Gold perceptions - Gemell et al - Aug 2016 - Centre for Exploration Targeting / The University of...

IS PERCEPTION REALITY?Evaluating the fiscal attractiveness

of international jurisdictions for

gold mining investment

Chris Gemell1

1. Wood Mackenzie, Australia

John P. Sykes23 & Allan Trench456

2. MAusIMM, Centre for Exploration Targeting, The University of Western Australia

3. Greenfields Research, United Kingdom

4. FAusIMM, Business School, The University of Western Australia

5. Centre for Exploration Targeting, The University of Western Australia

6. CRU Group, United Kingdom

AusIMM International Mine Management Conference

Brisbane, Australia: 24 August 2016

Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment

Which of these is most attractive?

24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 2 of 24

Burkina Faso MaliGhana TanzaniaSouth Africa

10% free government

ownership

10% free + 15% paid

national ownership10% free government

ownership

4% ad valorem

gold royalty

28% corporate tax

Brazil ColumbiaChile PeruGuyana

1% gold royalty 4% gold royalty20% corporate tax 30% corporate tax40% corporate tax


PERCEPTIONS: What

does industry think?

Is perception reality? Evaluating the fiscal

attractiveness of international jurisdictions

for gold mining investment



What does industry think?

0 20 40 60 80 100 120

Chile

Peru

Ghana

Burkina Faso

Brazil

Guyana

Tanzania

Colombia

South Africa

Mali

Investment Attractiveness

24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia

2nd Quartile

1st Quartile

3rd Quartile

But this

considers

geological and

business

attractiveness

Slide 4 of 24


Specifically about policy and tax


0 50 100

Chile

Burkina Faso

Ghana

Tanzania

Peru

Guyana

Mali

South Africa

Colombia

Brazil

Policy Perception

0 50 100

Burkina Faso

Chile

Tanzania

Ghana

Colombia

Mali

Peru

Guyana

Brazil

South Africa

Perception of Taxation

1st Quartile1st Quartile

2nd Quartile

2nd Quartile

3rd Quartile4th Quartile

Slide 5 of 24


So is this the answer?


Burkina Faso Chile

&

Slide 6 of 24


ACTUALITY: What does

the model say?






Take a typical gold mine…

Capital cost: US$300 million

Nominal weighted average cost of capital (WACC): 10%

Development time: 3 years

Capacity at full-scale operation: 300,000 oz pa

Ramp-up: 50% in year 3; full production from year 4

Mine life: 11 years (50% production in final year)

Mining and processing costs: US$900 / oz (at year 0)

Gold price assumption: US$1300 / oz (at year 0)

Real gold price escalation: 0.1% pa

Real cost escalation: 0.1% pa

General inflation: 3% pa



…and model for each jurisdiction


0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

South Africa

Chile

Brazil

Burkina Faso

Colombia

Peru

Tanzania

Mali

Guyana

Ghana

Average Effective Tax Rate (AETR) Average Effective Tax Rate (AETR)

South Africa 36.3%

Chile 44.3%

Brazil 44.8%

Burkina Faso 52.2%

Colombia 55.0%

Peru 58.5%

Tanzania 58.8%

Mali 60.4%

Guyana 63.9%

Ghana 66.5%

Slide 9 of 24


So is this the answer instead?


South Africa Chile

&

Slide 10 of 24


COMPARISON:

Perception vs actuality






Attraction based on more than tax

• Lack of correlation between calculated tax

burden and overall investment attractiveness

suggests there is more to investment

attractiveness than tax rates.

• Countries which plot substantially above the

‘expected trend line’ such as Chile, Peru and

Ghana are more attractive than their tax

burdens alone suggest.

• Countries which plot substantially below the

‘expected trend line’ such as South Africa,

Brazil and Mali are less attractive than their

tax burdens alone suggest.

• The Fraser Institute Investment

Attractiveness ranking includes both

geological and non-geological factors, so it is

likely that geological or other non-tax factors

are responsible for this discrepancy.


R² = 0.0233

0

10

20

30

40

50

60

70

80

90

30.0% 40.0% 50.0% 60.0% 70.0%

Inve

stm

en

t A

ttra

ctive

ne

ss (

Fra

se

r In

st. 2

01

4)

Average Effective Tax Rate (AETR)

Expected Trend Line

No Real Trend Line

SABr

Ch

BF

Co

Ma

Pe

Ta

GuGh

Slide 12 of 24


Policy perception more than tax

• Lack of correlation between calculated tax

burden and policy perception suggests there

is more to minerals policy than taxation.

• Countries which plot substantially above the

‘expected trend line’ such as Ghana have

better perceived policy regimes than their tax

burdens alone suggest.


‘expected trend line’ such South Africa and

Brazil have worse perceived policy regimes

than their tax burdens alone suggest.

• The Fraser Institute Policy Perception

ranking includes both non-tax policy factors,

so it is likely that such factors are

responsible for this discrepancy.


R² = 0.0128

0

10

20

30

40

50

60

70

80

90

30.0% 40.0% 50.0% 60.0% 70.0%

Inve

stm

en

t A

ttra

ctive

ne

ss (

Fra

se

r In

st. 2

01

4)


Expected Trend Line

No Real Trend Line

SA

Br

Ch

BF

CoMa

Pe

Ta

Gu

Gh

Slide 13 of 24


The tax rate may not be the problem

• Most countries perception of taxation

correlates fairly well with actual tax burden,

suggesting industry perceptions are fairly

strong on this factor.

• However, overall policy and investment

attractiveness is made of more than just the

tax rate.

