hap p ens to the mine as sets and wheth er (and when, if at all) the de cis ion to walk away should tri gg er any pay ment ob liga tion. Ter mina tion clauses are es senti al and rare ly dis cus sed until the very end of negotia tions and yet, they will de ter mine the end of the mar riage. We adv ise all part ies to think careful ly and dis cuss how they can “get out” of the mar riage, and make sure that the min ing contra ct clear ly sets forth all of the pos sibilit ies and the con sequ ences of ter mina tion for each type of ter mina tion.
S OL VEN CY OF THE M IN ING COM PANY Most IMCs con duct their min ing op era tions through com p an ies that have no as sets other than the re levant min ing li cen se or contra ct, the mine op erat ing as sets, and, per haps, the contra cts for sale of the mine out p ut. The parent IMC is not a party to the min ing contra ct, and the com p any's cash needs are co v ered by funds from the parent com p any, nor mal ly pro v ided on a when-needed basis. This means that if the op erat ing com p any gets in troub le, or falls be hind on pay ments to the state, the state has no ac cess to funds un less the IMC chooses to con tinue fund ing its op erat ing sub sidia ry. Govern ments deal with this risk by re q uir ing the parent com p any to guaran tee the risks of its sub sida ry. The amount of such guaran tees, and the con di tions under which they can be cal led upon, are al ways sub jects of dis p ute, and in v ol v e fair ly com p lex legal is sues re lat ing to ac tions that must be taken in order to call upon a guaran tee. Govern ments should not at tempt to negotiate such terms with out the as sis tance of lawy ers ex p erien ced in such matt ers.
Legal and Negotia tion Con sidera tions
Often, par ticular ly with small er IMCs which may have weak er fin an ci al struc tures, govern ments in s ist on re ceiv ing guaran tees (often in the form of lett ers of credit) from sol v ent fin an ci al in stitu tions. The amounts of such guaran tees are negoti able but usual ly re p resent a per cen tage of the over all es timated value of the contra ct. Again, such in stru ments in v ol v e a high ly tech n ical cor n er of the law and ex p ert legal help is es senti al. The govern ment should also con sid er what would be the con sequ ences for the mine as sets under local law should the worst happ en, and the min ing com p any de clare bankrupt cy. In many cases, the min ing com p any will have given its lend ers a mortgage on the mine as sets in order to fin an ce mine con struc tion. It may be neces sa ry for the govern ment to con sent to such a mortgage in order to en able the con struc tion of the line, but if it does so, it should re q uire, in the min ing contra ct, that the lend ers can not dis mantle the mine and sell of the as sets pieceme al with out the con sent of the state. A good lawy er and a wise bank er can help the govern ment negotiators think through these is sues. It is bet t er to im agine the worst be fore it oc curs and pro v ide for it, to the ex tent pos sible, be fore it hap p ens.
COR RUP TION De spite in creas ing at ten tion to the issue, cor rup tion re mains in many loc a tions. In the last few years, many co unt ries have fol lowed the lead of the Uni ted States Foreign Cor rupt Prac tices Act, and have pas sed and have begun to en for ce laws that levy heavy penalt ies on com p an ies that par ticipate, di rect ly or in direct ly, in bribe ry of govern ment of fici als. For this and busi ness rea sons, the large min ing com p an ies sub ject to such laws have be come much more care ful about the peo p le with whom they do busi ness and the way they con duct busi ness. Be cause of this, if a li cen se is is sued to a small er com p any and the sur round ing cir cumstan ces sug gest cor rup tion, the li cen see may find it im p os sible, after it makes a dis cove ry, to bring in a partn er with the fin an ci al capac ity needed to de v elop the mine even if cor rup tion can not be pro v en. This may mean that the state has a valu able
Plann ing for Troub le
miner al asset held by a com p any that is not tech nical ly in de fault under its li cen se, but which is also un able to go for ward with mine de v elop ment. The moral, of co ur se, is that govern ments may need to con sid er more careful ly than they some times do, the na ture of the per sons to whom they are is su ing min ing li cen ses and award ing min ing contra cts -- not al ways easy to do in a min ing re gime in which prior ity is de ter mined by time of fil ing a claim. In re gimes which re q uire ex p lora tion or min ing contra cts, this is some what eas i er to deal with if the contra ct form re q uires a re p resen ta tion that the contra ct re cipient has not car ried out any cor rupt ac tivit ies (which can be de scribed in some de tail) in con nec tion with ob tain ing the contra ct. Breach of this re p resen ta tion can give the govern ment the right to ter minate the contra ct.
