The Fraser Institute Annual Survey of Mining Companies About the Investment Attractiveness of Mining Jurisdictions Presented by Dr. Michael A. Walker Executive Director

The Fraser Institute Mining Survey Providing Valuable information to the mining industry and policy makers since 1997.

3 Engineering & Mining Journal Engineering & Mining Journal “It isn't as prestigious as the Miss America or Miss Universe pageants, but in the mining world, it's about the next best thing.” “It isn't as prestigious as the Miss America or Miss Universe pageants, but in the mining world, it's about the next best thing.”

4 The Survey n Sent to 1,121 exploration, development, and mining consulting companies n Responses from 259 companies (23% response rate) n Representing $575 million in exploration spending in 2004 or 15% of total global spending according to Metals Economics Group n Representing $798 million of expected spending in 2005

5 The origins and raison d’etre of the survey n The Stockholm syndrome and the Mining Industry n British Columbia’s sad history n An instrument to provide the hostages anonymity and the captors real information

6 Why Survey Mining Companies? n It’s the only way to get reliable information n Perception of potential investors is the reality –Attitude of regulators often more important than regulations n Survey generates information on a key problem facing the mining industry: Uncertainty –Key because of lag between investment and production n Provides potential investors valuable insights not available elsewhere. n Creates communication and accountability for governments

7 Two components of the Mining Exploration and Development Investment Decision n The Geological endowment in the target jurisdiction n The Policy endowment including the laws and the process of their implementation n The Mining Survey asks questions about both

8 Geological Endowment n Mineral potential assuming NO land use restrictions or regulations, further assuming industry “best practice” standards

9 Policy Endowment Indicators – we ask mining companies, “are you deterred from investing because of ….” n Uncertainty concerning existing regulations n Environmental regulations n Regulatory duplication and inconsistencies n Taxation regime n Uncertainty concerning native land claims n Uncertainty concerning protected areas n Infrastructure n Socioeconomic agreements n Political stability n Labour regulation n Geological database New this year: Security

10 Compilation of Results: Three Overview Indexes n Policy Potential Index –Examines attractiveness of overall policy climate n Mineral Potential Index –Looks at mineral potential under best practices standards n Composite Index –Combines policy and mineral index, based on the weights the respondents say they would use: 40% for policy and 60% for mineral potential

11 But First: An overview of the Results for Specific Policy Areas through two sets of charts

12 The first set of charts shows Chile’s relative rank compared to all other jurisdictions For each factor, per cent of respondents who say: Factor is a strong deterrent for investment Would not invest due to this factor Chile identified by arrow

13 Uncertainty concerning the administration, interpretation and enforcement of existing regulations

14 The second set of charts shows a comparison of selected jurisdictions (Combines answers for “strong deterrent” and “would not invest”) n Pacific jurisdictions in Light Green n Russia, India and China in white n South America in Grey n Chile in red and/or identified by arrow n North America in Orange n Africa in Light Blue

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16 Environmental regulations

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18 Regulatory duplication and inconsistency

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20 Taxation regime

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22 Uncertainty concerning native land claims

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24 Uncertainty over which areas will be protected as wilderness or parks

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26 Quality of infrastructure

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28 Socioeconomic agreements

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30 Political stability

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32 Labour regulations/Employment agreements

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34 Quality of geological database

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36 Security situation Security situation

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38 The Policy Attractiveness Index n A simple equally-weighted composite of all policy areas

39 Policy Potential Attractiveness

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41 Now, to turn to Mineral Potential

“Best Practices" Mineral Potential: Asks respondents to rate the mineral attractiveness of each jurisdiction assuming no land use restrictions in place and assuming industry “Best Practices" Per cent of respondents who say: Encourages investment Not a deterrent for investment

43 “Best Practices" Mineral Potential: Assuming no land use restrictions in place and assuming industry “Best Practices"

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45 Composite Policy/Mineral Potential Index for Insight on Investment attractiveness n The policy potential component is the composite policy potential index n The mineral potential component is the “best practices” mineral potential n The survey asks how the industry would weight the two components n The components are weighted according to this answer – 60% mineral potential; 40% policy potential

46 Policy/Mineral Potential

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48 We ask those who complete the survey to give their own direct assessment of the central question: “Does the mineral potential and the current policy regime in the jurisdiction encourage investment in mining?” Chile has similar rankings in both this index and the Policy/Mineral composite index

49 Mineral Potential: Assuming current regulations/land use restrictions

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51 Does Chile live up to its potential? How does Chile’s actual overall performance relate to what would be Chile’s performance if industry best practices, and not current regulation, were the driver of performance? How does Chile’s actual overall performance relate to what would be Chile’s performance if industry best practices, and not current regulation, were the driver of performance?

