mining in the americas

Mining in the Americas

www.pwc.com/ca/mining

ii Mining in the Americas

Contents

Colombia 2

Mexico 6

Chile 10

Brazil 14

United States 18

Peru 22

Argentina 26

Canada 30

PwC Mining Centre of Excellence 33

The Fraser Institute Annual Survey of Mining Companies: 2011–12 was sent to approximately 5,000 exploration, development, and other mining-related companies around the world. Conducted from October 4 to December 23, 2011, represents 802 responses. The survey has become a valuable guide to miners around the world for political and policy risk. It provides miners with the considered advice of 800 miners from around the world.

Fred McMahonVice President Research, International, and co-author of the Fraser Institute Annual Survey of Mining companies

The Fraser Institute

Mining in the Americas 1

Welcome to mining in the Americas

Strong demand for precious and base metals has driven growth, expansion, and exploration for minerals and metals in North and South American mining industries. It’s an exciting and opportune time for investment in the mining sector. Mining companies will have to address several opportunities and challenges including – resource nationalism, rising costs, access to capital and the sociopolitical environment.

In this publication, we provide an overview of the business environment, market opportunities, environmental indicators, and local economies in Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru, and the United States of America. We worked with the Fraser Institute, which provided results from its annual survey of mining companies about policy risk, as well as the research and consulting firm Eurasia Group to provide an assessment of political risk for the countries in this publication.

Each country profile consists of:

• an overall industry outlook including main economic indicators and mining resource potential,

• insight on what certain laws and regulations to be aware of when navigating the legal and tax environment,

• a review of various mining factors, mainly related to infrastructure, workforce, energy, and sustainability, and

• a discussion of the importance of community and environment engagement and investment in a corporate responsibility approach

I hope you enjoy reading the publication and I encourage you to reach out to the mining leader in your territory to find out more about mining in the Americas.

John GravellePartner, Mining Industry Leader for the Americas, PwC

2 Mining in the Americas

Colombia

The country has been producing gold for centuries and also produces other commodities such as coal, nickel and copper. Exploration has grown tremendously in recent years (2001 to 2010) areas with mining titles boomed from 2.8 million acres to 21 million acres. Between April and June 2011, flows of foreign direct investment in Colombia reached US$3.4 billion, of which US$2.4 billion was related to the mining and energy sector: $US2.8 billion from oil and US$911 million from mines and quarries.1 Some of the major investors and producers in mining in Colombia are Cerrejon, Drummond, Glencore and Cerro Matoso.

The Colombian mining industry accounted for US$4.8 million2 or 4.9% of the GDP growth and represented 23.7% of the country’s exports.3 Non-metallic minerals represent 24.4% of the value of mining gross domestic product (GDP), growing 6.1% annually over the past 10 years.

Considering that Colombia does not have a solid institution that promotes and supports the mining industry, one of the main challenges it’s facing is with regard to the creation of the National Agency for Minerals (ANM) that will start in 2012. The agency will have major functions such as recruitment, evaluation and technical studies, performing audits and collections, transforming the geological services to enhance and improve exploration and ensuring the creation of sustainable mining practices. The formation of the ANM is intended to increase the mining sector’s growth rate to 9.5% from 3.3% and increase its share of GDP. This would generate US$12 billion in royalties by 2020.

Navigating the legal and tax environment Put into effect in 2001, Colombia’s Mining Code encourages sustainable exploration and mining, inherently enhancing productivity and competitiveness. The code governs the ownership of mining titles and establishes that the same rights are granted to national and foreign investors. The set of rules that deals with mining concessions and contracts in Colombia allows great flexibility in terms of transferability of mining properties; the owners have total independence and autonomy to develop the project as they see fit. The role of the Government is only to ensure that the terms of agreement (including payment of royalties and environmental protection) are being complied with.4

Colombia has taken decisive actions in recent years to attract foreign investment through new laws that make the regulatory landscape more efficient and attractive to investors.

Industry outlookColombia is the largest producer and exporter of coal in Latin America.

1. Dane, MundoMinero magazine

2. Fuente: Boletín Estadístico de Minas y Energía. Sector minero 1990–2010.

3. Fuente: Mining In Colombia. Exploring the Last Andean Frontier. Engineering & Mining Journal.Diciembre 2011.

4. Fuente: Mining In Colombia. Exploring the Last Andean Frontier. Engineering & Mining Journal.Diciembre 2011.


Mining factors Infrastructure

Colombia’s mining industry is facing major challenges related to infrastructure. The current roads and railways are not sufficient to import the needed machinery for mining and exploring, or to transport goods to market. However, several projects are being developed to improve the infrastructure.

Recruiting and retaining a skilled workforce

Due to the current mining boom, there are not enough skilled labourers to keep up with the existing mining requirements. To further compound the problem, there are a limited number of mining programs offered by universities that can adequately train people fast enough to meet the rising demand of labour.

Illegal mines

Increasingly there are a number of mines operating without government permission. The lack of regulatory protocol is a considerable human and environmental risk for the immediate surrounding areas. Illegal mining is sustained with unskilled labour, and therefore does not face the same labour shortages that legal mining operations face. In the long term, if illegal mining grows, it will continue to negatively impact legal mining operations.

Community and the environmentMining companies must attain sustainable development in a local, regional and national context. Colombia’s governmental authorities expect to obtain a more balanced development within regions enjoying the positive impacts including local employment, vendor and supplier entrepreneurship, infrastructure and technical skills education, among others.

Approximately 30% of Colombia’s territory is inhabited by strict ethnic groups. Constitutionally these groups are given preferences and have to be respected and treated according to their particular traditions. International investors looking to operate near these residential sites need to be aware of their customs.

Uncertainty protected areasTrade barriers

Taxation regimeSocioeconomic agreements

SkillsSecurity situation

Regulatory uncertaintyRegulatory duplication

Legal systemLabor challenges

InfrastructureGrowing lessening uncertainty

Geological databaseEnvironmental regulations

Disputed land claimsCorruption

Political stability

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Mild deterrent Strong deterrent Would not invest

Fraser Institute 2011–2012 survey results

“The country is preparing itself in every way by improving human capital, infrastructure, competitiveness, and macroeconomic management.”

— Claudia Jiménez, Head of Industry Group “Gran Escala”


Political overview

President Juan Manuel Santos (2010–2014) remains in a politically strong position. His approval ratings have consistently remained at or above 65% and he has retained control of a large coalition in congress. Colombia’s economy has remained steady, with growth projections likely to reach 4–4.5% in 2012. The Santos administration has seen a small decline in the unemployment rate, the successful passage of reforms that will save and equitably distribute royalties earned from oil and mining production, and the maintenance of smooth relations with Colombia’s neighbors.