Legal and Negotia tion Con sidera tions
TO PUB L ISH OR NOT TO PUB L ISH? Traditional ly min ing contra cts have been shrouded in sec re cy. In some cases, they were not even shared with in govern ment. Even agen cies with re spon sibilit ies re lat ing to min ing op era tions were not able to see the un der ly ing contra ct. Cer tain ly those not party to the ag ree ment could only guess at the terms. This was in line with stan dard prac tice going be y ond the extra ctive in dust ries sec tor. Yet the merits of keep ing deals con fiden ti al are in creasing ly ques tioned by govern ments and civil society, and even com p an ies. Govern ments are be com ing more and more open about their pro cure ment and contra cts with private part ies. This trend is ex tend ing to min ing, where trans paren cy is in creasing ly the norm.
EVOLV ING B AS E S FOR DIS CL OS URE A grow ing numb er of govern ments now pub lish min ing contra cts, rang ing from Peru to Guinea to Afghanis tan. Some have legis lated to re q uire dis closure. For ex am p le, Li beria’s Extra ctive In dust ries Trans p aren cy In itiative (LEITI) law man dates LEITI to “serve as one of the nation al de p osito ries of all con cess ions, contra cts, and li cen ses and similar ag ree ments and rights gran ted by the Govern ment of Li beria to in dividu als and com p an ies in re spect of the logg ing, min ing, oil, forest ry, ag ricul ture and other de sig nated sec tors; and to grant mem b ers of the pub lic ac cess to such con cess ions and ag ree ments in keep ing with their status as pub lic docu ments.”
Legal and Negotia tion Con sidera tions
The law goes on to state that: "For the pur pose of this Act, contra ct trans paren cy shall mean (1) pub lic ac cessibil ity of materi al con ces sions/licen ses and ag ree ments re lated to the sec tors with in the scope of the LEITI as per Sec tion 5.4 hereof; and (2) the postaward re view and/or audit of the pro cess by and through which con cess ions, contra cts, and li cen ses are awar ded for ex plora tion and/or ex ploita tion of miner als, forests and other re sour ces in order to as cer tain that each award was made in com plian ce with applic able laws." A few govern ments dis close in ac cordan ce with broad er con stitution al or freedom of in for ma tion com mit ments. For ex am p le, Ar ticle 150 of the con stitu tion of Niger states: "Les contra ts de pro spec tion et d'exploita tion des re sour ces naturel les et du sous-sol ainsi que les re venus versés à l'État, désagrégés, société par société, sont in tég rale ment publiés au Journ al Of ficiel de la Répub lique du Niger." Some, such as Guinea and DRC, simp ly pub lish pur suant to volun ta ry com mit ments, not bac ked by any law. In some co unt ries, min ing ag ree ments are ratified by Par lia ment and therefore should auto matical ly be in the pub lic domain. Some contra cts also be come pub lic ly avail able via the in v es tor. Most com mon ly these are re v ealed through fil ings with re gulators, such as those in Canada and the Uni ted States, by firms li sted on Toron to and New York stock ex chan ges. These will in clude contra cts that may not have been made pub��� lic by the govern ment. For ex am p le, the min ing com p any SEMAFO has three separate contra cts filed under the Canadian securit ies database SEDAR (Sys tem for Electronic Docu ment An alysis and Re triev al), in clud ing their contra ct with the govern ment of Bur kina Faso. It re mains rare for the contra ct it self to spec ify that it will be dis closed. Howev er, in co unt ries that have adop ted contra ct trans p aren cy, you will find an ab s ence of con fiden tial ity clauses or even lan guage specificy ing pub lica tion in newer ag ree ments. For ex am p le, Li beria's MDA with Wes tern Clust er Li mited / Sesa Goa Li mited / Bloom Foun tain Li mited / Elenil to Miner als & Min ing LLC simp ly states in Ar ticle 33:10 that "The
To Pub lish or Not to Pub lish?
