Mining Industry: Who Really Benefits?, Study notes of Auditing

Download Mining Industry: Who Really Benefits? and more Study notes Auditing in PDF only on Docsity! WHO BENEFITS FROM MINING? Over the last few years, the tide of resource nationalism has risen globally with countries from Africa to Australia, Brazil, Canada, Chile and India considering options to increase state interventions in the mining sector. But nowhere was a debate on the desired level of state participation in mining as high-profile, emotionally charged, divisive and potentially damaging as in South Africa. Although ultimately settled against nationalisation, it has cost the country a sharp drop in attractiveness as mining jurisdiction (from 49 in 2008/2009 to 64 in 2012/2013, as measured by Fraser Institute policy potential index) and billions of dollars in deferred and / or abandoned investment. And the negative sentiment still prevails, as illustrated by the words of an exploration company Vice-President: “Both South Africa and Zimbabwe are driving social experiments not driven by logic and economy, but by ideology. In the absence of reason, primary industries become the cash cows to fund the un-fundable. The rise of oligarchs in both countries evidences decline” (Fraser Institute Annual Survey of Mining Companies 2012/2013). However, despite the current macro-economic uncertainty, governments around the world are still taking, or are planning to take, ever larger shares of mining profits. Whilst straightforward nationalisation is no longer on the agenda of governments serious about economic growth, it has been replaced by a raft of interventionist measures in both emerging and well-established mining jurisdictions. These measures include: limiting foreign ownership, mandatory state share in mining projects, reviewing and auditing of mining rights and contracts, transferring of new exploration rights to state-owned companies, removing tax incentives and tax holidays, changing tax basis (on gross revenue rather than profit), introducing new taxes, royalties and licence fees, restricting mineral exports, declaring some metals and mineral commodities as “strategic” and mandating local beneficiation. In Africa, 24 out of 54 countries rely on relatively few mineral products to generate more than 75% of their export earnings. Yet mining companies on the continent are pervasively treated with suspicion by their host governments. Mining as an industry is too often seen as closed enclave, foreign owned with few linkages to other sectors of economy, not-aligned to local aspirations, eagerly repatriating dividends and leaving behind damaged environment and scarred communities. Mining companies are also often alleged of exaggerating costs and misrepresenting production to pay less tax than is otherwise due. This results in an on-going state effort to “tighten the net” with new regulations and escalating requirements, which may in turn lead to unintended consequences and shrinking, rather than growing, of the mining pie. The size of Namibia’s mining sector is relatively modest by African and world comparisons, but with the world’s fourth largest uranium production, the seventh largest diamond output and a host of smaller mining operations in other commodities, it still directly contributes 8% -10% to country’s GDP. The country’s historically stable and predictable regulatory and fiscal environment has earned Namibia recognition as the third most attractive mining jurisdiction in Africa, behind Botswana and Morocco. Namibia has actually improved its overall ranking from 45th place in 2011/2012 to 30th spot in 2012/2013, which was the largest jump out of all ranked African jurisdiction. It improved its ratings in uncertainty concerning disputed land claims, availability of labour and skills and uncertainty concerning the administration, interpretation or enforcement of existing regulations. Although the survey recognised that in Namibia “mineral resources data is provided at relatively low cost to industry participants. This creates a junior- senior company level playing field thus encouraging investment”. It also noted that: “Black Economic Empowerment (BEE) rules, the uranium moratorium, and moves by the government to change mining law are toxic to new exploration investment” (Fraser Institute Annual Survey of Mining Companies 2012/2013). Clearly, some mining investors were concerned that sustained attractiveness of Namibia as a mining jurisdiction is being put at risk. Without much prior communication or consultation with the mining industry, the Namibian Ministry of Finance announced in 2011 that it was considering a number of new tax measures designed to increase government revenues from mining. Although these were eventually deferred (but not all together retracted) until their potential consequences were better assessed, it caused a serious uncertainty among mining investors. The uncertainty was further escalated early this year when the Ministry of Finance issued a draft new revenue-based tax that proposed differentiated rates of tax on exported minerals. Adding to these mining-targeting resource nationalism measures are concerns about limited value from a state-owned mining company, Epangelo, which was launched in 2009. The Minister of Finance asserts that: “We only want to make sure that we get a fair share from (mineral) value” (Chamber of Mines News, February 2012) – but is the current state-share of mining profit unreasonable? In context of this, let’s examine the question of who benefits from mining simply from the high- level value creation (or destruction) point of view. Each, not only mining, opportunity has an inherent, or “in-situ”, value; which could eventually end up in the pockets of enterprising investors, if not for various concessions necessary to convert it into a commercial value all along the life-cycle of the project. These concessions, at a very high level, could include: R&D capital, investment capital, operating costs (including salaries of employees and procurement from suppliers), time value of money, royalties and taxes, etc. (refer to value graph below). In -s it u o p p o rt u n it y va lu e R&D Capital Investment Capital Operating Cost Taxes & Royalties Time Value of Money R e si d u al v al u e Value Graph