Still, significant security and infrastructure challenges remain for the government. While the government has made substantial progress in recent years in its battle against the Revolutionary Armed Forces of Colombia (FARC), the FARC still retains ability to undertake attacks and kidnappings. Furthermore, the FARC’s demise could create a vacuum that emerging criminal groups can exploit. Over the past year, the rise of criminal bands comprised of drug trafficking organizations and former right-wing paramilitaries have emerged as a serious problem. This increases pressure on the armed forces to exert more territorial control and consolidate government influence in areas formerly dominated by the FARC. Additionally, heavy rains have badly damaged Colombia’s weak infrastructure and caused the displacement of millions of people. The government has been slow to get new infrastructure projects off the ground, but should be able to make some progress this year.

Mining sector outlook

Colombia’s institutional capacity has not kept up with the pace of investment in the mining sectors and the government was confronted with a number of mining accidents, scandals over the permitting process, and clashes over environmental regulations in 2011. The government is now restructuring the bureaucracy responsible for oversight of the mining sector, and expects the new institutions to be in full operation by mid-2012. The government created a new National Mining Agency (ANM) at the end of 2011, appointed a Vice minister of Mining at the Ministry of Mines and Energy, revamped the geological services agency, and created a national environmental licensing authority responsible for analyzing the environmental aspects of mining permits. The government is also soliciting bids for a company to help create a monitoring system to supervise Colombia’s mines in operation.

The new bureaucratic restructuring should help to alleviate some of the hurdles and mixed messages investors and companies were receiving with respect to their operations in the mining sector. Increased oil and mining production—and the fact that royalties and dividends on such production account for at least a third of government revenues—means that the government will be paying more attention to the sector’s development. This should help to reduce some of the uncertainty in the sector, especially with respect to environmental licensing and safety regulations.

Colombia


Mexico

In 2010, the production of the main metals in Mexico broke all previous records, with the exception of copper. After falling to second place as a silver producer and staying there for five years, Mexico regained the top position in 2010, ahead of Peru. The jump was due mainly to constant growth in the production of Minera Fresnillo (the world’s largest producer of silver), the startup of operations at Peñasquito a subsidiary of Goldcorp, and sustained growth at mines belonging to Industrias Peñoles, Alamos Gold, Coeur d’Alene Mines, Endeavour Silver, New Gold, Capstone Mining, Minefinders, and Great Panther Silver. Mexico is ranked second in fluorite production behind China, and eleventh in gold with predictions of being one of the top five producers worldwide in the next few years.2

The future of mining in Mexico is linked to domestic and foreign investment. From 2011 to 2012 there was US$9.3 billion invested in mining and US$21 billion from 2007 to 2012, most of which will be used to start up and expand projects. Although mining is driven by foreign investors, there are a number of Mexican mining companies investing in the industry including Grupo Mexico, Fresnillo Plc and Frisco Group.

Mexico is in first place in Latin America and fourth place worldwide in attracting mining exploration investment, exceeded only by Canada, Australia and the US.3 In 2010, exploration investment amounted to US$641 million, 70% of which was from foreign companies and 30% from domestic companies.

Navigating the tax environment There are no specific tax rules to support the development of Mexican mining companies. Mining companies can have an immediate deduction of fixed assets (if certain requirements are met), including up to 87% of mining machinery and equipment. They are also obligated to pay to employees 10% of adjusted tax profit each year.

Mining companies can pay dividends without withholding as long as they have income subject to full tax rates, which will drop over the next few years – 30% in 2012, 29% by 2013 and 28% starting in 2014.

The Flat Tax law implemented on January 1, 2008 replaced the Asset Tax law. The Flat Tax applies to both Mexican residents and foreign residents with permanent establishments in Mexico. The Flat Tax applies to the extent the computation yields an amount which is higher than the Income Tax for the year. A tax rate of 17.5% applies to income computed on a cash-flow basis.

Mining companies must pay the Mexican government for the right to use mining concessions. The Mexican government grants only one type of concession, which covers both exploration and production. In 2011, the Department of Economy granted about 500 mining concessions which were granted for 50 years and extendable for another 50 years.

Industry outlookMexico is an important player in worldwide mining. The mining industry continues to thrive with an annual production of US$13.9 billion, contributing to 1.6% of the country’s gross domestic product (GDP). It generates 290,000 direct jobs and 1.5 million indirect jobs.1 The leading minerals found in Mexico are gold, silver, bismuth and fluorite.

1. Mundo Minero, October 17, 2011.

2. Mundo Minero, October 17, 2011.

3. Metals Economics Group.


Mining factors Although the Mexican industry is well known for its top-rate ore deposits, quality labour, technical innovation and development, there are negative aspects in relation to matters such as modern labour laws, legal certainty regarding land ownership and high crime rates.

Energy costs

Mining requires intensive consumption of electricity which is expensive is Mexico.

Security

One of the greatest concerns is Mexico’s high crime rate. The mining sector has joined groups of citizens and businesses that are demanding coordinated actions from the different government sectors to stop the crime wave that has hit much of Mexico. Companies seek to protect their workers and mining operations from organized crime, but the measures taken have proven insufficient.

Sustainability

Mining is facing an enormous challenge: the industry can only continue to grow if projects focus on the safety of its workers, environment and the communities (respect of culture and customs) in which mine sites operate. CAMIMEX, the Mexican Chamber of Mines, has launched a program for self-regulation with regards to environmental and community labour issues. However, the commitment to achieve sustainability remains a substantial challenge. Negative environmental impacts as a result of mining companies lacking technical operations, has been a point of contention for many organizations and agencies, opposing the development of the sector.

Education

The Mexican mining industry is continuing its efforts to promote and recruit young people through the Education Trust for students and professors involved in Earth Science higher studies. In recent years, the mining sector has faced a number of problems hiring professionals that will support and promote the expansion of the mining industry.

Labour

Mining workers’ unions are strong in Mexico and frequently demand better benefits and/or salary increases. The Mexican mining industry has suffered from a lack of labour reforms that are critical to the progress of Mexico. Illegal work stoppages have been frequent and have caused uncertainty and unemployment.

Environment

The mining sector is one of the most regulated industries by the environmental authorities and complies with strict international standards and regulations. The Ministry of the Environment has issued certificates to make sure the mining industry’s efforts continue to protect the environment. To date, 69 mining operations have been issued a Clean Industry certificate and 18 more are in the process of being certified.

Safety and health in the work environment

The mining industry has a permanent commitment to train its personnel and take the necessary actions to ensure their safety. The Labor Department reported that 54 work centres have incorporated the Safety and Health Self-Management Program; 19 of which enrolled voluntarily in 2010 and 7 which received top-level recognition.

References: The information in this report has been obtained from recent publications from the Mining Mexican Chamber except where noted.









Political stability

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Political overview

The opposition candidate Pena Nieto of the PRI is favored to win the presidential election on 1 July 2012, although the outcome will be closer than what current polls are forecasting. A surprise victory by leftist candidate Andres Manuel Lopez Obrador is highly unlikely but the business community should remain aware of his progress. Given the electoral calendar, 2012 will be characterized by policy and reform paralysis prior to the new president assuming office on 1 December.