• Some countries tax perceptions do not

correlate with actual tax burden, suggesting

than can be more to taxation, than just the tax

rate too.


‘potential trend line’ such South Africa and

Brazil have worse perceived taxation regimes

than their tax burdens alone suggest – this

may indicate non-rate based taxation

problems such as opacity and complexity.


0

20

40

60

80

100

30.0% 40.0% 50.0% 60.0% 70.0%

Inve

stm

en

t A

ttra

ctive

ne

ss (

Fra

se

r In

st. 2

01

4)


Potential Trend Line

SA Br

ChBF

Co

MaPe

Ta

Gu

Gh

Outliers?

Slide 14 of 24


Perception premiums & discounts?• Perceptions of policy and taxation and actual

attractiveness can be different.

• This difference may influence investment

decisions.

• Jurisdictions with a better perceived policy regime

than actuality may be charging a ‘perception

premium’ and could be somewhat of an

‘investment trap’ (Ghana?).

• Jurisdictions with a worse perceived policy regime

than actuality may be charging a ‘perception

discount’ and could be somewhat of an ‘investment

opportunity’ (Brazil & South Africa?).

• This assumes that factors missing from the

analysis do not ‘swamp’ the data…


Pe

rce

ptio

n

Actuality

Recognised good

regime:

Perception

matches actuality

(Safe investment)

Recognised poor

regime:

Perception

matches actuality

(Obviously avoid)

Unrecognised

good regime:

Perception worse

than actuality

(Investment

opportunity?)

Unrecognised

poor regime:

Perception better

than actuality

(Investment

trap?)

Slide 15 of 24


So is this the answer actually this?


South Africa Brazil

&

Slide 16 of 24


Is there an easier method?






BEWARE: Every jurisdiction differs

0%

10%

20%

30%

40%

50%

60%

70%

80%

SouthAfrica

Chile Brazil BurkinaFaso

Colombia Peru Tanzania Mali Guyana Ghana

Structure of Average Effective Tax Rate by individual tax components

Corporate Tax Royalties Ownership Dividend Other Taxes



No single rate predicts overall burden


R² = 0.2725

30%

40%

50%

60%

70%

15.0%25.0%35.0%45.0%

Ave

rage

Eff

ective

Ta

x R

ate

(A

ET

R)

Corporate Tax Rate

R² = 0.3389

30%

40%

50%

60%

70%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%

Ave

rage

Eff

ective

Ta

x R

ate

(A

ET

R)

Royalty Rate

Slide 19 of 24


IN SUMMARY: Beware

initial perceptions






Misperceptions & opportunities?

• Modelling mining tax rates is complicated: current fiscal regimes are

probably too complicated to be effective;

• Beware headline tax rates: do detailed due diligence before investment;

• Perceptions do not match actuality in minerals taxation: Overall combined

tax rates over the life of the mine are the only true measure;

• Mining policy is not all about taxation: Some jurisdictions will have non-

taxation based policy issues impacting upon their image;

• Mining taxation is not all about the headline tax rate: Some jurisdictions

may have non-tax rate related issues impacting their image;

• Some jurisdictions may be providing a perception discount: they are seen

as worse than they actually are – a potential investment opportunity?

• Some jurisdictions may be charging a perception premium: they are seen

as better than they actually are – is this something the industry realises?



Further research required

• Will the results be the same for different types of gold mine?

• Will the results be the same for different commodities?

• Will the results be the same for different types of corporate

structure and financing (debt/equity etc.)?

• How will the opacity and volatility of different tax structures

affect the investment climate?


i.e. beware these limited findings!

Slide 22 of 24


Further reading

Main references

• Gemell, C., Sykes, J.P., & Trench, A. 2016. Is Perception Reality? Evaluating the Fiscal

Attractiveness of International Jurisdictions for Gold Mining Investment. AusIMM International

Mine Management Conference. Brisbane, Australia. 22-24 August.

• Trench, A., Gemell, C., Venables, T., Curtis, M., & Sykes, J.P. 2015. Evaluating the Attractiveness

of Fiscal Regimes for New Gold Developments: African and South American Peer Country

Comparisons. International Mining for Development Centre (IM4DC). May.

Other references

• Collier, P, 2010. The Plundered Planet: Why We Must – and How We Can – Manage Nature for Global Prosperity, Kindle edition

(Oxford University Press: Oxford).

• Jackson, T, 2015. Survey of Mining Companies 2014 [online], Fraser Institute: Vancouver. Available from:

<https://www.fraserinstitute.org/sites/default/files/survey-of-mining-companies-2014.pdf>.

• Trench, A and Sykes, J, 2015a. The forgotten economic potential of new mineral discovery [online], MiningNewsPremium.net.

Available from:

<http://www.miningnewspremium.net/storyview.asp?storyID=826948493&section=Strictly+Boardroom&sectionsource=s176>

• Trench, A and Sykes, J, 2015b. Three rules to build a resources economy [online], MiningNewsPremium.net. Available from:

<http://www.miningnewspremium.net//storyview.asp?storyID=826947744&section=Strictly+Boardroom&sectionsource=s176>

• Wilson, A, McMahon, F and Cervantes, M, 2014. Survey of Mining Companies 2012–2013 [online], Fraser Institute: Vancouver.

Available from: <https://www.fraserinstitute.org/sites/default/files/mining-survey-2012–2013.pdf>.


THANK YOUContact details:

Chris Gemell: [email protected]

John Sykes: [email protected]

Allan Trench: [email protected]

AusIMM International Mine Management Conference

Brisbane, Australia: 24 August 2016

Gold perceptions - Gemell et al - Aug 2016 - Centre for Exploration Targeting / The University of...

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