Govern ment shall make pub lic this Ag ree ment and any amend ments or writt en in terpreta tions of this Ag ree ment." Such clauses align with the re com mended lan guage in the In ter nation al Bar As sociation’s Model Min ing Ag ree ment, which states at sec tion 30.1 (a) This Ag ree ment …. is a pub lic docu ment. Similar lan guage is now being in cor p orated into in dividu al co unt ry model ag ree ments.
IS DIS CL OS URE B RE ACH OF CONTRA CT? How is pub lica tion of ex ist ing deals re con ciled with the ex ist ence of con fiden tial ity clauses? When ex amined close ly, the idea that cur rent ag ree ments must re main sec ret is a myth. Most govern ments could pub lish their min ing contra cts with out risk of legal con sequ ence. Con fiden tial ity clauses may be more nuan ced than ex p ec ted. Typical ly re stric tions are li mited to “in for ma tion and data” and not neces sari ly the contra ct it self. For ex am p le, the North en Ter rito ry of Australia McArthur River Pro ject ag ree ment specif ies (Ar ticle 24) that "Ex cept to the ex tent ot herw ise re quired by law or the Stock Ex chan ge Li st ing Rules, the Ter rito ry and the Com pany agree that a party shall not make pub lic any con fiden ti al in for ma tion pro vided by the other party pur suant to this Ag ree ment with out first ob tain ing the con sent of the other party." The 2002 Ag ree ment bet ween the Govern ment of Sier ra Leone and Sier ra Rutile Li mited similar ly notes, "The Govern ment will keep con fiden ti al all in for ma tion pro vided to it by the Com p any, wheth er be fore or after the date of this Ag ree ment and con firms that it shall not dis close such in for ma tion to any third party with out the Com pany's prior writt en con sent." There is cer tain ly no shor tage of data generated in re la tion to a modern min ing op era tion – seis mic, geolog ical, drill ing and trad ing data. Much of this may be just ifiab ly pro -
Legal and Negotia tion Con sidera tions
prieta ry or com mer cial ly sen sitive. Yet such in for ma tion does not sur face in min ing contra ct docu ments. Cer tain ly where dis closure has oc cur red, it has not ten ded to generate op p osi tion from eith er party. The sky has not fall en in. Even where the law does not re q uire dis closure, as in Guinea, the govern ment has dis closed ag ree ments retro ac tive ly with out issue. It has not pro v en an issue worth jeopar diz ing good re la tions bet ween contra ct ing part ies. Plus, many contra cts are al ready avail able if you are able and will ing to pay to ac cess high cost com mer ci al databases. These are typical ly used with in in dust ry. So de spite the legal grey area, com p an ies are ac cess ing ag ree ments of com p etitors, which ques tions the valid ity of con cerns for com mer ci al sen sitiv ity. Such ar range ments pro v ide no level play ing field for ac cess to contra ct data.
How to Do it? As with many newer trends, the nuts and bolts of the pro cess are still being tes ted. In co unt ries where contra ct trans p aren cy is re q uired, there can be am biguit ies as to the “what, when, where, who and how” of dis closure. Neith er re levant legis la tion nor the contra ct it self may spec ify when the contra ct should be made pub lic ly avail able. They may not spec ify where contra cts will be avail able – pub lished in newspap ers, in the nation al gazet te, on a de dicated govern ment web site? Some chan nels of dis tribu tion are more ac cessib le than oth ers. Not all govern ments in dicate how the contra ct will be pub lished. There are in stan ces where only a sum ma ry of key terms is made avail able (this re mains an opt ion for com p an ies in pro jects with IFC in v est ment). But who de ter mines what is “key”. Who will make the contra cts pub lic? Should it be the Minist ry of Mines as in De moc ratic Re p ub lic of Congo, an oth er agen cy, or the EITI multistakeholder group (where one ex ists) as in Li beria?
