Daye kaba fasken mining ccafrica forum 2014

Maximizing National Benefits in the Mining Sector in Africa September 18, 2014

CCAFRICA CANADA-AFRICA BUSINESS SUMMIT 2014 Toronto

Daye Kaba, Partner dkaba@fasken.com (416) 868-3448

Outline of the Presentation

• Why Africa & mining?

• Canadian Mining Sector in Africa • Mineral Policy in Africa • Concluding remarks

I. Why Africa? • Size of the continent • Huge underexplored mineral potential

True Size of Africa

Africa’s Mineral Wealth & Potential • Africa’s mining potential is huge and remains largely underexplored.

• The continent hosts about 30% of the world’s total mineral reserves and even a higher share of deposits of diamonds, vanadium, manganese, platinum, cobalt and gold.

• “The exploration expenditure per square meter averages 65 US dollars in Canada, Australia and Latin America, whereas the African equivalence remains below 5 US dollars per square kilometre” (South Africa’s Mineral Resources Minister 2012)

Africa’s Mineral Prospectivity – Examples • DRC/Zambia: the DRC and Zambian copper belts are the second largest global reserve of copper (about 1/3 of the Chilean reserve and some of the highest grade copper deposits in the world).

• Botswana produces around 30% of the world’s diamonds by value and is the world’s leader producer of gem-quality diamonds.

• South Africa accounted for nearly 80% of the world production in platinum in 2010.

• Guinea accounts for 30% of the world’s bauxite reserves

III. CanadianMining MiningSector SectorininAfrica Africa II. Canadian • Canada is a global mining giant and a leading player in Africa’s mining sector.

• In 2012, 70% of the equity capital raised globally by the mining industry was raised on the TSX and TSXV. • Of the $10.3 billion in equity raised for mining on the TSX and TSXV, $1.9 billion or 18.5% was for projects in Latin America while another $1.7 billion or 16.5% was for projects in Africa.

• In 2013, approximately 58% of the equity capital raised globally by the mining industry was raised on the TSX and TSXV. • According to Natural Resources Canada, 155 Canadian companies with cumulative “mining assets” totaling $31.6 billion were operating in Africa in 2011.

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http://cidpnsi.ca/blog/portfolio/governing-natural-resources-for-africas-development/

Canadian-owned producing mines in Africa Canadian Mining Companies in Africa (2011/2012)

III. Mining Policy - Objectives • Mineral policy seeks to strike the seemingly unachievable balance between the interests of Government on the one hand and the interest of the investment community.

Mining Policy – Objectives (continued) • Governments want to maximize the returns from the mining sector, while preserving the environment and yet remaining as attractive as possible to investors.

• Investors want to maximize their Internal Rate of Return (IRR) while reducing risks.

• Key elements of recent trends in mineral policy in Africa include the following: • Fiscal regime (comprised of taxes and royalties) • Employment and Capacity Building • Community Development and CSR • Environmental Protection • Local Beneficiation

Fiscal Regime • Mining policy is based on a concessionary system as opposed to a contractual system (as is typically the case in the area of oil and gas). As such, revenue is mostly derived from taxes.

• Fiscal Regimes typically include inter alia the following: • Surface Fees • Income Tax • Royalties • Withholding Taxes • Import and Export Duties • Capital Gains Tax • Value Added Taxes • Government Equity

Fiscal Regime – Key Considerations • One key factor with respect to the fiscal regime is the timing of revenues.

• Governments usually receive income taxes once the mine is producing and the company has recovered its expenditures on the project.

• On the other hand, royalties (assuming that they are value based such as Net Smelter Royalties) are typically payable once commercial production commences. This explains why reforms to fiscal regimes usually entail changes to royalty rates.

• In most countries in Africa, the host government is entitled to a free carried interest (usually 10%) once production commences. This usually enables the country to have a board member at the ProjectCo level.

