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Mineral projects in Asian countries
Pergamon
PII: S0301-4207(98)00012-9
Resources Policy. Vol. 24, No. 2, pp. 87–93. 1998 1998 Published by Elsevier Science Ltd. All rights reserved. Printed in Great Britain 0301-4207/98 $19.00 ⫹ 0.00
Mineral projects in Asian countries Geology, regulation, fiscal regimes and the environment1 Koh Naito2 and Hajime Myoi Metal Mining Agency of Japan, Toranomon 1-25-5, Minato-ku, Tokyo 105, Japan
James Otto Institute for Global Resources Policy and Management, Colorado School of Mines, Golden, CO 80401-1887, USA
David Smith Harvard Law School, Cambridge, MA 02138, USA
Masaharu Kamitani Sumiko Consultant Co. Ltd, Tokyo 160, Japan
The Asia region contains considerable minerals potential and exploration investment in the mineral sector has been on the rise. Many Asian countries have recently enacted new mining codes and fiscal systems, or are in the process of doing so, in order to attract foreign investment in the mineral sectors. This paper describes some of the main features of Asian mining laws and fiscal systems. 1998 Published by Elsevier Science Ltd. All rights reserved
Introduction Mining investment is different from investment in other economic activities. When undertaking mineral projects, transnational mining companies (TMCs) are challenged by geology, engineering, financing and market risks as well as by a broad spectrum of policy, regulatory and fiscal issues. The politically sensitive nature of the industry, due to issues such as state sovereignty, ownership and control, environment, community impact, sustainability, depletion and site dependency, has led most nations to develop regulatory and fiscal systems distinctly different from those
1
The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of their respective organizations. 2 Present address: Mining and Industry Unit, World Bank, Washington, DC 20433, USA.
that regulate most other industrial activities. TMCs thus face a substantial challenge when appraising mineral sector investment opportunities. Three global surveys based on questionnaires completed by TMCs (Johnson, 1990; Otto, 1992; Clark and Naito, 1997) have attempted to identify corporate mineral investment decision criteria. While the results of the surveys differ in some respects, each indicates that most mining companies consider regulatory and fiscal systems to be the leading investment determinants following geological conditions. Table 1 lists the key factors identified as important to corporate decision-making and indicates that government policies as expressed in regulatory and fiscal systems play a key role in investment decision-making. Most countries in Asia recognize these determinants and are now in the process of revising their mineral sector policies with the intent to encourage mining and exploration activities by both domestic and 87
Mineral projects in Asian countries: Koh Naito et al Table 1
Significant determinants of corporate mineral investment in a country
Geological potential for target metals and minerals Political stability Mineral law Mineral ownership, security of tenure (right to mine), exploration/mining terms, right to transfer ownership Fiscal regimes Stability and/or predictability of fiscal regimes, ability to repatriate profits, level of tax liability, reasonable foreign exchange regulations, permitted external accounts Others factors considered by companies Provisions related to management control, host country equity, environmental obligations, obligations to workers, the right to market minerals, the right to use mineral rights as collateral, confidentiality of data, dispute-settlement mechanism Sources: Derived from results of global surveys by Johnson (1990), Otto (1992), Clark and Naito (1997).
foreign companies.3 Although this evolution enhances the attractiveness of the region for mineral sector investment, the status of investment conditions in individual countries varies widely. This paper presents information useful in assessing and comparing mineral investment prospectivity and risk in selected Asian countries (Central Asian Republics (excluding Turkmenistan), China, Mongolia, and the ASEAN nations excluding Brunei and Singapore).
Consequences of structural reform of global mining industry During the 1980s, large-scale mineral sector investment outside socialist economies took place mainly in industrialized mineral producing countries. A major shift into Latin America and Southeast Asian nations occurred in the 1990s.4 The shift saw a 5 year decline in exploration expenditures in the United States and Canada relative to worldwide exploration expenditures. Metals Economic Group (1997), which has compiled annual estimates of exploration by major TMCs since 1992, estimates that in 1992 approximately 40% of worldwide exploration investment by major TMCs was spent in the United States and Canada, but that by 1997, the percentage had fallen to less than 25%. This investment shift has been stimulated by revised national mineral development policies emphasizing free market principles and an expanded private sector role (Table 2). These policy modifications have taken place in both developing and transition economies and have been implemented through reformation of regulatory and fiscal regimes, and government institutional frameworks. Otto (1997) reports that more than 90 nations since 1985 have introduced new mining laws, have made major amendments to their existing mining laws, or are cur3
At a 1997 workshop organized the Metal Mining Agency of Japan and the Malaysian Chamber of Mines, senior government officers from Asia met to discuss mining law modifications. Almost all countries represented had either recently introduced a new mining law or were working on a new or amended mining law. See MMAJ and MCM (1997). 4 Mining industry structural reform in the Asia and the Pacific region is described by Clark and Naito (1997).
88
Table 2
Recent changes in mineral policies
쐌 Removal or reduction of barriers to foreign investment in the mining sector 쐌 Reduced fiscal restraints through revised taxation schemes 쐌 Enhanced transferability of mineral rights 쐌 More careful definition of the linkage between exploration right and mining right 쐌 Closure of some areas to mineral activities 쐌 Imposition of obligations to reduce the impact of mining operations on the environment and local communities
rently drafting new laws. These reformations started mainly in Latin America in the last decade (World Bank, 1996) and similar policy reform is now occurring in Asia (Naito et al., in preparation) and Africa (Otto, 1995). Andrews (1991) concludes that this worldwide trend has prompted TMCs to re-shape their corporate exploration and mining strategies in an increasingly global context.