Why Pub lish? Per haps the real ques tion should be “why not”? Putt ing contra ct terms in the pub lic domain can be rea ssur ing to in v es tors and local stakehold ers alike. Of fici als negotiat ing on be half of their govern ments may be even more care ful to en sure they pro tect the pub lic in terest when they know the re sult ing deal will be made pub lic. Pub lica tion
To Pub lish or Not to Pub lish?
can help build trust bet ween contra ct ing part ies and society. It can avoid mis p er cep tions around the con tents of the ag ree ments. This is im p or tant for govern ment, but also for the min ing com p any who may be come a local pre s ence for de cades. Pub lica tion en ables broad er an alysis of the deal. Above all, it can facilitate more ef fective monitor ing of contra ct im p lemen ta tion both by govern ment and by third part ies. For ex am p le, civil society groups are ac tive ly monitor ing com p lian ce with par ticular contra ctu al ob liga tions in co unt ries as di v er se as Peru, Bur kina Faso, Afghanis tan and Canada. Com p an ies, too, are also keen to an alyze deals awar ded to com p etitors and are often the most vigilant in not ing pos sible in dica tions of cor rup tion. Such motiva tions help ex p lain why contra ct dis closure is now re com mended good prac tice ac cord ing to the World Bank and the In ter nation al Moneta ry Fund. The IFC re quires the dis closure of the prin cip al contra ct for min ing pro jects in which it in v ests. A numb er of com p an ies, such as Rio Tinto, have stated that they have no ob jec tion to contra ct dis closure. It is in line with ICMM’s prin ci p les. The new EITI stan dard en courages par ticipat ing co unt ries to dis close contra cts or to ex p lain the basis for nondisclosure. This is pro mpt ing ad dition al co unt ries, such as Sen eg al and Mozam bique, to com mit to mak ing min ing contra cts trans p arent, going for ward. The Open Contra ct ing Partnership, a new multi-stakeholder ef fort, is de v elop ing a stan dard for re lease of contra ct in for ma tion, in clud ing an adap ta tion for extra ctives contra cts.
Legal and Negotia tion Con sidera tions
AP P ENDIX G LOS S A RY L IS T OF COM MON LY RE FER RE D TO CONTRA CTS
GLOS S A RY Amor tiza tion Pro cess of de creas ing an amount owed over a per iod. It re f ers to pay ing debt con sist ing of in terest and part of the prin cip al by mak ing re gular pay ments over a per iod of time. In vest ment Treat ies Ag ree ment bet ween states in which they com mit to pro v ide co v ered foreign in v es tors speci al sub stan tive and pro cedur al pro tec tions. These may bi later al in v est ment treat ies (BITs) or in v est ment chapt ers that are part of free trade ag ree ments. Biome Major ecolog ical com mun ity type often re fer red to as ecosys tem. Brownfield A brownfield in v est ment is an in v est ment in ex ist ing in frastruc ture. Capit al Ex pen di ture (CAPEX) Money in v es ted to buy or upgrade a fixed asset (e.g: build ing or mac hine ry) that will create fu ture be nefits that ex tends be y ond the tax year. Its co un terpart OPEX is the cost of runn ing it. The purchase of a photocopi er, for ex am p le, would in v ol v e CAPEX while the paper and toner re p resents the OPEX. Con sor tium
Busi ness ag ree ment where part ies agree to par ticipate in a com mon ac tiv ity or pool their re sour ces in order to ac hieve a com mon goal. Each party re tains its separate legal status and the con sor tium's con trol is li mited and de lineated in the contra ct. Con struc tion plan A plan that sets forth the sequ ence and schedule for a mine's con struc tion and/or re habilita tion ac tivit ies. De precia tion De crease or loss in value be cause of age, wear, or mar ket con di tions. In ac coun tan cy, it re f ers to two as p ects of the same con cept: (a) the de crease in value of as sets, and (b) the al loca tion of the cost of as sets to per iods in which the as sets are used. It can be used as an in come tax de duc tion that al lows a tax p ay er to re cov er the cost or other basis of cer tain pro p er ty. Doub le taxa tion prin ci ple Re f ers to in come taxes that are paid twice on the same sour ce of in come. It oc curs when cor p ora tions are con sidered separate legal en tit ies from their sharehold ers and both pay taxes (cor p ora tions over their earn ings and sharehold ers over the di v idends). It is often mitigated by tax treat ies bet ween co unt ries. Due di lig ence Re f ers to an in v es tiga tion car ried out by a party to learn and ver ify the full background, his to ry and cur rent situa tion of a party with which it may contra ct or an asset it may ac quire. Econom ies of scale Econom ies of scale occur when the cost per unit of out p ut di minis hes with in creas ing scale of the pro ject as fixed costs are spread out over more units of pro duc tion. Econom ies of scope
Glos sa ry
