Resource nationalism update - EY

September 2014

Mining & Metals

EY key contact

Resource nationalism update

Mineral-rich countries are ensuring they are extracting sufficient economic rent for the rights of mining companies to exploit their resources. Each month, countries announce increases, or intended increases, to resource revenues via taxes, royalties, beneficiation or state ownership. Yet at the same time, we are now increasingly seeing countries change their laws to encourage mining investment. EY’s mining and metals-focused monthly update summarizes these legislative and taxation changes by country, to help you better manage the implications of resource nationalism for your business.

Andy Miller Global Mining & Metals Tax Leader +1 314 290 1205 [email protected]

Recent developments by type of resource nationalism Increases in taxes and royalties Indonesia

Ukraine

Restriction of imports and exports This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization accepts any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, you should seek appropriate advice.

China

India

Indonesia

Philippines

Retreating resource nationalism — return focus to investment attraction Australia

Brazil

India

Iran

Zambia Mining reform Indonesia

Mali

Papua New Guinea

Commodities impacted Aluminium — Brazil

Bauxite — Indonesia

Coal — Australia, China

Gold — India

Iron ore — Australia, India, Iran, Ukraine

Nickel — Indonesia

Resource nationalism by country Australia Australia's upper house has voted to repeal a 30% tax on coal and iron ore mining profits above AUD75m per year (USD69m). The Minerals Resource Rent Tax (MRRT) was passed in late 2011 by the previous Labor Government. Since coming into effect in July 2012, the MRRT had failed to reach all revenueraising targets. The repeal legislation is now in the House of Representatives, where it is expected to pass.1 China China is expected to soon put curbs on shipments of low-quality coal, responding to calls for support from the country's miners. The China National Coal Association has called for the Government to halt imports of low-quality coal with ash and sulfur content exceeding 15% and 0.6%, respectively. The National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) have agreed on the proposal; however, it still awaits approval from China's State Council to be written as law. The Association is targeting a 10% cut of imports by year-end in a bid to restore balance to the domestic market. If the regulation is implemented, Australian and South African coal with a heating value of 5,500 kcal per kg will be worst hit, since their ash content is 23%–25% and they contain sulfur of 0.8%–1.0%. In 2013, China imported about 54mt of thermal coal from Australia and another 13mt from South Africa, which would not meet the proposed restrictions.2 Brazil Brazil has introduced a temporary import tariff exemption on primary aluminium. The move, from Camex, the country's foreign trade council, is hoped to reverse a trend of falling output. The change will allow 300,000t of unwrought aluminium to be exempt from import tax for a 12-month period. 3 India Increased royalties for a range of commodities have been approved by the Indian cabinet. The revised rates will take effect after the federal government notifies the changes. The increases include: ► ► ► ► ► ► ► ►

Iron ore to 15% of sales from 10% Bauxite 0.6% from 0.5% Copper to 4.62% from 4.2% Zinc ore to 9.5% of the value of the metal content from 8% Zinc concentrates 10% from 8.4% Lead from 1.7% to 14.5% Phosphates to 12.5% from 11% Manganese from 4.2% to 5%

The changes are substantial enough that producers are likely to be forced to pass on part of the increases to consumers. The additional royalty on iron ore will lead to a cost increase of INR250/t (USD4/t) for steelmakers for example.4 The new Modi Government has also said it will make amendments to the Mines and Minerals Development and Regulation (MMDR) Act.5 Separately, India does not plan to restrict exports of iron ore despite curbs on illegal mining. The Indian Government claims there is still enough of the raw material for domestic steelmakers. However, court orders against unlawful mining over the past four years cut iron ore output by a quarter, to 152mt in the last fiscal year. Iron ore output in the year ended 31 March 2014 was 48mt more than local consumption; however, exports were just 14.41mt as a duty of 30% and high freight rates made Indian ore uncompetitive.6 Indonesia In Indonesia, Government officials have said the country has no plans to wind back the exports of unprocessed nickel ore and bauxite. While some companies producing partially processed minerals, such as copper concentrate, have resumed exports, the Government has said the same rationale does not apply to unprocessed exports of nickel ore and bauxite. Indonesia’s Chief Economic Minister, Chairul Tanjung, has said, "Nickel is different because if you are smelting in Indonesia the added value is much higher than copper … because of that it's a separate issue." Additionally, the Government lacks the power to intervene on nickel and bauxite as the ban stemmed from a law passed by the Parliament in 2009. The bans have seen massive declines in export revenue and significant job losses as mines have shut. However, despite this, about USD8b are now being spent to build three alumina refineries and two ferronickel projects.7 Iran Iran will delay the introduction of a 10% tax on unprocessed iron ore exports until March next year because of a struggling iron ore market that has seen many private mines in the country close. The tax, which was to be introduced this year, was planned to gradually increase the export duty to 20% according to sources. Iran already imposes a 40% tax on exports of iron ore concentrates and a 30% duty on pellets based on free-onboard prices. The 10% tax on iron ore fines and lump was aimed at supporting the country’s emerging domestic steel industry.8

4 “India approves increased royalty rates on minerals,” Bloomberg, 22 August 2014; “India hikes mining royalty,” Mineweb.com, 25 August 2014. 5 “India dangles prospect of mining policy changes,” Mineweb.com, 26 August 2014.

1

“Australian lawmakers vote to scrap 2011 tax on coal, iron ore miners,” Platts, 2 September 2014.

6

2

“China readying coal import curbs to help sickly miners-sources,” Reuters News, 3 September 2014.

