Economic analysis to support royalty and regulatory reform · US exports of coal hit record highs in 2012: ... Colombia’s competitiveness for new mining investment ... a separate

Economic analysis to support royalty and regulatory reform

Andrew Phillips

Americas Mining & Metals Forum – September 2013

Page 2 Estimating the economic and fiscal contributions of

mining in the US and abroad

Agenda

► Economic contributions of coal exports and

mining in the US

► International comparative tax analysis to support

royalty reform discussions

Page 3

Economic contribution of coal exports and the US mining industry

Page 4

Why conduct an economic impact study?

► Make the case for legislative action, inform

policymakers of potential consequences of action

or inaction

► Educate regulators

► Demonstrate payback from offering incentives

► Build community support for projects



EY study on coal exports: background and context

► National Mining Association (NMA) commissioned

EY/QUEST to estimate the economic contributions of US

coal exports

► Current trends in the US coal mining sector:

► Recent reduction in domestic coal consumption

► Foreign demand for coal as a cost-effective energy source--Asia

► US exports of coal hit record highs in 2012:

► US producers exported 126m short tons of coal

► Export growth limited by export capacity constraints – particularly from

the West Coast

► Resistance to proposed new export terminals by communities along

rail lines and near terminals



US coal production and exports, 1995–2012

Source: EIA, Annual Energy Outlook 2012

9% 9%

8%

7%

5% 5%

4%

4% 4%

4% 4% 4%

5%

7%

5%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

14%

900

950

1,000

1,050

1,100

1,150

1,200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Pe

rce

nta

ge

of to

tal p

rod

uctio

n

US

pro

du

ctio

n (

mill

ion

sh

ort

to

ns)

Coal exports as % of US production US coal production



US coal production and demand

► Domestic coal demand fell significantly over the last decade

► US domestic coal consumption fell 11% in 2012

► 21% decline since most recent peak in 2007

► Coal’s share of domestic electricity generation has fallen to 40% from 50%

over 10 years, mostly due to a shift toward low cost natural gas

► Global demand remains robust, particularly in East Asia

► Largest reserves of coal are in Powder River Basin (Montana and

Wyoming)

► The vast majority (89%) of US coal is exported through the Gulf of

Mexico or ports along the East Coast.

► Transportation of coal from the Power River Basin to the East Coast is

costly and inefficient, limiting the amount of exports from the region

► With largest demand in Asian markets, renewed interest in export

terminals in the Pacific Northwest



New export terminals proposed in the Pacific Northwest

► In 2010, coal companies began announcing plans for coal export

terminals on the West Coast to ship coal to growing markets in Asia.

► Currently active proposals

► Port of Morrow – Boardman, OR

► Millennium Bulk Terminals – Longview, WA

► Gateway Pacific Terminal – Cherry Point, Bellingham, WA

► Withdrawn proposals

► Port of Coos Bay – Coos Bay, OR

► Port of St. Helens – St. Helens, OR

► Grays Harbor Export Terminal – Grays Harbor, WA

► Proposed export terminals have encountered resistance from

environmental groups

► Environmental impact of increased rail traffic

► Drop in global price of coal will make renewables relatively more

expensive, reducing their uptake



Locations of proposed coal export terminals

Coos Bay

Boardman

St. Helens

Longview

Bellingham

Grays Harbor

Powder River Basin

Withdrawn Proposal

Active Proposal

Columbia River

Railways



Estimating economic impacts

► Direct effect. Coal mines, transportation providers, ports

► Indirect effect. Supplier-related economic impacts

► Induced effect. Consumption-related economic impacts



Economic impact of US coal exports

Direct

Indirect

& induced Total

Employment

Export coal production 25,130 63,290 88,420

Downstream transportation 8,850 31,070 39,920

Port operations 5,370 7,560 12,930

Total employment 39,350 101,920 141,270

Labor income ($millions) $3,781 $5,494 $9,275

Gross value added

($millions) $7,200 $9,366 $16,566



Which states benefit from US coal exports?

20,000+

10,000-19,999

1,000-9,999

Less than 1,000

Total direct, indirect and induced job contribution of US coal exports



Which sectors benefit from US coal exports?

Distribution of estimated US employment contribution from coal exports, by major sector

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Induced

Indirect

Direct

35,100

30,500

19,500 18,400

16,500

12,300

4,800

2,200



How does coal mining compare with other US mining sectors?