Major corporate determinants for mineral investment in Asia Unprecedented TMC access to a country poses inherent risks, including political, geological (technical), regulatory, fiscal and environmental risks. Therefore TMCs need to formulate internal guidelines in order to assess the prospect and risks of entry into a new country. Major trends in Asian countries that may have an impact on TMC country and regional assessments are presented below. Geological attractiveness and exploration/mining activities Asian geology can be divided into four orogenic belts; the Pre-Cambrian massifs with two Phanerozoic surrounding foldbelts, which were formed through the Caledonian and/or Variscan orogenies, and the present island arc system at the margin of the continent. These orogenies, which were accompanied by major igneous activities, resulted in various types of metallic mineralization. The major metallogenic provinces in this region can be summarized as southern China (tin, tungsten, molybdenum, lead, zinc), Kyrgyzstan to Uzubekistan (gold, copper), eastern Kazak-
Mineral projects in Asian countries: Koh Naito et al
stan to Xingjian province in western China (copper, lead, zinc), and the western Pacific Island Arcs including Myanmar, Indonesia and the Philippines (copper, gold, nickel). A number of world class mineral deposits have been discovered in these provinces. Some countries in Asia have a long-established mining history and some produce more than 10% of world mine production of specific metals. For example, state enterprises in China are major producers of tungsten, antimony and tin and Kazakstan is one of the world’s largest chromium producers. Analysis of recent worldwide corporate exploration expenditures by the Metals Economic Group (1997) shows that major TMCs spent in excess of US$4.03 billion on worldwide exploration for gold, base metals, and other nonferrous metals and minerals in 1996. The analysis indicates that the Latin America and Asian regions have experienced high exploration growth rates relative to other regions. TMC exploration expenditure in Asia was approximately US$362.9 million in 1996 corresponding to 9.0% of total worldwide TMC expenditure. Indonesia, which since the late 1960s has provided a stable regime for mineral investment, and the Philippines together accounted for 78% (US$282.4 million) of the Asian 1996 total followed by Kazakstan (US$23.5 million), China (US$20.4 million), Myanmar (US$12.6 million), and Malaysia (US$12.0 million). The data indicate that although China and the Central Asian Republics may have relatively attractive geology and proven world class deposits, TMC mineral exploration expenditure there remains at a low level. Legal regimes for exploration and mining A ‘mining law’ is the principal regulatory instrument governing mineral activities and it defines both the rights and obligations of mining title holders and the powers of government officers. The government’s primary role is to regulate subsoil mineral activities, including domestic exploration and mining activities as well as initial mineral processing. Mine site closure, site reclamation and environmental compliance may also be addressed by a mining law or may be the subject of other laws. Over the past few years many Asian governments have passed new mining laws or are currently drafting new laws in order to encourage direct foreign investment in mineral exploration and development activities.5 This trend in Asia reflects a change in national mineral policies resulting in reduced restrictions on direct foreign investment in the mineral sector and redefining the government’s role as that of regulator rather than producer. New Asian mining laws show a commitment to granting exclusive rights to qualified parties for mineral activities in the form of licenses, permits, leases or concession tenements. The basic framework of Asian mining laws usually addresses at 5
See the research by Naito et al. (in preparation).
least the following topics: (1) government authority, (2) restrictions on mineral activity, (3) exploration and mining rights and obligations, and, on a more limited basis, (4) the environment (Table 3). According to Sillitoe (1995), major mineral deposits in the Circum-Pacific region, which includes many Asian nations, during the past 25 years, took an average of 19 years of exploration time and required approximately 9 years to develop from initial discovery to production. Many deposits were explored by at least two and sometimes as many as five or more companies. This past experience indicates that mining law drafters should carefully consider the terms, renewability and transferability of exploration and development rights. Mineral activities are generally divided in mining laws into the stages of exploration, mining and reclamation. In some Asian nations, the exploration stage may be subdivided into phases, including prospecting, exploration and feasibility study. Prospecting (sometimes called reconnaissance) rights allow an initial survey to assess the geological setting or mineral resources distributions relying on field observations using satellite remote sensing and geological, geophysical or geochemical techniques. Since reconnaissance falls between scientific research and mineral exploration, and because the granted survey area may be large, not all countries grant the holder of a prospecting right an exclusive right to prospect within the grant area. (For example, in Thailand and Mongolia more than one entity can obtain prospecting rights over an area.) Under many Asian mining laws (Table 4), the prospecting right can be issued for a large area (more than several hundred square kilometers) and is of short duration (1 or 2 years). Activities during the exploration stage typically include drilling, test