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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
PERCEPTIONS: What
does industry think?
Is perception reality? Evaluating the fiscal
attractiveness of international jurisdictions
for gold mining investment
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 3 of 24
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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
Specifically about policy and tax
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
So is this the answer?
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
Burkina Faso Chile
&
Slide 6 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
ACTUALITY: What does
the model say?
Is perception reality? Evaluating the fiscal
attractiveness of international jurisdictions
for gold mining investment
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 7 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 8 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
…and model for each jurisdiction
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
So is this the answer instead?
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
South Africa Chile
&
Slide 10 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
COMPARISON:
Perception vs actuality
Is perception reality? Evaluating the fiscal
attractiveness of international jurisdictions
for gold mining investment
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 11 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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.
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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.
• Countries which plot substantially below the
‘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.
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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)
Average Effective Tax Rate (AETR)
Expected Trend Line
No Real Trend Line
SA
Br
Ch
BF
CoMa
Pe
Ta
Gu
Gh
Slide 13 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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.
• Countries which plot substantially below the
‘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.
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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)
Average Effective Tax Rate (AETR)
Potential Trend Line
SA Br
ChBF
Co
MaPe
Ta
Gu
Gh
Outliers?
Slide 14 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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…
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
So is this the answer actually this?
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
South Africa Brazil
&
Slide 16 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
Is there an easier method?
Is perception reality? Evaluating the fiscal
attractiveness of international jurisdictions
for gold mining investment
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 17 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 18 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
No single rate predicts overall burden
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
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
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
IN SUMMARY: Beware
initial perceptions
Is perception reality? Evaluating the fiscal
attractiveness of international jurisdictions
for gold mining investment
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 20 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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?
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 21 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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?
24 August 2014AusIMM International Mine Management Conference, Brisbane, Australia
i.e. beware these limited findings!
Slide 22 of 24
Is Perception Reality? Evaluating the fiscal attractiveness of international jurisdictions for gold mining investment
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§ion=Strictly+Boardroom§ionsource=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§ion=Strictly+Boardroom§ionsource=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>.
24 August 2014AusIMM International Mine Management Conference, Brisbane, AustraliaSlide 23 of 24
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