Possibilities of fair deal between state and the

mining company”

16-17 September 2013 at Finlandia Hall, Helsinki

Pentti Noras, Director International Relations, Geological Survey of Finland GTK

Agenda

• Global developments

• Characteristics of the deal

• Roles of state and the enterprises

• Government control worldwide

• Positive linkages of mining industry

• Pros and cons of the deal in Finland

• What can be done?

1980s: Dispersion of company operations and community relations

INTEGRATED FUNCTIONS OF ”LOJO KALK LTD”

TILL 1980s

SINCE 1990s

Unit operations of mine and plants all by company employees by contractors

Processing up to end products from limestone to prefab construction elements

subcontractors/ customers

Logistics: • Road transports • Rail terminal & transports • Seaport • Shipping

company vehicles company terminal and cars company port service company company reighters

contracted State Rail Port Authority contracted

Power generation & distribution company´s power branch privatized

Operation & Maintenance (O&M) company function contracted

Health & Social care ”Employee Club”

company health post company offering

purchased N

Education & Training Banking Pension Fund

company vocational school cooperative savings & credits company fund w/privileges

Public privatized public fund

Non-mining related production seed crystal for NOKIA decreasingly

3

Changes the world finds, develops and uses natural resources

• Globalization of commerce

• Democratization of governments

• Shortsighted business behaviour

• Increasing flow of information

• Population growth

• Increasing demand for resources

• New demand mix

• Critical sentiments & nationalism

Characteristics of the deal between state and company

• Btw citizens and shareholders (theory), btw regulatory regime and company (practice)

• Rights and benefits of several stakeholders be recognized

• Extremely political: all national levels, foreign-political

• Sensitive to citizen/group activity -- activism

• Rules cannot be fully carved in stone

• ENVIRONMENT

New order of industrial production

70%

30%

Source: Accenture 2013

Atlantic

Pasific

Arctic

China

Last updated: November 29, pm2012 12:45

Mines protest exposes Myanmar dilemma By Gwen Robinson in Bangkok

Enterprise role and the State intervention

• The role of mine enterprise: – bring capital and technology, – comply with business regulations, – generate ”return on investment”, – demonstrate CSR.

• The role of State:

– Set-up and execute ownership functions, – safeguard the socio-economic potential of

mining to the society, ”return on resource use”,, – supplement the negative spill-over effects

from production.

Government take via taxes and royalties currently

increasing

Ernst & Young 2011-2012

Increased government control in 2010s

• Outright nationalization: Bolivia, Venezuela, Argentina

• Stealth nationalization: Chile, Sweden, Botswana, Ghana, Mongolia,

South Africa, India, Zimbabwe

• Preference to local companies: China, Russia, South Africa,

• Corporate income tax: Canada, Chile, Indonesia, Ghana

• ”Above average profits”: U.K., Ghana, Namibia, Zambia, Tanzania

• Royalties: U.S., India, Zambia, Zimbabwe

• Resource Rent Tax (RRT): Australia, India

• Export/import duties: China, India

• Requirements on using local inputs: South Africa

• Requirements on value-addition: South Africa, Indonesia

• Support to local science and technology: Malawi

What justifies a marked take from licencee to the state?

• return on using of the public capital: revenues and linkages

• market value of minerals

• resources depletion

• competitive land use

• potential of multiple, unforeseen risks

• decreased quality of environment

• project temporarity

• required supervision and inspection

• extra post-closure legacies

Policy Potential Index (Fraser 2012/2013)

Chile

Could successfulness of the deal be basis for ranking of countries?

NEW RANKING SYSTEM FROM

?

MINING Value-adding

Knowledge Infrastructure

Supplies

Fiscal

Mining linkages

MINING

Fiscal

Mining linkages

Copper price to cost 2000-2012

production cost 90% percentile

LME price

(world production value USD 110 bill. in 2012)

Mining tax base: sample of 20 TNCs

Source: PwC 2010

Tax planning -- Yes Tax evasion -- No

• Transfer pricing: combat through additions to the

corporate tax regulations

• Double Tax Agreements: to be amended to protect

the Mongolian tax base

Mining linkages

MINING Value-adding Supplies

Value-addition of minerals in the U.S.

USD 106 bill. Mine production + scrap (without net exports)

USD 633 bill. Processed materials

USD 2,230 bill. Value-added to GDP (15,100)

USGS 2012

in 2011

16Pentti Noras 3.11.2009

Research &

education

Exploration

Drilling

Blasting

Loading

Hauling

Mine structures

Cluster Finlandesa-Sueco de Industria Minera:

Distribuidoras para Operaciones Mineras

SWEDISH PRODUCERS

RMG

SGU

universities Hagby

Craelius

Flexit

ABB

Alimak

Indau

JamaWassara

Atlas Copco

Toro

Volvo

FINNISH PRODUCERS

Dyno Nobel

Kimit

FORCIT

I Products for underground and open cast mining operations

Source: Ericsson & Noras, 2005, 2012

II Productos para ingenios minero-metalurgicos

Analyzers and automation Filtration Flotation Grinding Physical separation Thickening and clarifying Water treatment

Concentrates production

Ferrous metals and ferroalloys processing

Non-ferrous metals processing Light metals processing

Metals processing

Tailings management

Gaseous and aqueous effluents control

Sulphuric acid production

Source: Ericsson & Noras, 2005, 2013

Mining linkages

MINING

Knowledge Infrastructure

Mongolia: contribution by sector to GDP growth

2008-2012

Source: WB 2013

2011 2012

Finland: mining

advantages

• New test ground for innovations and technology improvement

• Throughout strengthening of the minerals cluster • Replacement of imported raw materials • Employment and revenues for remote areas • Stimulation of transports and other infrastructure in

the North to Barents • Restarting of the sector education and training • Improved public service: geologiacal information,

minerals processing, …

Finland: mining shortcomings

• Poor definition of minerals ownership

• Mining law reminds ”everyman´s right”

• Knowledge and skills

• Shortage of domestic capital

• Limited chances for value-addition -> raw materials exporter

• Narrow taxation base – mainly CIT only

• Prone to tax avoidance

• Inefficient enforcement of laws and regulations

• Risks of environmental, non-foreseen legacies

• Eroded reputation

Improvement of national benefits from mining

#1 Revision of mining taxation • RRT, cash flow tax? • Allowance of directed tax deductions

#2 Revision of environmental requiremements and their

enforcement, #3 Check opportunities for more linkage benefits, #4 Without intention to nationalize the sector,

State majority enterprise for Exploration/Mining to be studied.

Kiitos! Tack så mycket!

MINING Value-adding

Knowledge Infrastructure

Supplies

Fiscal

Mining linkages

Industrial Policy

Sector Ministries

Institutes

Awarding Licenses

Regulation & Monitoring

Tax Collection

Benefits Distribution

Sustainable Development

Plan & Practices

1

2

3

4

Compensations

Gvt Agenda