pitting, trenching and sometimes tunneling to locate and appraise the volume of mineral deposits. The exploration right is granted for 2– 3 years, but is usually renewable for up to at least 6–8 years. Exploration areas are smaller than prospecting areas and are usually subject to annual percentage relinquishment or minimum expenditure requirements. The holder of an exploration right usually has the exclusive right to explore in the granted area. Some countries in Asia provide for a feasibility study period between the exploration and mining phases. Where such a period is provided, it is relatively short with a typical duration of about 1 year. In contrast, mining rights are granted for long periods of up to 25–30 years, with provisions for renewal. The link between the exploration and mining stages is the most important issue because risk-averse TMCs will prefer to invest in a legal environment that ensures security of tenure so that the discoverer of an economically viable mineral deposit will be able to progress into commercial development. Although Asian countries have generally strengthened the linkage in their new mining laws (Table 4), at present 89
Mineral projects in Asian countries: Koh Naito et al Table 3
Legal aspects of exploration and mining projects: important components of new Asian mining laws
Government authority Ownership of minerals; powers granted to government officers; enforcement, penalties and fines; authority to negotiate contracts Restrictions on mineral activities Qualifications for authorization to explore, mine and process; areas closed to mineral activities; mineral types subject to special controls or conditions; areas subject to special controls or conditions; land access; resolution of conflicting land uses Exploration and mining rights and obligations Maximum extent of exploration or mining area; initial term for exploration and mining right; renewal of an exploration or mining right; cancellation or termination of a right; exploration area relinquishment; minimum exploration expenditure obligations; security of tenure; reporting; mineral rights transferability; annual holding fees or rentals; royalties Environment Environmental impact assessment; environmental impact mitigation; social or community impact; monitoring and reporting; reclamation; postclosure liability
Table 4
Legal regimes of exploration and mining within Asian countries
Countries
China Mongolia Philippines
Malaysia
Indonesia Thailand Vietnam Laos Cambodia
Myanmar Kazakstan
Kyrgyzstan Uzbekistan
Tajikistan
Mining Law (issue date)
Mineral Resources Law (Jan. 1, 1997) Minerals Law (July 1, 1997) Philippines Mining Act of 1995 (RA7942) (Apr. 10, 1995) State Mineral Enactment (Under consideration) Mining Law No. 11, 1967 (Dec. 2, 1967) Minerals Law (Dec. 26, 1967) Mineral Law (Sept. 1, 1996) Mining Law (Apr. 12, 1997) Mines and Mineral Law (Under consideration) Myanmar Mines Law (Sept. 6, 1994) Underground Resources Law and Amendments 1996 (Jan. 27, 1996) Law on Entrails of the Earth (July 2, 1997) Law on Mineral Resources ‘the Subsoil Code’ (Sept. 23, 1994) Mining Code (Under consideration)
Maximum Duration* for
Relinquishment obligation
Security of tenure Concession transferability
Exploration
Mining
Not specified
Not specified
Not specified
Yes
Yes
7 years
100 years
Voluntary
Yes
Yes
8 years
50 years
Yes
Yes
Yes
(FTAA**) 4 years
(FTAA) 42 years
Up to licensee
Not specified
(FTAA) Yes
8 years
50 years
Yes
Yes
Yes
Not specified
Not specified
None
Yes
6 years
50 years
None
Yes
No (exploration) Yes (mining) Yes
10 years
50 years
Yes
Yes
Yes
6 years
55 years
Yes
Yes
Yes
5 years
15 years
Yes
Not specified
Not specified
6 years
25 years
Yes
Yes
No
10 years
20 years
Yes
Yes
No
5 years
15 years
None
Yes
Yes
Negotiable
Negotiable
Unknown
Unknown
Negotiable
The information in this table was verified by Asian governmental officers in charge of mining law and policy (MMAJ and MCM, 1997). The information source of the Central Asian Republics is Clark et al. (1998). *: Including renewals, **: Financial or Technical Assistance Agreement (FTAA).
90
Mineral projects in Asian countries: Koh Naito et al Table 5
Fiscal regimes of exploration and mining within Asian countries
Countries
Corporate income tax
Royalty
Import duty
Dividend Tax holiday withholding tax
Foreign external account
Government equity requirement
China
33%
1–4% on sales revenue
None
None
Yes
None
Mongolia
40%
2.50% of sales value
None
20%
Yes
None
Philippines
35%
2% of gross value
3%
15%
Yes
None
(FTAA) Malaysia
28%
Indonesia
30%
On sliding scale 10% for tin 5% advalorem for gold Unit production 20% royalty scheme
(6th CoW) Thailand
30–35%
Vietnam
10–25%
Laos
30–35%
2–5% price of sales (FOB)
none
10%
Cambodia
30–35%
None
None
Myanmar
30%
2–5% of gross value 3–4% on sales revenues
Duty applies
3%
Kazakstan
30%
Negotiable
Duty applies
15%
Kyrgyzstan
30%
Unknown
Unknown
Uzbekistan
16–36%
exempt
10%
Tajikistan
Negotiable
⬍ 30% on value (5% for Au) 2.5% on gross sales Negotiable
Negotiable
Negotiable
5 years except gold 100%/2yrs, 50%/3yrs 10 years except gold 100%/5yrs, 50%/5yrs 5 years from commercial operation
10%
None
Yes
None
7.5%
None
Yes
None
5–8 years for BOI-approved projects 3 years from commercial operation
Yes
None
Yes
None
Yes
Gemstones yes Yes
Yes
None
2.5% for Cu, Au Exempt for BOI- None of sales approved projects ⬍ 12% of sales none 5–10% for minerals
⬍ 100%/2yrs 50%/2yrs None
3 years from None commercial operation 100%/5yrs Yes Next ⬍ 50%/5yrs 3 years from Yes start exploitation 7 year net profits Yes tax holiday Negotiable Negotiable
Yes None Yes Yes Yes
Sources: Otto et al. (1997), EW Center and MMAJ (1998) and information from the governments, using questionnaires. CoW: Contract of Work, BOI: companies granted by Board of Investment (BOI) in Thailand.