If Pena Nieto is elected, Mexico could face a more promising reform outlook by the end of 2012. Labor reform, which would make hiring and firing workers somewhat more flexible, and fiscal reform to ramp up tax collections and lower the costs of social security are both likely. Energy and telecom reforms, however, do not share the same outlook.

Meanwhile, the outlook for security is largely unchanged with violence remaining high, although there are some signs of tentative stabilization. While the election will bring a flurry of finger-pointing and promises to back out of the current security strategy, a major tactical shift by the PRI is unlikely. The security strategy will continue to rely on a heavy military presence, close cooperation with the US, a growing role of the federal police, and a push to adopt the 2008 judicial reform more quickly and effectively.


Mexico’s mining sector is currently one of the most open sectors in the nation, having undergone a significant liberalization more than 25 years ago. Mining companies pay fees for land access, as well as normal corporate taxes, but do not pay royalties on production. The relatively small size of the sector in relation to the nation’s GDP has largely kept it off the political radar of most politicians. Indeed, the prevalence of hydrocarbons production has prioritized oil over minerals in the nation’s political discourse.

Although the Miners’ Union is known for sometimes organizing strikes against mining companies, this union has been much less effective in leveraging its strike capacity against employers in recent years. Higher level court rulings, including the Supreme Court of Mexico, have decided against the union, signaling that its leaders’ capacity to use trumped-up claims against employers will not be supported in court.

It is expected that under either a PRI or PAN presidency, the current mining regime would remain. Given the sector’s small contribution to the economy, it is unlikely that a royalty regime will be installed, though fiscal reforms could raise effective corporate tax rates through the elimination of loopholes and deductions. A PRD presidency, however, would alter this calculus, as the president would likely introduce royalties on production in addition to raising corporate tax rates.

Mexico


Chile

Chile’s mining industry consists primarily of open pit, hard-rock mining, and is divided into two large sectors: metals (copper, iron, zinc, gold, silver, molybdenum, etc.) and non-metallic (nitrates, iodine, lithium, boron, potassium, etc.). Most of the large-scale mines are located in the desert area in the northern part of the country and the Andean Cordillera. Chile has the largest underground mine, El Teniente, which belongs to Codelco.3

According to the Chilean Copper Commission (COCHILCO), Chile has mining investment valued at US$66.9 billion (US$44.2 billion will be implemented in the 2011–2015 period).4

Of that, US$54.3 billion will be invested in copper mining, US$9.8 billion in gold and silver mining, and US$2.2 billion in iron and industrial minerals mining.5

Foreign investment has been fundamental for the growth of the mining industry in Chile. In addition to the direct effects like the development of mining projects, foreign capital inflows has caused indirect effects such as increased export capacity, incorporation of advanced technology, the creation of new jobs, and the demand for local goods and services. According to the Foreign Investment Committee, in 2010 foreign investment for the mining industry reached US$833 million or 38.3% of the total foreign investment received in the country.

Copper production has grown by almost 50% to 5.4 million tons in 2010 from 3.5 million tons in the 1990s as a result of increased investments. Gold production has fluctuated in the last decade, ranging between 50,000 kg (in 2000) and 38,416 kg (in 2010). It’s forecasted that when Barrick Gold’s Pascua Lama and Cerro Casale projects, Kinross’s Lobo-Marte project

and Goldcorp’s El Morro project go into commercial operation, the production of gold will reach at least 90 tons per year and will make Chile one of the 10 largest gold producers in the world.

Due to the quality and size of mining deposits, large multinational mining companies dominate the mining sector in Chile (Anglo American, Barrick Gold, BHP Billiton, Newmont Rio Tinto, Xstrata, etc.) There are, however, numerous Chilean-owned companies, the largest being Antofagasta and Codelco.

Chile has the following agreements to provide equal treatment in cross-border commerce:

• Free Trade Agreements (FTAs) with Canada, Mexico, United States of America, Central America, the European Community, Australia, South Korea and China

• Economic Complementation Agreements with Mercosur (Argentina, Brazil, Ecuador, Peru and Venezuela)

• Bilateral Agreements with Colombia, Ecuador, Peru and Venezuela

Trade agreements have allowed copper cathodes to enter these countries at a 0% tariff. China is the exception with copper concentrate at a 0% tariff, and copper cathodes and blister with a 2% tariff.

Industry outlookThe mining industry in Chile is one of the main industries that supports much of the economic and social development of the country. Chilean mining industry represented 19.2% of the gross domestic product (GDP) in 2010 – an increase of 24% compared to the previous year.1 This increase was due to rising metal prices. Mining exports accounted for 65% of the country’s total exports, which reached US$67.9 billion Freight on Board (FOB) in 2010.2 Alone, shipments of copper reached a total of US$40.3 billion (FOB), 45% more than the previous year due to record copper prices.

1. Data of national accounts provided of the Central Bank (at current prices).

2. According to the Central Bank.

3. Chile’s National Copper Corporation – Codelco.

4. Report “Inversión en la Minería Chilena – Cartera de Proyectos” – July 2011.

5. Report “Inversión en la Minería Chilena – Cartera de Proyectos” – July 2011.


Navigating the legal and tax environment Mining companies in Chile are subject to the general income taxation regime which consists of the First Category tax (Corporate Tax) at a current rate of 20% and further additional withholding tax at a 35% rate with a tax credit for the First Category tax paid.

Since 2006, mining companies are subject to Specific Mining Tax which is a mining tax that is deductible for income tax purposes. The Specific Mining Tax applies to the taxable operational mining income (TOMI) which equals taxable income calculated for income tax purposes subject to specified adjustments. The rate depends on the operating margin and varies from a marginal rate of 4% up to 14%. Local mining investors may also negotiate an agreement similar to a foreign investment contract under which the Chilean government grants them a tax invariability of the specific mining tax rate for 12 years.

Interest payments abroad are normally subject to a 35% withholding tax rate. This rate can decrease to 15% if the lender is resident or domiciled in a country who has signed a Double Tax Treaty with Chile. If the loan is granted by a Foreign Bank or Financial Institution, interest payments will be subject to a reduced 4% withholding tax rate. Currently Chile has 24 Double Tax Treaties in effect.

Mining factors More than half the operating costs for Chilean mining companies are related to workforce, maintenance and general services and energy.

Energy and water

Chilean mining companies are conscious about high energy costs and a scarcity of water resources. Today, many companies are investing and setting up alliances with research centres or foreign companies that have experience with renewable energy. Particularly, solar energy is playing an important role as it exploits the natural resources of the geographical location where the majority of the mining companies are operating in Chile. Some companies have initiated the construction of solar plants to provide the energy needed for their operations.

Infrastructure

Chile’s geographical landscape contains over 4,000 km of coast with port terminals located relatively close to the mineral deposits. Although major ports remain in state hands, the autonomous companies that took control of the port complexes have opened the facilities to investors via concessions to meet the growing demands of a booming economy.

