INTERNATIONAL POLICY CONFERENCE “COMPETITIVENESS & DIVERSIFICATION: STRATEGIC CHALLENGES IN A PETROLEUM- RICH ECONOMY” The Economics of Mineral Ownership Rights, Negotiations and Legal Issues Fred Cawood 14 – 15 March 2011, Accra, Ghana

THE ECONOMICS OF MINERAL OWNERSHIP RIGHTS, NEGOTIATIONS AND LEGAL ISSUES Strategic Challenges in a Petroleum-Rich Economy

 Drivers of a country’s Law and Policy framework  Mineral ownership and legal rights  Strategy for Sustainable Development  Appropriate Law and Policy with ‘optimal mining’ at concession level FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 3

 Common sense matters, e.g. respect  Nature of Mining  Economic landscape  Political economy  Sustainable development There is no such a thing as 'standard approach FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 4

 What is mining?  Reserves and resources  Resource base - What matters are concentration factors  Reserves - McKelvy's Box  Ownership and investment  Need for risk capital – Typical risks  Private/State Participation schemes  Participants  Small-scale companies  Junior companies  Multinational companies  Non-mining companies '...relative scarcity in the earth's composition... Crowson, 1998 FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 5

Surface development costs Processing/Smelter costs Gross revenue Marketing and Transport costs Taxable Income Smelter Marketable product Operating costs Underground development costs Processing plant FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 6

Turnover taxes Finance costs Input costs Labour Goods Services Dividends Tax MINERAL ROYALTY Investor’s NPV Reinvestment Regulatory costs Income Tax Converting ore body into a valuable product, which is exchanged for cash FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 7

8 Source: Worldmapper Who are the mineral exporters? Who are the mineral importers? FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 8

 Brundtland definition  It does not mean that the minerals should be kept in the ground for future generations  It means that the wealth-creating potential must be maximized  Generally accepted as having three dimensions  Difficult concept for mining because individual ore deposits are not sustainable  Depends on the economics of the project  Undiscovered ore deposits are valueless.  Value added is the basic measure of the effectiveness of mining and of its contribution to welfare "(Development which) meets the needs of the present without compromising the ability of future generations to meet their own needs" FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 9

Mineral ownership and legal rights  Economic Rents and Benefits  Law and Policy must clearly state investor rights and obligations  Administration of rights  Complex relationships require sensitive negotiations “President John Atta Mills pledged his government’s determination to ensure that oil ‘becomes a blessing and not a curse. We will not let you down,’ he told an expectant nation…” Gyasi, S. New African February 2011 FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 10

Mine F (Loss) Mine F (Loss) Mines A - E (Mine E is Marginal) Mines A - E (Mine E is Marginal) Mine A - D Mines A - C Mines A + B Mine A Mineral Price Px P Mineral Quantity Qx Q Supply for D1 Initial Total Demand (D1) FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 11

Mine F (Loss) Mine F (Loss) Mine E (Marginal) Mine E (Marginal) Mine D Mine C Mine B Mine A Mineral Price Px P Mineral Quantity Qx Q Supply for D1 Initial Total Demand (D1) Profitable mines (A-D) FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 12

Mine E (Marginal) Mine E (Marginal) Mine D Mine C Mine B Mine A Mineral Price Px P2 Mineral Quantity Qx Q2 Q Supply for D1 Initial Total Demand (D1) Shift in Total Demand (D2) Historical marginal mines become profitable (A-F) FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 13

Mine E (Marginal) Mine E (Marginal) Mine D Mine C Mine B Mine A Mineral Price Px P2 Py P Mineral Quantity Qx Q2 Q Supply for D1 Shift in Total Demand (D2) FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 14

Mine F (Loss) Mine F (Loss) Mine E (Historically Marginal) Mine E (Historically Marginal) Mine D (Loss) Mine D (Loss) Mine C (Now marginal) Mine C (Now marginal) Mine B Mine A Mineral Price Pn Px P Mineral Quantity Qx Q Supply for D1 Initial Total Demand (D1) New Demand FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 15