most Asian countries do not provide for automatic progression from an exploration right into a mining right. The only exception is Mongolia. Typically, the obtaining of a mining right is subject to the submission of various mandatory reports, such as a feasibility study, mining plan and environmental impact assessment, all of which must be submitted to the government before the mining right is granted (or ‘vests’). Often, this requirement is intended to insure that the operation will use resources efficiently and will minimize the impact of mining operations on the environment and/or the local community. Asian mining laws do not allow an application for a mining right to be refused arbitrarily, and during the application process no other applicant can be granted the
mining right until the exploration right holder’s application is first considered. The transferability of mineral rights, allowing participants to farm-in or farm-out all or part of a high risk exploration or mining project, is also critical for the mining industry. Most Asian mining laws allow for transfer of rights to another qualified party. The process, however, is usually subject to government review and approval and may be considered a taxable event. Fiscal systems With the advent of new mining laws, many Asian governments have also revised their mineral sector fiscal systems. Table 5 provides information on taxes 91
Mineral projects in Asian countries: Koh Naito et al Table 6
Summary of typical legal and fiscal regimes in Asian countries
Legal regimes Duration for exploration with renewals mining with renewals Relinquishment obligation Security of tenure Transferability of concession
Fiscal regimes
6–8 years 25–30 years 40–50 years Yes Yes Yes
applicable to mines in 14 Asian nations. Typically, income tax rates are 30–40% of taxable income, royalties 2–4% of gross mineral value, and dividend withholding taxes 10–20%. Unlike other regions, many Asian countries provide some form of tax holiday (3–5 years). Import duties are generally low or zero-rated. Almost all Asian countries allow mines to maintain foreign external accounts and only a few require a government equity position. The trend in Asia is toward a lowering of tax levels, not only for the mining industry, but for other industries as well. Other factors affecting exploration and mining projects Public awareness of the natural environment has led to a global, and Asian, trend toward adopting stricter national environmental policy, and governments have increasingly moved to exclude or restrict mineral activities in areas such as national parks, historical and cultural sites, forest reserve areas and so forth. When mineral activities are approved in an area, environment-related restrictions or obligations are imposed. Pring (1997) has noted that environmental requirements for mining projects can be found in national laws, lender (World Bank, EBRD, Asian Development Bank, private banks) guidelines, United Nations-originated treaties, protocols and conventions (such as the Basel Convention and Rio Declaration), and private industry guidelines (ISO14000, etc.). Environmental damage from mining operations can induce social and economic disruptions of local communities (and indigenous peoples), particularly where the community’s economy is based on agriculture, fishing or forestry which depend heavily on the natural environment (Cordes, 1997). Few Asian governments have acted to draw local communities or indigenous peoples into the mine approval process,6 although most mining codes do provide for a means to compensate landowners or landusers for damages resulting from mining operations. Environmental awareness is rapidly growing throughout Asia and it is likely that in the future environment-related mining costs will increase, approvals will be more difficult 6
An exception is the Philippines which introduced the ‘Indigenous Peoples Rights Act (IPRA)’ in 1997 to legally involve indigenous local communities in mining projects.
92
Corp. income tax Royalty
30–40% 2–4% of sales or value
Import duty Exempt/small Dividend withholding tax 10–20% Tax holiday 3 years plus Foreign currency external account Yes Equity requirement No
to obtain in sensitive areas, and application granting may become more time-consuming.
Summary Asia contains substantial areas with high geological prospectivity and a number of discovered world class mineral deposits. Most countries in Asia are now in the process of reforming their legal and fiscal frameworks in light of today’s increasingly competitive global marketplace. Some Asian countries, such as Indonesia, have a long established record of investment under relatively stable or predictable legal regimes, while other countries have only recently passed new mining codes. The summary of typical legal and fiscal regimes in Asian countries is shown in Table 6.
Acknowledgements The authors would like to acknowledge Mr Yoshiharu Kida (Director of MMAJ Bangkok office) and his research assistant Ms Phakachon Sutheepattalawan for their tireless data collecting from Asian countries. Discussion on mineral policy and legislation of the Central Asian Republics with Dr Allen L. Clark (EastWest Center) and Dr Jennifer C. Clark (Pacrim Resources Development Inc.) has been very valuable.
References Andrews, C (1991) Mining investment promotion; a view from the private sector. Natural Resources Forum 15, 50–58. Clark, A and Naito, K (1997) Structural reform of the mining industry in Asia and the Pacific region. Asian Journal of Mining July/August, 28–42. Clark, J C, Clark, A L and Naito, K (1998) Emerging mineral policy and legislation in the economic development of the Central Asian Republics. Resources Policy 24, 115–123. Cordes, J (1997) Mining and indigenous peoples. International Resources Law: Today’s Oil, Gas and Mining Projects. Rocky Mountain Mineral Law Foundation’s Mineral Law Series, Denver. EW Center and MMAJ (1998) Mineral Development Projects Appraisal in Central Asian Republics: Aspects of Geology, Legislation and Policy. EW Center and MMAJ, Tokyo, Japan. Johnson, C (1990) Ranking countries for mineral exploration. Natural Resources Forum, 178–186. MMAJ and MCM (1997) New mining legislative frameworks in
Mineral projects in Asian countries: Koh Naito et al Asian countries. Proceedings of workshop, Kuala Lumpur, July 1997. MMAJ and MCM, Tokyo, Japan. Metals Economic Group (1997) Corporate Exploration Strategies: A Worldwide Analysis. Metals Economic Group, Halifax, Canada. Naito, K, Myoi, H, Otto, J, and Smith, D (in preparation) Legal aspect of exploration and mining: a comparative study of mining law in Asia. Otto, J (1992) A global survey of mineral company investment preferences. Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region. United Nations ST/ESCAP/1197, New York, pp 330–342. Otto, J (1995) Competition for investment: implication for Africa. Mining Journal Supplement Sept. 29, 51–55. Otto, J (1997) A national mineral policy as a regulatory tool. Resources Policy 23, 1–7.
