The Fraser Institute Annual Survey of Mining Companies About the Investment Attractiveness of Mining

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The Fraser Institute Annual Survey of Mining
CompaniesAbout the Investment Attractiveness of
Mining Jurisdictions

• Presented by
• Dr. Michael A. Walker
• Executive Director

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The Fraser Institute Mining Survey

• Providing Valuable information to the mining
  industry and policy makers since 1997.

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Engineering Mining Journal 

• It isn't as prestigious as the Miss America
  or Miss Universe pageants, but in the mining
  world, it's about the next best thing.

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The Survey

• Sent to 1,121 exploration, development, and
  mining consulting companies
• Responses from 259 companies (23 response rate)
• Representing 575 million in exploration spending
  in 2004 or 15 of total global spending according
  to Metals Economics Group
• Representing 798 million of expected spending in
  2005

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The origins and raison detre of the survey

• The Stockholm syndrome and the Mining Industry
• British Columbias sad history
• An instrument to provide the hostages anonymity
  and the captors real information

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Why Survey Mining Companies?

• Its the only way to get reliable information
• Perception of potential investors is the reality
• Attitude of regulators often more important than
  regulations
• Survey generates information on a key problem
  facing the mining industry Uncertainty
• Key because of lag between investment and
  production
• Provides potential investors valuable insights
  not available elsewhere.
• Creates communication and accountability for
  governments

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Two components of the Mining Exploration and
Development Investment Decision

• The Geological endowment in the target
  jurisdiction
• The Policy endowment including the laws and the
  process of their implementation
• The Mining Survey asks questions about both

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Geological Endowment

• Mineral potential assuming NO land use
  restrictions or regulations, further assuming
  industry best practice standards

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Policy Endowment Indicators we ask mining
companies, are you deterred from investing
because of .

• Uncertainty concerning protected areas
• Infrastructure
• Socioeconomic agreements
• Political stability
• Labour regulation
• Geological database

• Uncertainty concerning existing regulations
• Environmental regulations
• Regulatory duplication and inconsistencies
• Taxation regime
• Uncertainty concerning native land claims

New this year Security
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Compilation of ResultsThree Overview Indexes

• Policy Potential Index
• Examines attractiveness of overall policy climate
• Mineral Potential Index
• Looks at mineral potential under best practices
  standards
• Composite Index
• Combines policy and mineral index, based on the
  weights the respondents say they would use 40
  for policy and 60 for mineral potential

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But FirstAn overview of the Resultsfor
Specific Policy Areas through two sets of charts
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The first set of charts shows Chiles relative
rank compared to all other jurisdictions
For each factor, per cent of respondents who
say Factor is a strong deterrent for
investment Would not invest due to this
factor Chile identified by arrow
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Uncertainty concerning the administration,
interpretation and enforcement of existing
regulations
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The second set of charts shows a comparison of
selected jurisdictions(Combines answers for
strong deterrent and would not invest)

• Pacific jurisdictions in Light Green
• Russia, India and China in white
• South America in Grey
• Chile in red and/or identified by arrow
• North America in Orange
• Africa in Light Blue

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Environmental regulations
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Regulatory duplication and inconsistency
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Taxation regime
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Uncertainty concerning native land claims
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Uncertainty over which areas will be protected as
wilderness or parks
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Quality of infrastructure
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Socioeconomic agreements
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Political stability
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Labour regulations/Employment agreements
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Quality of geological database
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Security situation
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The Policy Attractiveness Index

• A simple equally-weighted composite of all policy
  areas

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Policy Potential Attractiveness
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Now, to turn to Mineral Potential
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Best Practices" Mineral Potential

• Asks respondents to rate the mineral
  attractiveness of each jurisdiction assuming no
  land use restrictions in place and assuming
  industry Best Practices"

Per cent of respondents who say Encourages
investment Not a deterrent for investment
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Best Practices" Mineral Potential Assuming no
land use restrictions in place and assuming
industry Best Practices"
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Composite Policy/Mineral Potential Index for
Insight on Investment attractiveness

• The policy potential component is the composite
  policy potential index
• The mineral potential component is the best
  practices mineral potential
• The survey asks how the industry would weight the
  two components
• The components are weighted according to this
  answer 60 mineral potential 40 policy
  potential

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Policy/Mineral Potential
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We ask those who complete the survey to give
their own direct assessment of the central
questionDoes the mineral potential and the
current policy regime in the jurisdiction
encourage investment in mining?Chile has
similar rankings in both this index and the
Policy/Mineral composite index
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Mineral PotentialAssuming current
regulations/land use restrictions
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Does Chile live up to its potential?