In the con text of a min ing op era tion, such econom ies of scope will arise when the out puts of one type of in frastruc ture can be used as the in p uts of an oth er type of in frastruc ture. En viron ment al and Soci al Im pact As sess ment (ESIA) As ses ment de v eloped to ident ify any pos sible en v iron ment al, soci al or economic im pacts, both positive and negative, and any measures needed to mitigate. Contra cts now often spec ify the im p lemen ta tion of such stud ies but al though vari ous best prac tice in itiatives exist at a glob al level such as those of the Glob al Re p ort ing In itiatives in Amster dam, they are rare ly specified in contra ct. EIA’s are not neces sari ly made pub lic and de p end on the com p any and host govern ments re gula tions. En viron ment al and Soci al Man age ment Plan (ESMP) Plan that de tails the measures to be taken to avoid, minim ize or al leviate the en v iron ment al and soci al harms iden tified in the ESIA. Fly rock Rocks blown up or brok en apart by ex p losives. Free on Board (FOB) Its a trade term re q uir ing the sell er to de liv er goods on board a ves sel de sig nated by the buyer. It means that the buyer pays for trans p or ta tion of the goods. Free prior and in for med con sent (FPIC) Prin ci p le that an in digen ous com munit ies have the right to give or with hold its con sent to pro p osed pro jects that may af fect the lands they cus tomari ly own, oc cupy or ot herw ise use. It is in creasing ly being ad v ocated to in clude other com munit ies that will be af fected by min ing pro jects. Green field A green field in v est ment leads to the con struc tion of new in frastruc ture asset.
Hedg ing A hedge is an in v est ment posi tion in ten ded to of fset poten ti al los ses/gains that may be in cur red by a com p an ion in v est ment. In sim p le lan guage, a hedge is used to re duce any sub stan ti al los ses/gains suf fered by an in dividu al or an or ganiza tion. Home co unt ry The co unt ry where an in v es tor is re sident. Host co unt ry The co unt ry where an in v est ment is made. Often re fer red to when the in v est ment is made by a foreign in v es tor. In ter nation al min ing com pany (IMC) Term used in co unt ries to refer to foreign min ing com p an ies. Joint ven ture ag ree ment Ag ree ment where two or more com p an ies agree to share pro fit, loss and con trol in a cer tain pro ject, com mon where the pro ject is too big for a single com p any to fin an ce on its own. Partn ers can be from both the pub lic and private sec tors. “JVs are a use ful way of gain ing the be nefits of col labora tion with out the economic and polit ical risk as sociated with a merg er or other busi ness combination”- Ernst & Young 2011. Lon don Met als Ex chan ge Centre for in dustri al met als trad ing and price-risk man age ment. More than 80% of glob al non-ferrous busi ness is con duc ted here and its prices are used as the glob al be nchmark. Nation al min ing com pany (NMC) Term some times used to refer to state-owned min ing com p any. OPEX
Glos sa ry
Is the on go ing ex p en se that a busi ness in curs for per form ing its norm al busi ness op era tions. Its co un terpart CAPEX is the cost of buy ing it. The purchase of a photocopi er, for ex am p le, would in v ol v e CAPEX while the paper and toner re p resents the OPEX. Op por tun ity cost Is the value of the best al ter native for gone in a situa tion in which a choice needs to be made bet ween sever al mutual ly ex clusive al ter natives (e.g., extra ct or not). Rent Re v enue stream that accrues above and be y ond a norm al economic re turn on ac tiv ity or pro fit. The con cept was first de v eloped by econom ists Adam Smith and David Ricar th th do in the 18 and 19 cen tu ries. It dominates the economics of the glob al min ing in dust ry be cause of sharp ly vary ing cost of pro duc tion for a com mod ity sold at rough ly the same price. Econom ists dif feren tiate bet ween rent and a norm al re turn on capit al, or pro fit, and argue that it should be treated dif ferent ly. Rent en courages rent seek ing, an in tegr al part of the con cept of RE SOUR CE CURSE. Right - of - way A type of eas e ment gran ted or re ser v ed over the land for trans p or ta tion pur p oses. Royal ty Per cen tage share of pro duc tion which goes to the govern ment re gardless of the rate of pro duc tion or costs to the op erator. Royal ty rates often chan ge in cremen tal ly as pro duc tion in creases. Concession-type contra cts are al most en tire ly based on royalt ies and taxes. Soci al li cen se to op erate This con cept ex p res ses the on go ing ac ceptan ce of the pro ject by the sur round ing com mun ity. Tail ing
Materi al left over after the extra c tion of ore. Trans f er pric ing Is the price at which di v is ions of min ing (or other) com p an ies trans act with each other. Trans ac tions may in clude the trade of sup p l ies or labor bet ween the part ies. Waste rock Rock that must be re moved in order to gain ac cess to the de sired miner al. Windfall pro fit taxes Is a high er tax rate on pro fits that ensue from a sudd en windfall gain to a par ticular com p any or in dust ry.