In recent years there’s been a significant increase in the level of public investment in the development of ports and roads to improve the level of infrastructure. However, there’s still a need to increase the current level of investments in order to satisfy the expansion of the Chilean mining industry over the next few years.

Workforce

Compensation represents the largest cost, mainly due to the level of specialization needed and the lack of professional and technical staff available. This becomes more important considering the forecasted investment in mining projects over the next 10 years – which would result in 23,000 new positions.6

Although the local academic market has identified this necessity and is offering undergraduate, graduate and technical programs, students lack interest to become part of the mining workforce, due to geographic mobility, labour activities and the necessity for specialization.7

6. Over US$50 billion for the 2011–2020 period, Instituto de Ingenieros de Minas de Chile (IIMCh).

7. Estrechez Cíclica del Mercado Laboral en la Minería Chilena del Cobre: “Diagnóstico y Propuestas”, Comisión chilena del cobre .


Community and the environmentChilean regulations require project developers to perform an environmental impact assessment (EIA) for the future design of mining operations. This process includes an in-depth review of the potential environmental impact of the project and social participation from different project stakeholders. The last few years have

shown deep concern among the local and international community regarding the development of industrial projects in Chile. Companies, in the early stages of project development, must include local communities, national-level opinion leaders and international stakeholders in their stakeholder engagement process and social management plans. Doing so will help to create trust-based relationships that are essential to a successful implementation of any project.

International standards for responsible investment (e.g. Greenhouse Gas Protocol standards and ISO standards) help provide guidelines beyond national regulations and support project developers in their engagement with stakeholders.









Political stability

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Chile


Political overview

Despite robust economic growth of 6.3% and low levels of unemployment, President Sebastian Pinera remains deeply unpopular, with approval ratings of just 33% in December according to local pollster Adimark. He will face an uphill battle to restore his credibility and advance his agenda during the remainder of his four-year term. Moreover, the President’s center-right Coalition for Change lacks a majority in congress and is also grappling with internal disputes, which the opposition Concertacion will look to capitalize upon in the run-up to local elections in October 2012 and presidential elections in 2013. Legislative gridlock will thus remain the state of play in the foreseeable future as both major coalitions look ahead to election season.

An unusual wave of social unrest focused on education reform culminated in a political crisis in 2011, which emboldened other social groups—including labor unions—to make their own demands. Mounting social spending pressures will require greater revenues to maintain Chile’s fiscal balance. Pinera plans to present a tax reform proposal in March, which will likely extend temporary corporate tax hikes (from 17% to 20%) but avoid more structural reform. Otherwise, Pinera’s legislative agenda will likely be limited to microeconomic reforms deepening Chile’s capital markets, supporting innovation, and improving regulation.


While the outlook for Chile’s mining sector continues to be positive, President Sebastian Pinera’s political weakness could undermine his ability to play a decisive role in resolving labor disputes and advancing key energy projects. Several upcoming contract negotiations, including Codelco’s Andina mine, could prompt further labor unrest in 2012, as could ongoing threats from contract workers, particularly in a context of higher global copper prices. A legal dispute between Codelco and Anglo-American should help to smooth relations between Pinera and Codelco’s union, as well as play to Chileans’ nationalistic sentiments towards the mining sector. But Codelco’s move to acquire 49% of Anglo-American’s local assets should not be viewed as a sign that the state will play a more aggressive role in the sector.

Energy security remains a significant concern for the mining sector given that Chile’s mostly-imported energy results in costly electricity prices, and Pinera has consistently backtracked on controversial energy projects. Pinera’s nuclear energy ambitions were foiled after Japan’s Fukushima disaster, given its similar seismic profile, and the government may have to once again resort to energy rationing measures in 2012 in order to confront an ongoing drought. The government gave initial approval to the giant HidroAysen hydroelectric project, but fierce opposition from environmentalists will likely prohibit Pinera from advancing the project, at least until the lame duck session of his term, given his lack of political leverage. Failure to double the country’s energy capacity (currently 15.5GW) over the next ten years would ensure that costs remain high, and could constrain the growth of the mining sector.


Brazil

In 2011, the Brazilian mineral production reached a new record of US$50 billion, which represented a 28% increase compared to US$39 billion in 2010. In the next three years, it’s expected that Brazilian mineral production will increase at an estimated rate of 10% to 15% per annum, in large part due to the demand from emerging markets.

Between 2011 and 2015, Brazilian mining companies expect to invest US$68.5 billion in the mining sector. This represents an increase of 10.5% compared to 2010–2014.3 These investments apply to a number of minerals − iron ore representing 63% of the total. Despite significant investments in production and extraction, Brazil has relatively less mineral exploration. In 2009 and 2010 alone, the country received only 3% of the world’s total private investment in exploration.

The main mining companies with operations in Brazil are Vale, Anglo American, BHP Billiton, MMX and several other gold mining companies including Yamana, Kinross, Aura Minerals Inc., Golden Star Resources, Colossus and Aurora Gold. During the last three years there’s been a steady increase in the number of Canadian mining companies operating in Brazil.4

Industry outlookBrazil has substantial mineral deposits and is one of largest mineral producers and exporters in the world. The mining industry in Brazil contributes about 4% to the country’s annual gross domestic product (GDP)1, which is around US$100 billion. According to The Brazilian Mining Association, the main products exported and imported in 2011 were iron ore, niobium, gold, copper, silicon, bauxite, manganese ore and kaolin. Exports of iron ore, mainly to China, remain the largest source of growth for the export sector. With investments in iron ore of US$45 billion for 2011 to 2015, Brazil will continue to expand its exports to meet Asian demand.2

1. Ministry of Mines and Energy.

2. The Brazilian Mining Association.

3. Brazilian Mining Institute, IBRAM.

4. Junior Mine 2011.

Navigating the legal and tax environment There has been a national debate involving the new mining code. The current mining code hasn’t changed since 1940. The Brazilian government has been working to modernize select mining regulations (it does not have a forecast completion date). The new basic mining code guidelines discussed by the government and disclosed to the pubic cover the following main items:

• The creation of the National Council of Mineral Policy and Regulatory Agency;

• Changes in the rules related to granting mineral titles ensuring better monitoring, supervision, and management by the managing agency;

• The introduction of a limitation period to grant 35-year mining concessions;

• Changes in the financial compensation for the exploration of mineral resources (CFEM) (mining royalties) with the objective to increase the existing rates.

The new mining code aims to attract new players, improve monitoring and raise mining royalties. As a result, the new code will increase the cost of operations for mining companies in Brazil.