Otto, J, Byrne, P, Cordes, J, Stermole, J and Stevens, N (1997) Global mining taxation comparative study. Institute for Global Resources Policy and Management, Colorado School of Mines, Golden. Pring, G (1997) International legal, financial, and institutional aspects of environmental issues for sustainable mining and exploration activities. Proceedings of APEC-GEMEED Environmental Cooperation Workshop (ECOW97), Tokyo, December 1997, Tokyo, Japan. Sillitoe, R (1995) Exploration and discovery of base- and preciousmetal deposits in the Circum-Pacific region during the last 25 years. Resource Geology, Special Issue No. 19. 119p. World Bank (1996) A Mining Strategy for Latin America and the Caribbean. World Bank Technical Paper No. 345, Washington, DC.
93
PII: S0301-4207(98)00012-9
Resources Policy. Vol. 24, No. 2, pp. 87–93. 1998 1998 Published by Elsevier Science Ltd. All rights reserved. Printed in Great Britain 0301-4207/98 $19.00 ⫹ 0.00
Mineral projects in Asian countries Geology, regulation, fiscal regimes and the environment1 Koh Naito2 and Hajime Myoi Metal Mining Agency of Japan, Toranomon 1-25-5, Minato-ku, Tokyo 105, Japan
James Otto Institute for Global Resources Policy and Management, Colorado School of Mines, Golden, CO 80401-1887, USA
David Smith Harvard Law School, Cambridge, MA 02138, USA
Masaharu Kamitani Sumiko Consultant Co. Ltd, Tokyo 160, Japan
The Asia region contains considerable minerals potential and exploration investment in the mineral sector has been on the rise. Many Asian countries have recently enacted new mining codes and fiscal systems, or are in the process of doing so, in order to attract foreign investment in the mineral sectors. This paper describes some of the main features of Asian mining laws and fiscal systems. 1998 Published by Elsevier Science Ltd. All rights reserved
Introduction Mining investment is different from investment in other economic activities. When undertaking mineral projects, transnational mining companies (TMCs) are challenged by geology, engineering, financing and market risks as well as by a broad spectrum of policy, regulatory and fiscal issues. The politically sensitive nature of the industry, due to issues such as state sovereignty, ownership and control, environment, community impact, sustainability, depletion and site dependency, has led most nations to develop regulatory and fiscal systems distinctly different from those
1
The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of their respective organizations. 2 Present address: Mining and Industry Unit, World Bank, Washington, DC 20433, USA.
that regulate most other industrial activities. TMCs thus face a substantial challenge when appraising mineral sector investment opportunities. Three global surveys based on questionnaires completed by TMCs (Johnson, 1990; Otto, 1992; Clark and Naito, 1997) have attempted to identify corporate mineral investment decision criteria. While the results of the surveys differ in some respects, each indicates that most mining companies consider regulatory and fiscal systems to be the leading investment determinants following geological conditions. Table 1 lists the key factors identified as important to corporate decision-making and indicates that government policies as expressed in regulatory and fiscal systems play a key role in investment decision-making. Most countries in Asia recognize these determinants and are now in the process of revising their mineral sector policies with the intent to encourage mining and exploration activities by both domestic and 87
Mineral projects in Asian countries: Koh Naito et al Table 1
Significant determinants of corporate mineral investment in a country
Geological potential for target metals and minerals Political stability Mineral law Mineral ownership, security of tenure (right to mine), exploration/mining terms, right to transfer ownership Fiscal regimes Stability and/or predictability of fiscal regimes, ability to repatriate profits, level of tax liability, reasonable foreign exchange regulations, permitted external accounts Others factors considered by companies Provisions related to management control, host country equity, environmental obligations, obligations to workers, the right to market minerals, the right to use mineral rights as collateral, confidentiality of data, dispute-settlement mechanism Sources: Derived from results of global surveys by Johnson (1990), Otto (1992), Clark and Naito (1997).
foreign companies.3 Although this evolution enhances the attractiveness of the region for mineral sector investment, the status of investment conditions in individual countries varies widely. This paper presents information useful in assessing and comparing mineral investment prospectivity and risk in selected Asian countries (Central Asian Republics (excluding Turkmenistan), China, Mongolia, and the ASEAN nations excluding Brunei and Singapore).
