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Current mining taxation challenges in Africa:

understanding drivers and tips for responding

Eunomix

Mining Indaba, Cape Town

9 February 2015

Advisors in resilience

What this presentation will cover….

1. Some case studies of recent taxation shocks in mining

2. Overview of the key drivers

3. Eunomix’s 8 tips for approaching mining taxation challenges

4. Thinking about strategic integrated planning


What is the effect of poor mining taxation frameworks on investment?

It’s simple. Raising taxation or sudden shocks to the fiscal framework =

• Divestment, suspension or slowing of investment

• Operations close, life of mine reduced

• Job losses

• Less revenue for host government

= a very short workshop!


EXAMPLE 1: Zambia and Lumwana

• Let’s examine two prominent mining taxation policy examples that have hit the headlines in the last 12 months.

• Example 1: Zambia trebling of the mining royalty from 6% to 20% - in a falling copper price context.

• Barrick announces the suspension of Lumwana copper mine:

• “The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana. Despite the progress we have made to reduce costs and improve efficiency at the mine, the economics of an operation such as Lumwana cannot support a 20 percent gross royalty, particularly in the current copper price environment”

- Co-President Kelvin Dushnisky, Barrick

A short video on the impact of the Zambia tax (removed)


EXAMPLE 2: Mongolia and Oyu Tolgoi

• In 2014, the Mongolian government began looking to renegotiate their interest in the Rio Tinto’s mine Oyu Tolgoi,

• The government wished to swap equity back to Rio for an amended royalty.

• Why?

• The government realised that equity ownership requires contributions to be made directly, or in the form of reinvested profits, when capital is required for expansions - rather than just distributions.

• Government wants cash as soon as possible and with minimum risk Government was arguing that Rio Tinto messed up the original mine development, and that Rio alone should pay for the cost overruns on the development.


What are the drivers for fiscal framework shocks?

Understanding these three key drivers can help shape your response as a business, strengthen your planning and

extending your Life of Mine.


Driver 1: liquidity pressures

An acute and – at times – desperate need for cash on the part of African governments both at the national and the local level:

• Governments need money, often immediately, to pay off debts, special projects, elections, public wage bills, or for military campaigns

• Unlikely to be distracted by negotiated settlements or alterative proposals

• Lack of access to credit can exacerbate this need


Driver 1 (cont) can result in ‘death by a 1000 small cuts’


Driver 1 (cont): a thousand small taxes all adding up

Governments are not even always aware of the full taxation ‘picture’ in their countries:

• Royalties

• Windfall taxes

• Employee taxes

• Permits and licences (environmental permits, export licences)

• Fines and penalties – often arbitrary or random

The imposition of the what the ICMM 2009 report on Mineral Taxation regimes calls “Quasi Taxes”

These can all add up to create an unattractive taxation regime.


Driver 2: political pressures and populism

A need to demonstrate control and influence over the country’s natural and mineral endowments:

• Populism, especially before and after elections

• Responding to commodity booms and high prices (or needing to be seen to respond to them)

• Questioning of former political leaders’ choices and approach to mineral policy

• Assymetry in skills and capacity between governments and private companies – in some contexts (but not all), a low capacity or level of understanding of finance and commerce principles


Driver 3: low trust and poor communication

The Mining-Government relationship is often defined by lack of trust and high levels of mutual suspicion:

• The Mbeki High Level Panel Report on Illicit Flows From Africa published in late January 2015 highlights the perception (and reality?) that tax avoidance is commonplace amongst mining multinationals

• Governments and banks collude in this practice

• Shocking examples of cynical tax practices by multinationals and a lack of transparency

• Companies do not have direct frank engagement with their host governments – or only communicate in the bad times

• Companies do not actively participate in sharing knowledge and building capacity with their host governments


Driver 3: illicit revenue flows out of Africa report

Published in January 2015 and launched at the African Union which has now accepted a raft of its recommendations. • Perceptions of tax evasion and tax avoidance in Africa are backed up

by the findings in this report • False invoicing and profit shifting as practices • Use of tax havens • Putting an end to transfer pricing • Collusion of African governments and banks in this revenue loss “The Mbeki report found that, in the main, companies used a practice called trade misinvoicing: over- or under-charging on invoices in order to pay less import or export tax. But there are various other ways used by corporations to avoid paying taxes, including profit shifting. Transfer pricing is also common. Companies shift their profits offshore between subsidiary companies in an attempt to avoid paying tax in their host countries.” – Mail and Guardian