Recent Trends in Fiscal Regime • Mining Companies are usually concerned about the stability of the fiscal regime over the life of their project.

• The current trend is for countries to carve out certain taxes from the stability (ex: Burkina Faso) or to reduce the allowed time for stability (ex: DRC).

• Tax holidays are being seen less frequently • One of the approaches currently being adopted which seems to address both the concern for stability of mining companies and the ability of countries to take advantage of increases in commodity prices is a sliding scale royalty (royalty rate rises as commodity prices rise). Cote d’Ivoire’s new mining code has adopted this approach for gold.

Employment, Local Procurement and Capacity Building • Governments are looking to their mining sector to create employment, particularly highly skilled employment.

• Governments would like mining companies to: • build capacity and transfer skills to the national population; • Help develop local businesses by sourcing their equipment, materials with local companies.

• From the companies’ perspective, being able to procure reliable services locally and being able to hire a skilled local workforce, reduces expenses thereby increasing IRR. • Laws regarding local procurement and local employment can be more or less onerous depending on the jurisdiction.

• There is an opportunity for a win/win scenario in local procurement and employment.

Community Development and CSR • Increased emphasis on Corporate and Social Responsibility.

• Governments increasingly expect mining companies to be good corporate citizens.

• On the other hand, CSR enables companies to operate with a “social license”.

• Some of the recent trends include setting up local community development plans which are financed by part of the royalties or taxes that would previously go to a central government.

• Trend is positive – however implementation can pose certain challenges in some circumstances.

Environmental Protection • Environmental Protection is a key aspect of mining legislation.

• Environmental protection requirements have grown increasingly stringent.

• Most mining codes require the completion of an Environmental Impact Assessment prior to granting mining licenses.

• One of the trends that we are seeing is the implementation of surety bonds during the mining phase in order to finance rehabilitation and mine closure.

• Adoption of Equator principles

Local Beneficiation • There is a significant impetus to attempt to obtain more out of the value chain of mineral production by promoting local beneficiation. Countries seek to: • lessen the export of primary commodities without any value addition, and • create jobs and drive enhanced revenue creation.

• South Africa has been making a push for local beneficiation.

Currently considering the use of export taxes to promote it.

• The DRC has also been vocal on local beneficiation • Mining companies are concerned that local beneficiation may have a negative effect on the IRR. • Local beneficiation can be a win/win scenario if it makes economic sense. However significant infrastructure (including in respect of energy) is required.

Strengthening of legal system • Historically, lack of secure legal environment cited as an obstacle to foreign direct investment in Africa • On the civil law side, there has been strengthening of legal framework: OHADA (treaty for the harmonization of business laws in Africa) harmonized business laws in 17 countries, which use the same business law in 17 countries and provides for a more reliable dispute resolution mechanism.

• African mining legislation mostly up to international standards • The legal system of African countries has progressed significantly over the past 15 years.

IV. Concluding Remarks • Africa is one of the most geologically prospective regions in the world.

• Even if achieving the perfect balance of all of the stakeholders’ interest may not be achievable, there are several opportunities for win/win partnerships between host governments and mining companies.

• A number of the latest generation of mining legislation are doing more to incorporate more detailed provisions on community development, capacity training, skill transfers and environmental protection.

• As well, broader policy framework, such as the African Mining Vision (adopted by the African Union in 2009) or the Extractive Industry Transparency Initiative (EITI) being implemented.

Fasken Martineau: Leader in Mining & in Africa • Fasken Martineau DuMoulin LLP is a leading law firm in mining law.

• Fasken Martineau DuMoulin LLP, only Canadian law firm with offices located in Africa, notably in Johannesburg, South Africa.

• Fasken also services clients on transactions in Africa out of our London, Paris and Toronto offices.

• Fasken has significant expertise and experience on mining transactions in Africa.

• Please visit us at: www.fasken.com • For further questions, please contact: Daye Kaba dkaba@fasken.com