Consequences of structural reform of global mining industry During the 1980s, large-scale mineral sector investment outside socialist economies took place mainly in industrialized mineral producing countries. A major shift into Latin America and Southeast Asian nations occurred in the 1990s.4 The shift saw a 5 year decline in exploration expenditures in the United States and Canada relative to worldwide exploration expenditures. Metals Economic Group (1997), which has compiled annual estimates of exploration by major TMCs since 1992, estimates that in 1992 approximately 40% of worldwide exploration investment by major TMCs was spent in the United States and Canada, but that by 1997, the percentage had fallen to less than 25%. This investment shift has been stimulated by revised national mineral development policies emphasizing free market principles and an expanded private sector role (Table 2). These policy modifications have taken place in both developing and transition economies and have been implemented through reformation of regulatory and fiscal regimes, and government institutional frameworks. Otto (1997) reports that more than 90 nations since 1985 have introduced new mining laws, have made major amendments to their existing mining laws, or are cur3
At a 1997 workshop organized the Metal Mining Agency of Japan and the Malaysian Chamber of Mines, senior government officers from Asia met to discuss mining law modifications. Almost all countries represented had either recently introduced a new mining law or were working on a new or amended mining law. See MMAJ and MCM (1997). 4 Mining industry structural reform in the Asia and the Pacific region is described by Clark and Naito (1997).
88
Table 2
Recent changes in mineral policies
쐌 Removal or reduction of barriers to foreign investment in the mining sector 쐌 Reduced fiscal restraints through revised taxation schemes 쐌 Enhanced transferability of mineral rights 쐌 More careful definition of the linkage between exploration right and mining right 쐌 Closure of some areas to mineral activities 쐌 Imposition of obligations to reduce the impact of mining operations on the environment and local communities
rently drafting new laws. These reformations started mainly in Latin America in the last decade (World Bank, 1996) and similar policy reform is now occurring in Asia (Naito et al., in preparation) and Africa (Otto, 1995). Andrews (1991) concludes that this worldwide trend has prompted TMCs to re-shape their corporate exploration and mining strategies in an increasingly global context.
Major corporate determinants for mineral investment in Asia Unprecedented TMC access to a country poses inherent risks, including political, geological (technical), regulatory, fiscal and environmental risks. Therefore TMCs need to formulate internal guidelines in order to assess the prospect and risks of entry into a new country. Major trends in Asian countries that may have an impact on TMC country and regional assessments are presented below. Geological attractiveness and exploration/mining activities Asian geology can be divided into four orogenic belts; the Pre-Cambrian massifs with two Phanerozoic surrounding foldbelts, which were formed through the Caledonian and/or Variscan orogenies, and the present island arc system at the margin of the continent. These orogenies, which were accompanied by major igneous activities, resulted in various types of metallic mineralization. The major metallogenic provinces in this region can be summarized as southern China (tin, tungsten, molybdenum, lead, zinc), Kyrgyzstan to Uzubekistan (gold, copper), eastern Kazak-
Mineral projects in Asian countries: Koh Naito et al
stan to Xingjian province in western China (copper, lead, zinc), and the western Pacific Island Arcs including Myanmar, Indonesia and the Philippines (copper, gold, nickel). A number of world class mineral deposits have been discovered in these provinces. Some countries in Asia have a long-established mining history and some produce more than 10% of world mine production of specific metals. For example, state enterprises in China are major producers of tungsten, antimony and tin and Kazakstan is one of the world’s largest chromium producers. Analysis of recent worldwide corporate exploration expenditures by the Metals Economic Group (1997) shows that major TMCs spent in excess of US$4.03 billion on worldwide exploration for gold, base metals, and other nonferrous metals and minerals in 1996. The analysis indicates that the Latin America and Asian regions have experienced high exploration growth rates relative to other regions. TMC exploration expenditure in Asia was approximately US$362.9 million in 1996 corresponding to 9.0% of total worldwide TMC expenditure. Indonesia, which since the late 1960s has provided a stable regime for mineral investment, and the Philippines together accounted for 78% (US$282.4 million) of the Asian 1996 total followed by Kazakstan (US$23.5 million), China (US$20.4 million), Myanmar (US$12.6 million), and Malaysia (US$12.0 million). The data indicate that although China and the Central Asian Republics may have relatively attractive geology and proven world class deposits, TMC mineral exploration expenditure there remains at a low level. Legal regimes for exploration and mining A ‘mining law’ is the principal regulatory instrument governing mineral activities and it defines both the rights and obligations of mining title holders and the powers of government officers. The government’s primary role is to regulate subsoil mineral activities, including domestic exploration and mining activities as well as initial mineral processing. Mine site closure, site reclamation and environmental compliance may also be addressed by a mining law or may be the subject of other laws. Over the past few years many Asian governments have passed new mining laws or are currently drafting new laws in order to encourage direct foreign investment in mineral exploration and development activities.5 This trend in Asia reflects a change in national mineral policies resulting in reduced restrictions on direct foreign investment in the mineral sector and redefining the government’s role as that of regulator rather than producer. New Asian mining laws show a commitment to granting exclusive rights to qualified parties for mineral activities in the form of licenses, permits, leases or concession tenements. The basic framework of Asian mining laws usually addresses at 5
See the research by Naito et al. (in preparation).