Eunomix’s 8 tips for responding to and pre-empting fiscal shocks and taxation challenges

Tip 1: Transparency

• Support initiatives such as the Extractives Industry Transparency Initiative (EITI)

• Publish your stability agreements or mining conventions

• Release regular press statements on progress, monies paid and operational status



Tip 2: Incorporate flexibility

• Support legislation that acknowledges boom and bust periods

• Talk to governments about high and low price cycles

• Don’t pretend you’re not in a high price cycle when you are

• Predict and plan for windfall taxes in your mine planning



Tip 3: Communicate frequently and meaningfully

• Engage at all levels – from Presidential to local – frequently and consistently

• Don’t only communicate in the bad times

• Listen to governments and what they are telling you

• Engage with government on policy before legislation (either new laws or amendments) is formulated

• Engage not only with ministers but with senior civil servants

• Ensure business / industry associations (including chambers, associations, councils) properly represent the interests of their members

• Keep fully engaged with business / industry associations to address engagement with government, both



Tip 4: Build capacity in your host country

• Help to build capacity with financial and commerce skills, either through funding, internships, secondments

• Work closely with government to identify opportunities to share knowledge

• Spend time taking government through your results, your operational challenges and your costs so they can understand – costs are particularly important



Tip 5: Know your facts

• Highlight economic contributions of the mining sector to the economy, thereby leveraging this against additional direct contributions through taxation

– Seek to demonstrate this through data and research developed in collaboration with civil society and possibly government too

– Demonstrate not only contributions through taxation but through supply chain, infrastructure, etc

• Have to hand easy-to-share facts and figures about your operation ready and prepared to share when needed



Tip 6: Think about the split between local and national

• The tension between taxes being paid locally and nationally is real

• Work with government and other partners to ensure that local communities see and feel the benefits of the mine

• Be alert to local policy or emerging legislation which may touch on issues of local revenue flows



Tip 7: Incorporate political and mining risk into your planning

• Political risk – planned using 6 month, 1 year and long term horizons is no longer optional and must be incorporated into all parts of planning

• Seek expert advice and inputs into this sort of scenario planning

• Companies need to deepen their understanding of policy formulation, political agendas and government engagement:

– Significantly deepen their understanding of the fundamentals of the interface

between geology, economics and politics • Investing in Africa is not a short term game, particularly in a post-boom environment.

– Investors must see their role as one of helping governments understand the economic impact of their policies

• The gap between these two worlds is still too vast, and destruction of opportunity for all.

– The dialogue with governments must seek to align projects with national policy goals at country and local levels

– The greater the dialogue, and the ability of the industry to demonstrate its commitments and deliver on them, the lower the risks of resource nationalism



Tip 8: table negotiated settlements

• Can you offset your outstanding VAT against current taxes due?

• Can you invest in power or other infrastructure as an alternative?

• Are there areas of common interest between you and your host government where mutual investment might be an alternative to a higher royalty?

• Creative solutions can be tabled – as long as the principle of co-design is born in mind



A recap of the 8 tips:

1. Be hyper-transparent

2. Ensure flexibility

3. Communicate

4. Build capacity

5. Know the facts

6. Be aware of the national vs local

7. Plan for political and mining risk

8. Table negotiated settlements


Strategic integration:

How to approach strategic risk management of policy and legislation within a broad company strategy :

• Regulatory, fiscal and policy “risks” represent a factor of ever growing importance

• This is occurring while other “external” risks are also expanding while commodity prices are decreasing and the abnormal commodity super-cycle is well over: community demands, labour pressures, challenging infrastructure, environmental management, consumer advocacy

• Combined, these externalities have become an ever growing burden on the realisation of strategic goals, devouring ever greater scarce management time and resources, and competing with operations

• The traditional ways of setting up CSR and government relations efforts no longer works

• These issues need to be incorporated directly in strategic management and corporate design, and significant resources need to be allocated to them


Strategic integration (cont)

• While there are many right ways to do this, Eunomix’s experience demonstrates the necessity to:

– Closely integrate ops and externalities planning

– Break traditional silos

– Change the brawny culture to a more analytic and engaging one

– Question assumptions constantly

– Build multi-dimensional models

– Leverage ops investment intelligently to create shared benefits

– Create real partnerships and listen to what stakeholders want

– Develop your own script, based on your own means, goals, experience and culture

[email protected] | www.eunomix.com

[email protected]

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