$268

$321

$444

$656 $610

$235

$35 $83 $90 $81 $92

$57

$0

$100

$200

$300

$400

$500

$600

$700

Oil & naturalgas

extraction

Coal Iron ore Cu, Ni, Pb &Zn

Au, Ag Nonmetallicminerals

Output per worker

Average wages per worker

Output per work and average wage, by industry ($000)



US mining industry economic multipliers

3.2 3.5

4.5 4.5

4.0

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Oil &natural gasextraction

Coal Iron ore Cu, Ni, Pb& Zn

Au, Ag Nonmetallicminerals

Employment

Income

Output



Overall economic contribution of US mining industry

Page 17

Analysis of international competiveness for mining investment



Why should policy makers care about effective tax rates on new investment?

► Policy makers face two competing objectives:

► Generate revenue to fund public services

► Create a competitive climate for mobile business capital

investment

► Is the mining industry mobile?

► Mineral deposits are fixed (immobile)

► Most mineral deposits are not easily extracted – they require

significant investment and have associated risks

► Most mines are operated by multinational companies with the

ability to shift investment priorities —seeking the highest after-tax

rate of return

► To capture economic benefits of mining, countries need to offer

competitive tax regimes



International comparative tax analysis

► Comparative tax studies of total “government take” to

estimate effective tax rates in the country of interest and

comparison countries

► Example: Colombia’s Large Scale Mining Association

► EY analyzed the tax burden faced by hypothetical gold and coal

mining investments across nine different countries

► EY created models on the impact of legislative proposals on the

competiveness of each country’s tax system for new mining

investment

► Effective tax rates were calculated as total estimated tax and

royalty payments (government take) as a percentage of the mine’s

book income in each country



How are effective tax rates calculated?

Tax laws are

current law as of

Oct 2011

Effective rate of

government take =

PV(taxes)/

PV(income)

Create a core

financial profile for a

NEW MINE

Holding the

financial profile

constant, apply the

tax laws and mining

incentives in each

country

Model

investment and

operations over

30 years

Estimate the 30-

year net present

value of taxes

and royalties for

each country

Estimate the net

present value of net

income



How is the effective “government take” rate calculated?

PV (Sum of taxes and fees*

paid by the mine)

PV (Net pre-tax income

of the mine)

Effective rate of

government take

*Included taxes and fees:

► Income tax

► Royalties

► Taxes on equity/net worth

► Payroll taxes

► Import taxes

► Value-added taxes

► Other significant taxes/fees



Which countries are most competitive for coal mining?

0%

10%

20%

30%

40%

50%

60%

70%

80%

Argentina Australia Brazil Canada Chile Colombia Indonesia Peru † South Africa

Other included taxes & fees*

Payroll taxes

Mineral royalties

Corporate income tax rate

Note: effective tax rates calculated for an open pit coal mine using long run consensus forecast price.

*Included taxes and fees: customs duties, occupation fees, equity tax, municipal tax (Chile), explosives tax (Colombia), and profit sharing

(Peru). † Assumes that the mine is subject to a stabilization agreement.



Which countries are most competitive for gold mining?

0%

10%

20%

30%

40%

50%

60%

70%

Argentina Australia Brazil Canada Chile Colombia Indonesia Peru † South Africa

Other included taxes & fees*

Payroll taxes

Mineral royalties

Corporate income tax rate

Note: effective tax rates calculated for an open pit gold mine using long run consensus forecast price.

*Included taxes and fees: customs duties, occupation fees, equity tax, municipal tax (Chile), explosives tax (Colombia), and profit sharing

(Peru). † Assumes that the mine is subject to a stabilization agreement.



What are the implications of royalty structure during various stages of the price cycle?

0%

2%

4%

6%

8%

10%

12%

14%

Chile Peru S. Africa Canada(Ontario)

Indonesia(4%)

Australia(Western)

Effective royalty rates on sales at variable operating margins

5% Operating Margin 10% Operating Margin 20% Operating Margin 30% Operating Margin

50% Operating Margin 70% Operating Margin 90% Operating Margin



What tax system features are competitive for the mining industry?

► General tax system features:

► Low statutory rates

► Accelerated depreciation

► Zero-rate export for value-added taxes with refundability

► Mining-specific tax system features

► Stabilization agreements

► Exploration incentives

► Deduction for reclamation costs

► Income-based royalty structure to share price risk with govt



SMGE comparative mining tax study outcomes

► Used in mining tax reform discussions with public officials

and stakeholders to illustrate the potential impact on

Colombia’s competitiveness for new mining investment

► Presented to the Ministry of Mining

► Presented to the press during a press conference

► Discussed with the Minister of Finance and revenue service

► Helped shape discussions of royalty and tax reform in Columbia

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Documents

Economic analysis to support royalty and regulatory reform · US exports of coal hit record highs in 2012: ... Colombia’s competitiveness for new mining investment ... a separate