least the following topics: (1) government authority, (2) restrictions on mineral activity, (3) exploration and mining rights and obligations, and, on a more limited basis, (4) the environment (Table 3). According to Sillitoe (1995), major mineral deposits in the Circum-Pacific region, which includes many Asian nations, during the past 25 years, took an average of 19 years of exploration time and required approximately 9 years to develop from initial discovery to production. Many deposits were explored by at least two and sometimes as many as five or more companies. This past experience indicates that mining law drafters should carefully consider the terms, renewability and transferability of exploration and development rights. Mineral activities are generally divided in mining laws into the stages of exploration, mining and reclamation. In some Asian nations, the exploration stage may be subdivided into phases, including prospecting, exploration and feasibility study. Prospecting (sometimes called reconnaissance) rights allow an initial survey to assess the geological setting or mineral resources distributions relying on field observations using satellite remote sensing and geological, geophysical or geochemical techniques. Since reconnaissance falls between scientific research and mineral exploration, and because the granted survey area may be large, not all countries grant the holder of a prospecting right an exclusive right to prospect within the grant area. (For example, in Thailand and Mongolia more than one entity can obtain prospecting rights over an area.) Under many Asian mining laws (Table 4), the prospecting right can be issued for a large area (more than several hundred square kilometers) and is of short duration (1 or 2 years). Activities during the exploration stage typically include drilling, test pitting, trenching and sometimes tunneling to locate and appraise the volume of mineral deposits. The exploration right is granted for 2– 3 years, but is usually renewable for up to at least 6–8 years. Exploration areas are smaller than prospecting areas and are usually subject to annual percentage relinquishment or minimum expenditure requirements. The holder of an exploration right usually has the exclusive right to explore in the granted area. Some countries in Asia provide for a feasibility study period between the exploration and mining phases. Where such a period is provided, it is relatively short with a typical duration of about 1 year. In contrast, mining rights are granted for long periods of up to 25–30 years, with provisions for renewal. The link between the exploration and mining stages is the most important issue because risk-averse TMCs will prefer to invest in a legal environment that ensures security of tenure so that the discoverer of an economically viable mineral deposit will be able to progress into commercial development. Although Asian countries have generally strengthened the linkage in their new mining laws (Table 4), at present 89
Mineral projects in Asian countries: Koh Naito et al Table 3
Legal aspects of exploration and mining projects: important components of new Asian mining laws
Government authority Ownership of minerals; powers granted to government officers; enforcement, penalties and fines; authority to negotiate contracts Restrictions on mineral activities Qualifications for authorization to explore, mine and process; areas closed to mineral activities; mineral types subject to special controls or conditions; areas subject to special controls or conditions; land access; resolution of conflicting land uses Exploration and mining rights and obligations Maximum extent of exploration or mining area; initial term for exploration and mining right; renewal of an exploration or mining right; cancellation or termination of a right; exploration area relinquishment; minimum exploration expenditure obligations; security of tenure; reporting; mineral rights transferability; annual holding fees or rentals; royalties Environment Environmental impact assessment; environmental impact mitigation; social or community impact; monitoring and reporting; reclamation; postclosure liability
Table 4
Legal regimes of exploration and mining within Asian countries
Countries
China Mongolia Philippines
Malaysia
Indonesia Thailand Vietnam Laos Cambodia
Myanmar Kazakstan
Kyrgyzstan Uzbekistan
Tajikistan
Mining Law (issue date)
Mineral Resources Law (Jan. 1, 1997) Minerals Law (July 1, 1997) Philippines Mining Act of 1995 (RA7942) (Apr. 10, 1995) State Mineral Enactment (Under consideration) Mining Law No. 11, 1967 (Dec. 2, 1967) Minerals Law (Dec. 26, 1967) Mineral Law (Sept. 1, 1996) Mining Law (Apr. 12, 1997) Mines and Mineral Law (Under consideration) Myanmar Mines Law (Sept. 6, 1994) Underground Resources Law and Amendments 1996 (Jan. 27, 1996) Law on Entrails of the Earth (July 2, 1997) Law on Mineral Resources ‘the Subsoil Code’ (Sept. 23, 1994) Mining Code (Under consideration)
Maximum Duration* for
Relinquishment obligation
Security of tenure Concession transferability
Exploration
Mining
Not specified
Not specified
Not specified
Yes
Yes
7 years
100 years
Voluntary
Yes
Yes
8 years
50 years
Yes
Yes
Yes
(FTAA**) 4 years
(FTAA) 42 years
Up to licensee
Not specified
(FTAA) Yes
8 years
50 years
Yes
Yes
Yes
Not specified
Not specified
None
Yes
6 years
50 years
None
Yes
No (exploration) Yes (mining) Yes
10 years
50 years
Yes
Yes
Yes
6 years
55 years
Yes
Yes
Yes
5 years
15 years
Yes
Not specified
Not specified
6 years
25 years
Yes
Yes
No
10 years
20 years
Yes
Yes
No
5 years
15 years
None
Yes
Yes
Negotiable
Negotiable
Unknown
Unknown
Negotiable
The information in this table was verified by Asian governmental officers in charge of mining law and policy (MMAJ and MCM, 1997). The information source of the Central Asian Republics is Clark et al. (1998). *: Including renewals, **: Financial or Technical Assistance Agreement (FTAA).
