CHAPTER 15 DOING BUSINESS IN THE HOST COUNTRY -- NON-TAX CONSIDERATIONS FOR A MINERAL EXPLORATION COMPANY
| Jurisdiction | United States |
(Feb 1991)
DOING BUSINESS IN THE HOST COUNTRY -- NON-TAX CONSIDERATIONS FOR A MINERAL EXPLORATION COMPANY
CRA Limited
Melbourne, Victoria, Australia
INDEX
NATURE OF MINERAL EXPLORATION
SELECTING THE COUNTRY
PRACTICAL APPROACHES LEADING TO EXPLORATION PROGRAMMES
INVESTMENT CLIMATE
Political Factors
Foreign Exchange and Repatriation of Capital
Equity Participation
Fiscal Regime
Security
LEGAL ENVIRONMENT
Identification of Legal Requirements
Strategy
Negotiation of an Agreement with the State
APPROACH TO CRITICAL FACTORS
Political
Risk and Reward
Management and Control
Convertibility of Funds
Export of products/Import of equipment and materials
Fiscal
Right to Mine
To negotiate or not to negotiate?
PROPOSITIONS ?
ANNEXURE 'A'—Checklist A1
ANNEXURE 'B'—Asian Pacific Region B1
REFERENCES R1
ACKNOWLEDGEMENTS R2
———————
[Page 15-3]
This paper focuses on legal and commercial considerations which are not only taken into account by mining companies but influence the way in which they act in reaching decisions about undertaking mineral exploration in countries of which they have no previous mining experience. Although this Conference is generally about law and lawyers I would be surprised if any lawyer who is involved with mining companies, whether as in-house counsel or as an external adviser, could sensibly fulfill the role of the legal member of the team without a very good understanding of the business considerations that influence decisions about the exploration programmes undertaken by companies. Thus, I should begin by drawing attention to a number of the non-legal issues before moving to the legal areas with which lawyers get specifically involved when mining companies are examining the potential for exploration in a country for the first time.
NATURE OF MINERAL EXPLORATION
The willingness of mining companies to undertake and accept the uncertainties of exploration is driven by the common objective that it is primarily an investment in the future. It may also provide opportunities which could give the company a winning edge over its competitors. Exploration programmes are essentially high risk, costly and, very often, frustratingly slow in providing rewards for the mining company. The extent of the commitment that a mining company is prepared to make to exploration programmes differs from company to company and from country to country. No rigid ground rules can be formulated on how companies should approach exploration as each company will build its strategies around its corporate objectives, both long and short term, the demands on its funds from existing and potentially new businesses, and the state of its existing mining businesses. Some companies quite deliberately by-pass investment in internally generated and funded exploration programmes and rely instead on getting into farm-in arrangements or acquisitions from others that have discovered mineral prospects where this is compatible with the corporate objectives and business preferences of those organisations.
Large mining companies (in contrast to junior miners) that consider exploration programmes in new countries are almost inevitably looking to establish large scale mines that can be competitive with the best mines in the world. Seeking opportunities for world class mines would be the main objective but interest in mineral discoveries on a smaller scale may also provide opportunities, whether for development by the exploring company itself or by a commercial disposal of those prospects to others.
The minerals industry, it is well known, is a high risk business from exploration through construction, development, processing and marketing of the mined products. Its principal characteristics are summed up in the paper given by Douglas Ritchie.1
• exploration is expensive.
• new countries, with potentially large mineable deposits, create greater risks than countries in which there is an established history of mining activities.
• each mine is unique—it is custom built around the ore deposit, wherever that is located
[Page 15-4]
• mineral exploration and development is long term; there are no quick cash pay backs
• mining industries compete, by and large, in international markets
• exploration is essential for sustained development. As ore reserves of existing mines get depleted replacement can only come from new resources wherever located but not necessarily adjacent to the existing mines with its support and infrastructure facilities.
• exploration efforts should be maintained, at least, at consistent levels throughout good and bad economic times
• mining companies in establishing a new mine in virgin territories are often required to provide social, transport and industrial infrastructures which should normally be provided by governments
• mining operations are capital intensive
• environmental safeguards are increasing at mining sites and these are an intrinsic part of the cost of establishment of the mine.
SELECTING THE COUNTRY
Major mineral exploration activities are concentrated in relatively few countries. Unfortunately, often countries having attractive geological prospects do not necessarily have the favourable investment climate necessary for undertaking a major commercial mining venture.
The attitude of mining companies towards undertaking exploration activities in developing countries has varied considerably over the last few decades. During the 1980's, mainly in response to the slow down in the growth in consumption of minerals and weak commodity prices and profits, many companies changed their exploration activities to more stable countries. Major exploration activities then tended to be focused around a few countries, such as Australia, Canada and the United States. Once again changing economic developments and the diminishing of likely large scale mineral prospects in those countries as well as the opening up to private enterprise by many newly developed countries have compelled large mining companies to re-direct their attention to exploration towards newly developing countries and even to countries which are undeveloped by present day standards.
[Page 15-5]
Charles Johnson, the senior minerals economist who undertook a study last year involving major mining companies across the world, in his report2 highlights that the main reasons given by mining companies for the trend towards extending exploration towards developing countries (about 20-25% increased activity expected in the 1990's) are the increased competition in the traditional exploration areas of Australia, Canada and United States, improved legislation and governmental policies towards foreign investors and increased exploration budgets in international mining companies by the end of the 1980's. Although, it is too early to reach conclusions it is expected that extending exploration activities into the international arena will still tend to be targetted to a few countries in comparison to the approach of many countries adopted during the 1960-1970's. Incidentally, this report published by the East-West Centre, under the leadership of Charles Johnson, is in my opinion essential reading for those interested in wanting a good grasp of the issues involved for mining companies in formulating exploration strategies and budgets. I would also commend as a source of reference on these matters the surveys undertaken by the World Bank although I am not sure whether the recent surveys they have done have been published as yet. The World Bank surveys that we have seen, and to which we provided some inputs, will I am sure be available to other major mining companies which participated in them. These surveys provide extremely valuable insights into the legal systems and regulations as well as in the other features of the investment environment of particularly African and Asian countries.
It is unnecessary to summarise, or even to quote extensively from these reports. Instead I have endeavoured to extract relevant information with my comments, whenever I have thought these to be appropriate.
The principal factors relevant to the selection of countries in which exploration will be undertaken are in two broad areas, namely, the geological environment3 and the investment climate. It is stating the obvious, I know, but there is hardly any purpose in undertaking any significant exploration programme in a country, however attractive the investment environment, if the geological data available or the experts views about the geology of the country place it either in a non-interest area for exploration or very low on the list of countries in which a mining company would be prepared to make the commitment of undertaking a major mining operation. (Investment climate refers to the range of political, economic, legal, financial, tax, infrastructure, community and other considerations that determine whether a major mining company is prepared, either alone or jointly with others, to commit to a mining operation if minerals are discovered in economically viable quantities.)
PRACTICAL APPROACHES LEADING TO EXPLORATION PROGRAMMES
It is appropriate at this point to comment on the practical approaches involved before a decision is likely to be undertaken to commence an exploration programme in a new country, particularly one where there has not been extensive exploration activity by other major mining companies. While I think the approach and attitudes will vary among mining companies, and often will be modified from time to time as circumstances change, I believe the steps leading to a commitment to undertake any significant exploration programme will generally be along the following lines -
[Page 15-6]
• the starting point is the exploration budget. This will be determined mainly by the corporate growth goals in mineral production...
To continue reading
Request your trial