Tax regulations

The main taxes applied to mining companies are as follows:

• Financial compensation for the exploration of mineral resources (CFEM)

• Corporate income tax (IRPJ)

• Social contribution on net income (CSLL)

• Contribution for the social integration program (PIS) and contribution for social security financing (COFINS)

• Value-added tax on sales and services (VAT or ICMS)

• Contribution for intervention in the economic domain (CIDE)

• Withholding income tax (IRRF)

• Tax on financial transactions (IOF)

Mining factors Energy

Brazil has the sixth largest economy in the world. It also has the fifth largest population, but is still a small energy consumer when compared to the developed economies. According to ANEEL (the Brazilian National Agency for Utilities), 80% of the Brazilian power production comes from hydroelectric plants.

Labour

In 2011, a total of 165,000 workers were employed by the mining industry in Brazil. Studies undertaken by the National Secretariat of Geology, Mining and Mineral Transformation of the Ministry of Mines and Energy showed an employment ratio of 1:13 in the mining industry − for each position created in the mining industry, another 13 jobs were created.

Therefore, the mineral sector employs about 2.1 million workers, apart from the jobs generated during exploration, prospecting and planning stages, and the people working in the garimpos (mining for gold and other minerals).

Infrastructure

Mineral production will increase as investment in infrastructure and logistics is made. Mining companies are developing projects in remote locations that require substantial investment in infrastructure such as railways and roads, as well as hospitals, schools and other basic services. Another investment required is to build and expand ports as the existing ports are over capacity.

Community and environment Increased attention has been placed on environmental and community engagement by the Brazilian mining industry. Major mining companies in Brazil are at the forefront of the industry’s investment in this field. Recognition of the importance of community and environmental investment is a key part of their corporate responsibility approach to satisfy public opinion and stakeholder’s interest.

Despite criticisms surrounding a lack of sustainable environmental practices, Brazilian mining standards are increasingly regarded as matching those of Australia and Canada. Equipment and service suppliers invest significant time and energy in working with local communities to train and developing employees’ skills, as well as developing more environmentally sustainable technologies such as low-impact emission filters and energy-efficient engines.

“ In 2011, there were 65 companies listed on the Toronto Stock Exchange that have Brazilian properties.”









Political stability

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Brazil

Political overview

President Dilma Rousseff has entered her second year in office politically strong, enjoying 72% approval ratings according to a 5 December 2011 poll by CNI/Ibope. Despite her uneasy relationship with allied parties in congress, who make up overwhelming majorities in both chambers, Rousseff maintains enough political capital to advance her reform agenda while resisting pressure from legislators to increase spending. If her popularity were to suffer, however, she would be more vulnerable to such pressures.

Her government’s primary concern in 2012 will be executing its strategy to reduce Brazil’s perennially high interest rates without materially compromising economic growth. Commitment within government to meeting the primary fiscal surplus target of 3.1% of GDP, viewed as the key component to allowing the central bank to cut rates further, is strong. That said, authorities will struggle to meet the target given earlier decisions to increase the minimum wage and give tax breaks to industry. This will also increase pressure on the government to find means to boost revenues. Going forward, her government will keep as tight a rein on spending as possible to facilitate the central bank’s rate-cutting cycle.

Overall, Rousseff will continue to approach macroeconomic policy with the same pragmatism demonstrated during her first 12 months in office. The main risks will be more sector-specific than macroeconomic because of the government’s focus on industrial policy.


The Rousseff administration will send its final proposals for a long-awaited mining reform this year, possibly by late February. Broadly speaking, the reform will increase state control over the sector and raise taxes on export minerals, including iron ore, bauxite and gold, but the government will be careful not to overburden the sector with taxes and regulation as its primary objective is to increase investment in mining and mining-related sectors. In this sense, the government’s industrial policy objectives probably represent as meaningful a risk to mining companies as potential tax hikes, but both will be limited by the government’s desire to boost investment.

The proposal will likely be divided into three separate pieces of legislation. The first bill (industrial policy-focused) will introduce tighter investment requirements for concession holders, create concession contracts (currently there are none) and introduce rules for strategic deposits, including a bidding process and minimum national content requirements for developing the deposits. The second would create a regulatory agency for the sector and the third would introduce tax changes. The timing in which the mining reform will be proposed increases the risk that the government will be more aggressive in raising taxes on the sector. In a context in which the government is struggling to meet ambitious fiscal targets while metals prices remain high, the odds of the government proposing more aggressive tax increases or of legislators raising rates as the bills move through congress rise. Due to the crowded 2012 legislative calendar and municipal elections in October, final approval is only likely in late 2013.


United States

The 2010 production rankings from Gold InfoMine rank the United States second in coal production behind China, third in gold production behind China and Australia, and fourth in copper production behind Chile, Peru and China. The United States ranks eighth in silver production.

Three of the world’s largest producers of minerals, specifically gold, coal and copper, are headquartered in the US: Newmont Mining, Peabody Energy and Freeport-McMoRan. There are also several other active operating mines in the US owned by foreign companies. There is a positive outlook for revenue and production growth in the US for the mining industry, primarily due to demand from emerging economies.

There has been an increased demand from emerging economies for coal.2 The use of coal in power generation has driven demand upward in China and other Asian countries. This, in turn has driven up prices and production in the US.

The future of copper mining is also linked to the demand from emerging economies. For the foreseeable future, production is expected to increase in the United States. The production of copper has been a significant industry in the US for more than a century with significant mines located in Arizona, Utah, New Mexico, Nevada, and Montana. Copper is used in building and construction, most commonly in copper wiring, plumbing, heating and cooling systems, and telecommunications. The country’s biggest copper miner, Freeport-McMoRan, has extensive expansion plans under way at its Morenci mine in Arizona and is also planning to reopen its Chino copper mine in New Mexico, which will add to US copper production from 2014 onwards.3

Navigating the tax environment The US federal income tax structure supports the development of the US mining industry. The structure permits a percentage depletion deduction for US mines, and certain foreign mines if taxed in the US, in determining federal taxable income. The percentage depletion deduction can result in deductions in excess of the cost of US mining property. The federal statutory rate is 35% but mining companies (as well as other industries) are permitted a 9% production activity deduction that can effectively lower the federal income tax rate by 3.15%. Furthermore, there is no federal mining royalty for mining most minerals, other than coal on federal-owned land.

Mining companies are subject to state income tax which varies by state. For example, Nevada and Wyoming have no corporate income tax. Many states have a severance or production tax for minerals extracted within the state that varies by state. Certain states have income tax credits or sales and use tax exemptions for mining operations.

Industry outlookThe mining industry in the United States contributes approximately 2.33% or $344 billion to the country’s annual gross domestic product (GDP).1 The leading mineral resources found in the US include coal, copper, gold, iron ore, lead, molybdenum, silver, uranium, zinc and rare earths.

1. BMI – United States Mining Report 2011.

2. Coal Mining Market Research Report, NAICS, September, 2011.

3. BMI – United States Mining Report 2011.


In general, foreign investors are allowed the same incentives as US investors in the mining industry. However, foreign investors should be aware of certain Foreign Investment in Real Property Tax Act (FIRPTA) considerations that may be applicable. Additionally, certain restrictions apply to interest on intercompany debt. For example, the interest rate applied must consider the arm’s length standard of transfer pricing, which means that interest on debt between related parties should be charged at a rate that would apply if the debt were outstanding between two unrelated parties. Also, the US imposes thin capitalization rules, which may restrict the deductibility of interest on foreign related party debt if the US affiliated group’s debt-to-equity ratio exceeds 1.5:1.