LIST OF COM M ON L Y RE FER R ED TO CONTRA C TS Afghanis tan: Qara Zag han Gold Pro ject Contra ct bet ween Kryst al Natur al Re sour ces Com p any and the Minist ry of Mines of the Is lamic Re p ub lic of Afghanis tan (Janua ry 10, 2011) ("Afghanis tan - Qara Zag han") Australia: McArthur River Pro ject Ag ree ment bet ween the Northern Ter rito ry of Australia and Mount Isa Mines Ltd. (Novemb er 25, 1992) ("Australia - McArthur River Pro ject") De moc ratic Re p ub lic of the Congo: Avenant No. 1 à la Minière Amendée et Re for mulée du Sep tembre 2005 entre Répub lique Démoc ratique du Congo et La Générale des Carriéres et des Mines et Lun din Hold ings Ltd. et Tenke Fun gurume Min ing S.A.R.L. (De cemb er 11, 2010) ("DRC - Tenke Fun gurume") Ecuador: Contra to de Ex p lotac ion Minera Otor gado por Minis terio de Re cur sos Naturales no Re nov ables a favor de La Com p ania Ecuacor rien te S.A. (March 5, 2012) Guinea: Con v en tion de Base entre La Re p ub lique de Guinee et La Societe Simf er S.A. pour l'Exploita tion des Gise ments de Fer de Siman dou (Novemb er 26, 2002) ("Guinea Simf er") Li beria: Miner al De v elop ment Ag ree ment bet ween the Govern ment of the Re p ub lic of Li beria, Putu Iron Ore Min ing, Inc., and Mano River Iron Ore Ltd. (Sep temb er 2, 2010) ("Li beria - Putu (2010)")
Li beria: Miner al De v elop ment Ag ree ment bet ween the Govern ment of the Re p ub lic of Li beria, China-Union (Hong Kong) Min ing Co., Ltd. and China-Union In v est ment (Li beria) Bong Mines Co., Ltd. (Janua ry 19, 2009) ("Li beria - China Union") Li beria: Amen ded Min der al De v elop ment Ag ree ment bet ween the Govern ment of the Re p ub lic of Li beria and Mitt al Steel Hold ing A.G. and Mitt al Steel (Li beria) Hold ings Ltd. (De cemb er 28, 2006, amend ing the ag ree ment of August 17, 2005) ("Li beria - Mitt al (2006)") Li beria: Iron Ore Apprais al and Ex p lora tion Ag ree ment for the Putu Range bet ween the Re p ub lic of Li beria and Mano River Iron Ore (Li beria) Inc. (May 18, 2005) ("Li beria Putu (2005)") Mon golia: In v est ment Ag ree ment bet ween the Govern ment of Mon golia and Ivan hoe Mines Mon golia Inc. LLC and Ivan hoe Mines Ltd. and Rio Tinto In ter nation al Hold ings Ltd. (Oct. 6, 2009) ("Mon golia - Oyu Tol goi") Sier ra Leone: Ag ree ment bet ween the Govern ment of the Re p ub lic of Sier ra Leone and Sier ra Rutile Ltd. (Novemb er 20, 2001) Model Minde De v elop ment Ag ree ment 1.0 (April 4, 2011) ("MMDA")