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 Legal system of ownership  Level of ownership and Participation in ownership  Land and Mineral ownership  If mining has precedence over other land uses or not  Security of tenure  Terms and conditions  Land and mineral rights registry  Obligations  Health and Safety Requirements  Environmental and Social requirements  Reporting and monitoring requirements  Administration of rights  Responsible State Agency  Special incentives for investing in remote areas  Reconnaissance, Prospecting, Retention and Mining rights and permissions:  Mineral block auctioning FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 17

 Responsible State Agency  Special incentives for investing in remote areas  Reconnaissance, Prospecting, Retention and Mining rights and permissions  Mineral block auctioning Plans, budgets and programmes are essential to demonstrate commitment! FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 18

 Needs of producing/exporting countries  Instruments to stimulate mineral development  Instruments to maximise the net economic benefit of mining  Other instruments affecting the mining industry  Law and policy instruments used by importers to ensure availability of minerals that affect the mining industry  Support R&D to promote substitution and Recycling  Own/control production through Bilateral or multilateral agreements  Trade, Tariff and Competition policies  Restrictions on the usage of materials, or on end-use products  Realistic trade-offs between conflicting objectives  There are conflicting stakeholders with different agendas  Host country versus Mining Company  Present versus Future generations  External versus internal costs (Environment/Societal costs) FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 19

"...there is no such a thing as 'standard approach'...Policy options and recommendations must be country specific and must be adapted to the local economic, social and cultural environment" GTD, 2008  To ensure sustainable economic development policy makers must design appropriate policy supported by law, i.e. appropriate Mining Law and Policy  Address governance problems and capacity constraints first, which is critical for avoiding the resource curse  Aim for sustainable growth and economic development  Aim for optimal development of mineral resources FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 20

Address governance problems and capacity constraints first  Without political will and leadership by example good governance is a myth  Establish quality government institutions  The national strategy must set the basis for optimal resource development "Its [Agenda 21] successful implementation is first and foremost the responsibility of Governments. National strategies, plans, policies and processes are crucial in achieving this." - Preamble to Agenda 21 FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 21

Aim for sustainable growth and economic development  Mineral revenue management provides finance for development  Review fiscal policy for mining sector  Invest and reinvest proceeds for the future  Use resource revenues wisely (Consider stabilization funds)  Implement SD as a national ideology  Link mineral development with economic policy  Contribute to the (national) economic system  Establish distinctive development policy objectives from the national strategy  Promote linkages between mining and other economic sectors  Resource-based industrialization strategy (RISD) "Resource development must be grounded in society" Collier (2009) FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 22

Optimal development of mineral resources  Establish Mineral Policy and Law Frameworks for optimal development  Introduce equitable investment regime (See next slide)  Development and implementation of Mineral Laws and Model Agreements  Compile statistics/Information to understand and market the minerals sector  Efficient and clear system of rights and property titles  Implement clear licensing/production sharing/auctioning/COW regime  Provide for measurement/reporting tools  Regulate and monitor the sector  Manage local impact of mining  Agreements must enforce optimal mining  Enforce duties of the mining industry  Develop mine rehabilitation and closure provisions  Agenda 21 Instruments should be adapted for local conditions  Developing mineral policies to address country issues  Integrate environment and development issues in decision-making  Ensure public access to relevant information and Enforce compliance with the Law and Policy framework Considering Africa's potential for discovering more deposits, it is critical to get the discovery process right FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 23

 Development of mineral policies according to sustainable development principles and unique country issues  Reserve mineral ownership in public (Define level of state ownership)  Prevent mineral resources in the ground from becoming dormant assets  Stimulate/promote mineral development (Use-it-or-lose-it!)  Provide for compensation in the event of expropriation  Set corporate structure requirements  Level of foreign ownership  Level of national employment  Link concessions/agreements/licenses to national objectives  Sustain the benefits of mining after resource depletion  Reduce the cost of mining to society  CSR requirements “The State, or the lower governments, have inherent sovereign claim to all the minerals in their jurisdictions" Musselli et al, 2009 FT Cawood UNIDO conference in Ghana 14 – 15 March 2011 Page 24

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