• How does Chiles actual overall performance
  relate to what would be Chiles performance if
  industry best practices, and not current
  regulation, were the driver of performance?

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Room to ImproveDifference between Best
Practices and Current Regime
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Chile looks good on the Room to Improve index
but Trouble in Latin America???Trouble in
Chile???
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Trouble in Latin America?Policy Potential scores
over timeand a downward slide
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Evolution of Chiles Policy ScoreA downturn or
a blip?
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Chiles Policy History

• The following chart compares
• Chiles score in 1998/99, the first year Chile
  appeared
• with its score in 2003/04, reflecting strong
  improvements and the high score it achieved in
  2000/01 and maintained
• And its most recent score, reflecting a downturn

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Trouble in Chile? Historical policy scores
Forward to the Past? Per Cent who say each
factor deters investment
A mark below the line indicates that no
respondents considered this a negative factor
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Is the slide in the Mining Survey scores a
harbinger of things to come for Latin America?
For Chile? The Fraser Institutes Economic
Freedom of the World is a broad measure. It
shows a leveling off of freedom in Latin America
and a reduction in Chile.
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Evolution of Economic Freedom
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What does the future hold?

• Is Chiles decline in the Mining Survey a blip or
  a trend?
• Was the royalty battle a aberration or a sign of
  anti-market things to come?
• Is Chile vulnerable to succumbing to the Latin
  American disease?
• Or will Chile maintain its successful policies?

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A footnote on the Royalty Issue

• Mining survey reflects Chiles REPUTATION
• A good reputation is difficult to acquire but
  easy to lose Ex post Taxes are bad for your
  reputation
• The first migration of mining from British
  Columbia was caused by the imposition of an ex
  post royalty
• The second was caused by changing the rules of
  the game after people had committed their
  investment dollars
• Today British Columbia has a bad reputation in
  spite of recent favourable changes to mining laws

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Lessons about Royalties from Canada

• Dont change the rules for existing mines it
  breaks the implicit contract that attracted the
  investment to Chile in the first place
• Dont impose a fixed royalty that will convert
  large tracts of land into waste and maroon
  otherwise extractable minerals
• Dont calculate the royalty on the basis of
  market price minus costs of extraction that will
  ensure that costs are not controlled especially
  labour costs
• Do calculate the royalty on the basis of total
  profitability this will cause least distortion

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But then the issue becomes crystal clear..

• If you impose the only sort of royalty that makes
  any sense it will be a profits tax
• But why would it make sense to levy a special
  profits tax on your most successful industry?
• Obviously it does not make sense.

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The real questions raised by the royalty
discussion

• Do you want a bigger public sector?
• If you do how should it be financed?
• Does it make sense to risk your reputation as a
  predictable policy environment by raising taxes
  on mining - Chiles world class and leading
  sector?
• Does it make sense to attempt to raise taxes on
  your future capital investment - the most mobile
  component of Chiles economy?
• If there is broad-based public support for a
  larger public sector, why not raise broadly based
  taxes such as consumption taxes and personal
  income taxes.

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Perception versus Reality

• Technically the new mining tax respects the
  historical commitments made
• Therefore it shouldnt cause Chile to get a
  reputation of a promise breaker..however!
• This presumes that everybody understands the
  regime.but often opinions are based on lack of
  information
• In Mining as in many other areas it is the
  Perception rather than the Reality that matters

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Above all

• Dont forget that the great influx of Canadian
  capital to your mining sector was due to Canadian
  policy mistakesdont repeat them
• Dont forget that there are other capital hungry
  jurisdictions out there that would love to lure
  away the next wave of Chilean mining investment
• Dont forget the great effort you have taken to
  acquire the best reputation in international
  mining
• Dont forget how far you have come from the
  destructive politics and policy of the past

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The EndPhew!Thank you for the
OpportunityThe Fraser Institute Annual Survey
of Mining Companies 2004/2005

• Released January 2005
• Available complete and uncut at
• www.fraserinstitute.ca

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Senior Exploration Investment in 2002 (total
US480.2 million)
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Junior Exploration Investment in 2002 (total
US162.2 million)