There is no expectation for change to the mining tax regulations in the near term. However, comprehensive US tax reform may be back on the US Congressional agenda after the presidential election in November 2012.

Mining factors Energy

Because of the high processing needs of mining, much capital is spent on building various processing facilities such as smelters and refineries. Energy costs to run these facilities are a growing issue that mining companies face in the United States. Under the American Recovery and Reinvestment Act of 2009, the United States government set up a grant program called “Payments for Specified Energy Property in Lieu of Tax Credits”. This program makes government grants available to mining companies (and other companies) that place in service specified energy property.

Eligibility for this program was set to expire at the end of 2011, although various legislative bills and discussions are going on to extend this program. As of December 1, 2011, the US Treasury has paid $9.8 billion to 4,376 grant applicants. Many mines have received either grant dollars for their electrical generation projects or indirect sources of electricity for such projects.

Workforce

The US economy experienced a downturn when the financial crisis occurred in 2008. Unemployment topped 10% in late 2009/early 2010 and recently fell to 8.5% in December 2011, according to the United States Department of Labor. Although there are mining jobs available, many of the jobs require equipment skills or other technical abilities that make it difficult for companies to fill all the positions. In addition, many of these employment opportunities exist in areas where populations are small, increasing the difficulty of filling positions from the labour pool available.

Infrastructure

Another factor facing mining companies is the location of reserves. New natural resource reserves identified for development often exist in remote unpopulated areas of the country. Since these locations have no infrastructure (roads, ports, power supply, water supply, hospitals, or schools), mining companies face the challenge of developing this infrastructure. There are numerous US federal, state, regional and local government support programs available to companies, often in the form of grants, to build community infrastructure. Mining companies also contribute significantly to the cost of supporting community projects that improve the quality of life for miners and their families. An example is they provide educational training opportunities for the specialized jobs that the mining community demands.


Community and the environmentThe mining sector has been part of a larger national debate involving the energy sector as a whole that weighs the prospect of new jobs against concern about environmental damage. This debate is escalating between the environmentalists who want to prevent damage to communities, and state and local governments that need to expand their tax base and create jobs for their constituents. A potential open-pit iron

ore mine in Wisconsin has attracted attention lately, as historically the state has had a reputation for being relatively hostile to mining interests.4 Recently, the state Republicans introduced a bill that would streamline the mine permitting process and loosen restrictions on a mine’s ability to dump waste and draw down groundwater. Critics reacted to this proposed bill by saying that it would equate to a rollback of Wisconsin’s environmental regulations.

Another challenge facing the mining industry in the United States is whether the

economics of mine development outweigh housing development.5 In Florence, Arizona, such a fight is currently developing. Residential development groups want to build a master-planned community with 25,000 to 30,000 homes. A few miles away, a mining company wants to develop a copper mine. In this case, the Arizona state governor supports the mining project because it promises jobs and state excise-tax revenue over the next two decades. Town officials, however, believe that the longer-term benefits of property taxes derived from residential and commercial development outweigh the economic benefits of a mine.









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United States

4. The Wall Street Journal, December 15, 2011.

5. The Wall Street Journal, December 2, 2011.


Political overview

The gridlock fostered by divided government will persist in 2012, and legislative activity will grind to a halt as campaign season heats up. Because neither party has the power to advance its agenda, both will take their case to voters to let them decide their policy differences. But as soon as the winner emerges on 6 November, an action-filled lame-duck session will address the expiring Bush tax cuts and the automatic cuts slated to start in January 2013 due to the Super Committee’s failure—together amounting to $5 trillion over ten years.

This stalemate, combined with such a high-stakes lame duck, spells great uncertainty over taxes and economic growth for firms and investors. President Obama remains a slight favorite, but since the election is expected to be tight, there will be few signals in coming months as to how these policies will be resolved, which will likely dampen confidence, consumer spending, and business investment. The outlook is dim for new stimulus, even if the economy slows.

The lame-duck session will be the first opportunity for clarity. If one party does far worse than expected, it will be more motivated to strike deals in those final two months before its opponents take over. But a more divided electoral result could compel lawmakers to simply pass interim fixes and use 2013 to work out longer-term legislation.


As the 2012 presidential elections draw near, environmental, taxation, and national security questions will continue to remain at the fore of the US mining regulatory debate. In July 2011, the EPA released final guidance for review of mountaintop removal mining permits in Appalachia that clarifies the EPA’s role in reviewing mountaintop mining projects under the Clean Water Act and outlines the EPA’s legal responsibilities for its regional offices. The guidance uses scientific finds to clarify pollution limits for waterways and evaluate mountaintop removal mining permits. While the final guidance is not a rule and is not legally binding, it encourages communication between the EPA and state Departments of Energy on water quality permit questions. The guidance has been controversial since the EPA first released a draft in 2010 and has been criticized by the mining industry and environmental groups alike. Additionally, House Republicans have introduced a bill that would limit EPA oversight of state water quality standards and give states the right to block EPA vetoes. As with most energy bills introduced in the House, however, it lacks a companion measure in the Senate, where Democrats are unlikely to back such legislation as long as they hold the majority.

Efforts by the Obama administration to amend long-standing laws that have allowed hard-rock miners to extract from federal lands without paying royalties have also failed to move in Congress. But, in a similar vein, the Obama administration just placed a 20-year ban on new uranium mining in 1 million acres of public land around the Grand Canyon as the US Department of the Interior investigates the impact of mining on the region’s environment and economy. However, administration efforts to introduce a large-scale overhaul of hard-rock mining regulations will bear no fruit in the near-term. Despite bipartisan congressional agreement that reform of some kind is necessary and overdue, broader policy gridlock will delay progress on this front at least through the election.


Peru

In the first nine months of 2011, mining exports were US$20.5 billion, a 26.7% increase over the same period of 2010. This was despite reductions in production due to social conflicts and low-grade ore bodies. Copper (Antamina, Cerro Verde and Southern Peru Copper Corporation with 75% of total production) and gold (Yanacocha and Barrick Misquichilca accountable for almost 50% of total production) are the main national exports.1

Peru has signed 32 Bilateral Investment Treaties, with Asian/Pacific, European and Latin-American countries, which strengthens its trade liberalization policy. Additionally, Peru has signed the OPIC (Overseas Private Investment Corporation) agreement that facilitates investments from the United States.2

During the first nine months of 2011, investments in the industry were nearly US$4.7 billion, a 67% increase over the same period in 2010.3

Looking towards 2016, total mining investments are projected to reach US$52 billion, which will be attributed to expansions (US$9 billion), approved environmental impact studies (US$18 billion), and exploration (US$25 billion).