7

3

8

"Brazil withdraws import tariff on 300,000 tonnes of primary aluminum," Metal Bulletin, 7 August 2014.

"India will not restrict iron ore exports – minister," Reuter News, 21 July 2014. “REFILE-Indonesia ban on nickel ore, bauxite exports to stay – officials,” Reuters News, 11 August 2014.

"Iran to delay iron ore export tax to 2015 due to weak market – source," Reuters News, 20 August 2014.

Resource nationalism update September 2014 -

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Mali

Zambia

Mali has cancelled 130 mining permits, about 30% of existing permits, in a move to clean up the sector. The new Government said that it will carry out a complete inventory of existing mining contracts, titles and licenses and was ready to renegotiate permits that were not in the country's interest. The cancelled licenses include a range of permits but do not involve mines already in production. The cancelled permits include those held by Malians as well as foreigners and targeted those where no development has taken place. The mines ministry said the cancellation would effectively unfreeze those permits and allow the Government to issue them to other investors with the requisite technical and financial ability to pursue explorations.9

From 8 September 2014, Zambia will waive a rule requiring mining companies and other exporters to produce import certificates from destination countries in order to claim tax refunds. The requirement is being suspended as it is impractical. The Government planned to negotiate a staggered repayment of USD600m in value-added tax (VAT) paid by copper mining companies and other exporters and withheld because of failure to produce import certificates. The Zambia Revenue Authority (ZRA) said VAT withheld before the waiver came into effect could only be refunded when the import certificates had been produced. "ZRA is considerate of stakeholder concerns in the administration of taxes. Accordingly, ZRA has amended these rules," it said.

Papua New Guinea In Papua New Guinea, the Autonomous Bougainville Government (ABG) passed a new mining law on 8 August 2014. The law change vests the ownership of subsurface minerals to the customary owners of the land, rather than the state. The new law would allow landowners to veto mining exploration licenses. However, the law also requires all negotiations to take place through the ABG. Bougainville is home to the Panguna copper mine, formerly operated by Rio Tinto, which was shut in 1989 because of a civil conflict.10 Philippines A Philippine senator has filed a bill urging a halt to the export of unprocessed mineral ores, similar to a ban introduced by Indonesia. The new bill would require domestic processing of all minerals extracted in the country prior to export if passed into law. As in Indonesia, it may require nickel and other miners to build smelters in country to allow processing before shipment. The Philippines currently has two processing plants for nickel, both owned by Nickel Asia Corp, two for gold and one for copper. "This measure seeks to generate more domestic income, attract more investment, and lead to more jobs and livelihood for the Filipino people," the bill said in its explanatory note.11 Ukraine In the Ukraine, a royalty has been imposed on iron ore extraction, but it is unlikely to impact the country’s exports. On 1 August 2014, royalties on iron ore extraction were increased from 5% to a rate of 8%, applicable until 1 January 2015. The increase is to finance the Ukrainian military's operations.12

9 "Mali cancels 130 mining permits after sector audit," Reuters News, 31 July 2014. 10

"Mining law in PNG's Bougainville aimed at ensuring local government control of new projects," IHS Global Insight Daily Analysis, 11 August 2014. 11 “Philippines Senator files bill to ban mineral ore exports,” Mining Weekly, 3 September 2014. 12

“Increased royalties on iron ore mining in Ukraine unlikely to hurt exports,” SNL Financial, 6 August 2014.

Resource nationalism update September 2014 -

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EY’s Global Mining & Metals Center With a volatile outlook for mining and metals, the global sector is focused on cost optimization and productivity improvement, while poised for value-based growth opportunities as they arise. The sector also faces the increased challenges of changing expectations in the maintenance of its social license to operate, skills shortages, effective execution of capital projects and elevated government revenue expectations. EY’s Global Mining & Metals Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services to the mining and metals sector. The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately, it enables us to help you meet your goals and compete more effectively.

Area contacts Global Mining & Metals Leader Mike Elliott Tel: + 61 2 9248 4588 [email protected]

United States Andy Miller Tel: + 1 314 290 1205 [email protected]

Oceania Scott Grimley Tel: + 61 3 9655 2509 [email protected]

Canada Bruce Sprague Tel: + 1 604 891 8415 [email protected]

China and Mongolia Peter Markey Tel: + 86 21 2228 2616 [email protected]

Brazil Carlos Assis Tel: + 55 21 3263 7212 [email protected]

Japan Andrew Cowell Tel: + 81 3 3503 3435 [email protected]

Service line contacts

Africa Wickus Botha Tel: + 27 11 772 3386 [email protected] Commonwealth of Independent States Evgeni Khrustalev Tel: + 7 495 648 9624 [email protected] France and Luxemburg Christian Mion Tel: + 33 1 46 93 65 47 [email protected] India Anjani Agrawal Tel: + 91 982 061 4141 [email protected] United Kingdom and Ireland Lee Downham Tel: + 44 20 7951 2178 [email protected]

Global Advisory Leader Paul Mitchell Tel: + 61 2 9248 5110 [email protected] Global Assurance Leader Alexei Ivanov Tel: + 495 228 3661 [email protected] Global IFRS Leader Tracey Waring Tel: + 61 3 9288 8638 [email protected] Global Tax Leader Andy Miller Tel: + 1 314 290 1205 [email protected] Global Transactions Leader Lee Downham Tel: + 44 20 7951 2178 [email protected]

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 EYGM Limited. All Rights Reserved. EYG no. ERO181 CSG/GSC2014/1434398 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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