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Mineral projects in Asian countries: Koh Naito et al Table 5
Fiscal regimes of exploration and mining within Asian countries
Countries
Corporate income tax
Royalty
Import duty
Dividend Tax holiday withholding tax
Foreign external account
Government equity requirement
China
33%
1–4% on sales revenue
None
None
Yes
None
Mongolia
40%
2.50% of sales value
None
20%
Yes
None
Philippines
35%
2% of gross value
3%
15%
Yes
None
(FTAA) Malaysia
28%
Indonesia
30%
On sliding scale 10% for tin 5% advalorem for gold Unit production 20% royalty scheme
(6th CoW) Thailand
30–35%
Vietnam
10–25%
Laos
30–35%
2–5% price of sales (FOB)
none
10%
Cambodia
30–35%
None
None
Myanmar
30%
2–5% of gross value 3–4% on sales revenues
Duty applies
3%
Kazakstan
30%
Negotiable
Duty applies
15%
Kyrgyzstan
30%
Unknown
Unknown
Uzbekistan
16–36%
exempt
10%
Tajikistan
Negotiable
⬍ 30% on value (5% for Au) 2.5% on gross sales Negotiable
Negotiable
Negotiable
5 years except gold 100%/2yrs, 50%/3yrs 10 years except gold 100%/5yrs, 50%/5yrs 5 years from commercial operation
10%
None
Yes
None
7.5%
None
Yes
None
5–8 years for BOI-approved projects 3 years from commercial operation
Yes
None
Yes
None
Yes
Gemstones yes Yes
Yes
None
2.5% for Cu, Au Exempt for BOI- None of sales approved projects ⬍ 12% of sales none 5–10% for minerals
⬍ 100%/2yrs 50%/2yrs None
3 years from None commercial operation 100%/5yrs Yes Next ⬍ 50%/5yrs 3 years from Yes start exploitation 7 year net profits Yes tax holiday Negotiable Negotiable
Yes None Yes Yes Yes
Sources: Otto et al. (1997), EW Center and MMAJ (1998) and information from the governments, using questionnaires. CoW: Contract of Work, BOI: companies granted by Board of Investment (BOI) in Thailand.
most Asian countries do not provide for automatic progression from an exploration right into a mining right. The only exception is Mongolia. Typically, the obtaining of a mining right is subject to the submission of various mandatory reports, such as a feasibility study, mining plan and environmental impact assessment, all of which must be submitted to the government before the mining right is granted (or ‘vests’). Often, this requirement is intended to insure that the operation will use resources efficiently and will minimize the impact of mining operations on the environment and/or the local community. Asian mining laws do not allow an application for a mining right to be refused arbitrarily, and during the application process no other applicant can be granted the
mining right until the exploration right holder’s application is first considered. The transferability of mineral rights, allowing participants to farm-in or farm-out all or part of a high risk exploration or mining project, is also critical for the mining industry. Most Asian mining laws allow for transfer of rights to another qualified party. The process, however, is usually subject to government review and approval and may be considered a taxable event. Fiscal systems With the advent of new mining laws, many Asian governments have also revised their mineral sector fiscal systems. Table 5 provides information on taxes 91
Mineral projects in Asian countries: Koh Naito et al Table 6
Summary of typical legal and fiscal regimes in Asian countries
Legal regimes Duration for exploration with renewals mining with renewals Relinquishment obligation Security of tenure Transferability of concession
Fiscal regimes
6–8 years 25–30 years 40–50 years Yes Yes Yes
applicable to mines in 14 Asian nations. Typically, income tax rates are 30–40% of taxable income, royalties 2–4% of gross mineral value, and dividend withholding taxes 10–20%. Unlike other regions, many Asian countries provide some form of tax holiday (3–5 years). Import duties are generally low or zero-rated. Almost all Asian countries allow mines to maintain foreign external accounts and only a few require a government equity position. The trend in Asia is toward a lowering of tax levels, not only for the mining industry, but for other industries as well. Other factors affecting exploration and mining projects Public awareness of the natural environment has led to a global, and Asian, trend toward adopting stricter national environmental policy, and governments have increasingly moved to exclude or restrict mineral activities in areas such as national parks, historical and cultural sites, forest reserve areas and so forth. When mineral activities are approved in an area, environment-related restrictions or obligations are imposed. Pring (1997) has noted that environmental requirements for mining projects can be found in national laws, lender (World Bank, EBRD, Asian Development Bank, private banks) guidelines, United Nations-originated treaties, protocols and conventions (such as the Basel Convention and Rio Declaration), and private industry guidelines (ISO14000, etc.). Environmental damage from mining operations can induce social and economic disruptions of local communities (and indigenous peoples), particularly where the community’s economy is based on agriculture, fishing or forestry which depend heavily on the natural environment (Cordes, 1997). Few Asian governments have acted to draw local communities or indigenous peoples into the mine approval process,6 although most mining codes do provide for a means to compensate landowners or landusers for damages resulting from mining operations. Environmental awareness is rapidly growing throughout Asia and it is likely that in the future environment-related mining costs will increase, approvals will be more difficult 6
An exception is the Philippines which introduced the ‘Indigenous Peoples Rights Act (IPRA)’ in 1997 to legally involve indigenous local communities in mining projects.
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Corp. income tax Royalty
30–40% 2–4% of sales or value
Import duty Exempt/small Dividend withholding tax 10–20% Tax holiday 3 years plus Foreign currency external account Yes Equity requirement No
to obtain in sensitive areas, and application granting may become more time-consuming.
Summary Asia contains substantial areas with high geological prospectivity and a number of discovered world class mineral deposits. Most countries in Asia are now in the process of reforming their legal and fiscal frameworks in light of today’s increasingly competitive global marketplace. Some Asian countries, such as Indonesia, have a long established record of investment under relatively stable or predictable legal regimes, while other countries have only recently passed new mining codes. The summary of typical legal and fiscal regimes in Asian countries is shown in Table 6.
Acknowledgements The authors would like to acknowledge Mr Yoshiharu Kida (Director of MMAJ Bangkok office) and his research assistant Ms Phakachon Sutheepattalawan for their tireless data collecting from Asian countries. Discussion on mineral policy and legislation of the Central Asian Republics with Dr Allen L. Clark (EastWest Center) and Dr Jennifer C. Clark (Pacrim Resources Development Inc.) has been very valuable.
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