Navigating the tax environment The Mining Royalty, the Special Mining Tax (SMT) and the Special Mining Contribution (SMC) are payments to the Peruvian Government for the exploitation of mineral resources. Mining Royalty applies to metallic and non-metallic mineral resources, while SMT and SMC apply only to metallic mineral resources.

On September 2011, Congress passed three draft laws applicable to the mining industry:

1. Law amending the Mining Royalty Law: The basis for the calculation and payment of royalties was previously net sales. With the introduction of this new law, royalties will now be based on operating income. The royalty rate is between 1% and 7.14%, with a minimum payment of 1% of revenue.

2. Law establishing the Special Mining Tax (SMT): For mining companies without a Tax Stability Agreement (contracts that preclude changes to a tax scheme for a period of time), operating income from mining activity will be taxed at rates between 2% and 5.36%.

3. Law establishing the Special Mining Contribution (SMC): The SMC is only applicable to mining companies that have projects with Tax Stability Agreements in force. Such companies may voluntarily pay this contribution. The rate is between 4% and 8.79% and is applied to quarterly operating income based on a cumulatively progressive scale.

The amounts paid for Mining Royalty, SMT and SMC are deductible expenses for Income Tax purposes.

The calculation of effective rates is progressive, cumulative and is a function of the operating margin, so companies that have a higher operating margin pay a higher effective rate.

Concerns surrounding these tax changes are that mining companies could become less competitive and investment in new projects could be discouraged.

Industry outlookPeru produces numerous types of metals including silver, gold, zinc, tin, lead, copper and molybdenum.

1. Ministerio deEnergia y Minas. “Bienvenidos Peru: Un pais minero lleno de oportunidades.” http://www.minem.gob.pe/descripcion.php?idSector=1&idTitular=159&idMenu=sub149&idCateg=159.

2. Ministerio de Energia y Minas. “Bienvenidos Peru: Un pais minero lleno de oportunidades.” http://www.minem.gob.pe/descripcion.php?idSector=1&idTitular=159&idMenu=sub149&idCateg=159.

3. Ibid.


Mining factors According to a survey made by the research institute APOYO in 2009 senior mining executives and other industry players identified four main factors (challenges) affecting the competitiveness of the industry. They include social conflict, political stability, the effective presence of the government in mining zones, and the availability and quality of infrastructure.

A significant number of social conflicts are associated with mining activity. These conflicts affect current production and delay new investments.

Another important factor in mining is the lack of infrastructure, which increases development costs and the number of procedures and permits that require excessive resources and delay investment. Investment committed to various road concessions is approximately US$1 billion resulting in the construction of over 1,500 km of roads nationwide. Projections estimated that by 2011 Peru would have a road network of 128,896 km. Though this represents a significant improvement, the road network remains insufficient.

Community and the environmentAlthough investments in mining have increased, communities have not been receiving all the benefits because local governments lack capacity to manage these resources. The poverty level in some departments (a country subdivision similar to a province or state) where miners operate has reached as high as 70%.

The relationship between local communities and mining companies is marked by distrust. The main concern of the government towards mining conflicts appears to be focused on the maintenance of public order and the prevention of protests discouraging mining investment. The most common issues in mining conflicts are the environment, right of access to land and water, and the distribution of economic benefits.

Also, most mining projects in Peru are developed in Andean departments where substantial agricultural activities are located. The opening of new mines inevitably reduces local and sometimes regional levels of water. These situations cause depletion of water sources in some communities.

Despite conflicts, Congress passed a draft law of prior consultation in August 2011, which gives indigenous and native communities the right to reject any mining project that could have a negative impact on the territory that belongs to them.

“Peru has identified a portfolio of mining projects considered in more than 50,000 million dollars for the next 10 years.”

— Pedro Martínez, Chairman, National Mining, Oil & Energy Society (Peru)









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Political outlook

President Ollanta Humala has given strong signals since he came into office on 28 July 2011 that he will leave the broad parameters of economic policy unchanged and that he will not take his country in a more populist direction, as many investors feared. A recent cabinet reshuffle, in which he fired most of his leftist advisors and gave more power to figures that defend business-friendly macroeconomic policies, reinforced this commitment. As such, Peru will likely remain a positive economic story marked by high growth and macroeconomic stability. Moreover, the country is well positioned to weather a more challenging global economic outlook.

Humala, however, intends to follow through on his ambitious social policy agenda, which may come into conflict with his intention of maintaining macroeconomic stability, although Humala will likely refrain from taking actions that could hurt macroeconomic stability, at least as long as his popularity remains high—according to local pollsters Ipsos-Apoyo latest estimates, Humala’s approval ratings increased to 57% in December 2011. While Humala’s popularity has remained stable since he came into office in July 2011, Humala could see his approval ratings decline rapidly, as his predecessors did, if he does not deliver on his campaign promise to more aggressively reduce poverty and inequality.


Peru’s mining sector has grown substantially over the past decade, and the government estimates the pipeline of additional investments for the next few years to be around $51 billion. Although the government increased taxes on mining companies last year, it did so in a negotiated manner, and in a way that would not hurt mining investments. In fact, the government remains supportive of mining companies as it sees mining investment as the driver of economic growth and, more importantly, fiscal revenue. The government hopes to collect close to $1billion in additional revenue that would help fund Humala’s social policy agenda.

While policy towards mining will likely remain favorable to the sector in the next few years, there is a risk that the government could consider another round of tax increases if Humala’s approval ratings decline, or as the next election approaches. Mining investors will also continue to struggle with social protests and conflicts. While these protests are unlikely to develop into a national anti-mining movement, most remained unresolved and could delay planned investments. The government has recently taken a tougher stance against protestors that could result in an intensification of protests if not handled appropriately.

Peru


Argentina

In 2015, the Argentine base-metals market is forecast to be US$1.3 billion, an increase of 11.1% from 2010, contrasted to the projected compound annual growth rate of 2.1%.3

With a surface area of 2.7 million square kilometres, 75% of Argentina has mining potential that largely remains unexplored.4 The Andes in particular boast excellent geologic potential. Virtually all types of minerals can be found in Argentina: precious metals, ferrous and nonferrous metals, lithium and potassium.

The Argentinean mining industry is currently focused on project start-ups. These projects are being developed in the provinces of Santa Cruz, Chubut, San Juan, La Rioja, Catamarca, Salta, and Jujuy. Exploration activity continues to be strong, with many projects advancing to the feasibility study stage.

The mining secretary estimates that by 2015, the Argentine mining industry will reach US$28 billion in exports, investments of US$38.5 billion, direct and

indirect employment for 400,000 workers, and a total production of US$36.2 billion.5

There are more than 150 mining companies active in Argentina including major players like Xstrata, Vale, Barrick, BHP Billiton, Anglo Gold, Goldcorp, Pan American Silver, Yamana and Silver Standard. In the last year alone, the Argentine government signed multiple foreign investment agreements with several Chinese companies interested in mining. These agreements cover investments of US$574 million.