52 Room to Improve: Difference between “Best Practices” and “Current Regime”

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54 Chile looks good on the “Room to Improve” index but … Trouble in Latin America??? Trouble in Chile???

55 Trouble in Latin America? Policy Potential scores over time and a downward slide

56 Evolution of Chile’s Policy Score: A downturn or a blip?

Chile’s Policy History The following chart compares Chile’s score in 1998/99, the first year Chile appeared Chile’s score in 1998/99, the first year Chile appeared with it’s score in 2003/04, reflecting strong improvements and the high score it achieved in 2000/01 and maintained with it’s score in 2003/04, reflecting strong improvements and the high score it achieved in 2000/01 and maintained And its most recent score, reflecting a downturn And its most recent score, reflecting a downturn

58 Trouble in Chile? Historical policy scores – Forward to the Past? Per Cent who say each factor deters investment A mark below the line indicates that no respondents considered this a negative factor

59 Is the slide in the Mining Survey scores a harbinger of things to come for Latin America? For Chile? The Fraser Institute’s Economic Freedom of the World is a broad measure. It shows a leveling off of freedom in Latin America and a reduction in Chile.

60 Evolution of Economic Freedom

61 What does the future hold? n Is Chile’s decline in the Mining Survey a blip or a trend? n Was the royalty battle a aberration or a sign of anti-market things to come? n Is Chile vulnerable to succumbing to the Latin American disease? n Or will Chile maintain its successful policies?

62 A footnote on the Royalty Issue n Mining survey reflects Chile’s REPUTATION n A good reputation is difficult to acquire but easy to lose – Ex post Taxes are bad for your reputation n The first migration of mining from British Columbia was caused by the imposition of an ex post royalty n The second was caused by changing the rules of the game after people had committed their investment dollars n Today British Columbia has a bad reputation in spite of recent favourable changes to mining laws

63 Lessons about Royalties from Canada n Don’t change the rules for existing mines – it breaks the implicit contract that attracted the investment to Chile in the first place n Don’t impose a fixed royalty that will convert large tracts of land into waste and maroon otherwise extractable minerals n Don’t calculate the royalty on the basis of market price minus costs of extraction that will ensure that costs are not controlled – especially labour costs n Do calculate the ‘royalty’ on the basis of total profitability – this will cause least distortion

64 But then the issue becomes crystal clear….. n If you impose the only sort of royalty that makes any sense it will be a profits tax n But why would it make sense to levy a special profits tax on your most successful industry? n Obviously it does not make sense.

65 The real questions raised by the royalty discussion n Do you want a bigger public sector? n If you do how should it be financed? n Does it make sense to risk your reputation as a predictable policy environment by raising taxes on mining - Chile’s world class and leading sector? n Does it make sense to attempt to raise taxes on your future capital investment - the most mobile component of Chile’s economy? n If there is broad-based public support for a larger public sector, why not raise broadly based taxes such as consumption taxes and personal income taxes.

66 Perception versus Reality n Technically the new mining tax respects the historical commitments made n Therefore it shouldn’t cause Chile to get a reputation of a promise breaker…..however! n This presumes that everybody understands the regime….but often opinions are based on lack of information n In Mining as in many other areas it is the Perception rather than the Reality that matters

67 Above all……… n Don’t forget that the great influx of Canadian capital to your mining sector was due to Canadian policy mistakes…don’t repeat them n Don’t forget that there are other capital hungry jurisdictions out there that would love to lure away the next wave of Chilean mining investment n Don’t forget the great effort you have taken to acquire the best reputation in international mining n Don’t forget how far you have come from the destructive politics and policy of the past

The End……Phew! Thank you for the Opportunity The Fraser Institute Annual Survey of Mining Companies 2004/2005 Released: January 2005 Available complete and uncut at

69 Senior Exploration Investment in 2002 (total: $US480.2 million)

70 Junior Exploration Investment in 2002 (total: US$162.2 million)