Mining development has gained significant importance particularly in the north, south and Cuyo regions.

Operated by Barrick Gold, the Pascua Lama mine will generate many economic and social benefits for both Argentina and Chile and will reverse the slow decline in gold production experienced over the past four years. The project will create almost 5,500 jobs during the construction stage and once complete, will employ 1,660 people over its estimated 23-year lifespan.6

Navigating the legal and tax environment Argentina Tax treaties (DTT)

Argentina has tax treaties with Australia, Denmark, Russia (not in force), Finland, Spain, Belgium, France, Sweden, Bolivia, Germany, Brazil, Italy, The Netherlands, Canada, Norway, United Kingdom and Chile. An “ad-hoc” committee was recently created with the sole purpose of revisiting the DTTs signed by Argentina in order to detect areas of tax abuse.

Mining promotion regime

The Mining Investments Law No. 24,196, regulated by Administrative Order No. 2,686/93, sets forth a series of benefits for companies that carry out mining activities. These include:

• Total tax burden stability – Tax stability is offered for 30 years, and applies to the foreign exchange and tariff systems, excluding the foreign exchange parity and export tax rebates, refunds and/or reimbursements. Tax stability does not apply to value added tax (VAT).

Industry outlookMining currently accounts for 3% of gross domestic product in the Argentine economy.1 In 2010, its gross production value was more than US$6.5 billion. During that time, there was also an influx of 2,500 new companies providing services to the industry. Argentina offers broad geological potential, and an investor-friendly legal system.2

1. “Attractive will grow stronger as a mining country”, p. 55 to 56, Latinominería Bilingual Edition – www.latinomineria.com.

2. “Market Forecasts Argentina – Base Metals.” Datamonitor 0073-2431-2010.ISI Emerging Markets”.

3. Ibid.

4. “Argentina Land of Mining Opportunities.” Panorama Minero Year XXXIV. Iss. 376 (February 2011) – ISSN 0325 – 7207.

5. “Mineria Junio 2011: Key Market,” p. 82. ISI Emerging Markets.

6. Panorama Minero. “Compendio Bilingüe 2011,” p. 36.


• Double income tax deduction – Double tax deductions are allowed for expenditures in prospecting, exploration, special studies, mineralogical and metallurgical assays, pilot plant and other work intended to determine the technical and economic feasibility of projects. Exploration fees are not included as a deductible expense.

• Income tax exemption – Profits derived from the contributions of mines and mining rights as equity are exempt from income taxes according to the Mining Investment Law.

• Accelerated amortization – Allowed for capital investments in new mining projects and expansion of existing ones.

• Exemption from the payment of customs duties – Exemption related to imports of capital goods, including special equipment or components.

• VAT credits – Credits are available for imports and purchases of goods and services intended for use in mining activities including prospecting, exploration, metallurgical assays and applied research.7

Mining factors Argentina’s energy matrix is fully utilized and consumption continues to grow. The two main energy sources are thermal generation (70%) and hydro generation (20%). The growth of thermal generation requires the discovery of new reserves, and hydro generation is limited by uncertain climatic factors. Accordingly, access to energy is and may well remain a substantial cost to mining companies.

Water use in mining is highly criticized by environmentalists in Argentina since the most important mining areas of Argentina are located upstream of important watersheds.

Argentina has one of the longest railway networks in the world, covering a distance of 35,753 kilometres. The Belgrano Railroad, the longest and most frequented, offers both local and international transportation to Bolivia and Chile. However, restoration of branch lines remains a key infrastructure issue for mining development.

Workforce

Attracting qualified people to all sectors of the mining industry is a challenge. For years, companies have been developing training programs where individuals from countries with strong mining roots lead projects alongside Argentine personnel. Although it is a long-term process, positive results are already evident.









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7. Mining Investments Law N°24.196/1993 and the Regulative Decree N° 2686/93.


Political overview

President Cristina Fernandez de Kirchner won reelection in October 2011 by a very comfortable margin with 54% of the vote. The ruling Peronist party will enjoy a working majority in both houses of congress and a fractured opposition emerged from the election significantly weakened. The president begins her second term with a strong political mandate, high levels of popularity, and ample control of state institutions.

Current distortions, especially high inflation (around 25% according to private estimates) and deteriorating fiscal and external accounts, will probably worsen. The government will likely try to contain inflation at its current levels by lowering the rate of fiscal expansion and continuing to pressure both unions and businesses to keep prices low, but will have difficulty in doing so.


The Fernandez de Kirchner administration is broadly supportive of Argentina’s mining sector, but risks for foreign operators will emerge from the macroeconomic environment, particularly foreign exchange restrictions. In October 2011, the government imposed tougher restrictions on oil and mining companies that mandate the repatriation of export profits and later introduced broad-sweeping administrative hurdles to purchasing foreign exchange. There is also a risk that mining firms will face higher taxes or royalties.

An additional risk lies in anti-mining legislation at the provincial level and local opposition to mining projects. Anti-mining legislation has already advanced in provinces such as Chubut and Cordoba, which outlaws open pit mining and bans the use of certain chemicals. The risk that similar legislation is adopted in other provinces is on the rise and is exacerbated by popular opposition to mining projects.

Argentina


Canada

The mining industry is one of the most important customers for Canada’s transportation system. Minerals and metals sector accounts for nearly half of the commodity volumes carried by railroads in Canada.

The mining sector is also a key contributor to business activity at major shipping ports in Canada, accounting for almost two-thirds of commercial volumes. Canada has four primary marine shipping regions. Quebec’s iron ore is shipped through St. Lawrence. Coal is of particular importance in the Pacific region as shipments move from those ports to Asian markets.

Canada is home to Toronto Stock Exchange, the world’s largest mining exchange. As a result, Canada is the most common place for junior exploration companies looking to complete an initial public offering.

Canadian tax environment Mining companies are subject to federal and provincial income tax as well as provincial mining tax. Regarding income tax, the government does recognize the capital intensive and high risk nature of mining and to partly compensate allows a 100% deduction for costs incurred during exploration and development. This eases the tax burden in the early stages of mining.

Flow -through shares are an advantageous structure put in place by the Canadian government to encourage investment in junior mining companies. Generally speaking, this policy allows individual investors to deduct the purchase of the share from their personal taxable income, decreasing the amount of tax the investor has to pay. Certain exploration expenses are also eligible for a tax credit that varies by province.

Canada’s provinces levy a mining tax that, generally speaking, is levied on income from production before financing costs and depletion. Rates vary but are typically 10%–16%. Such taxes are deductible for income tax purposes.

Overall, Canada has moderately tax friendly policies for mining companies, especially at the early stages of the mine life cycle.

Mining in Quebec Plan Nord proposes a sustainable development model aimed at developing natural resources, while protecting the environment and ecosystems, brining benefits to northern residents and Quebec residents in general.

The area covered by Quebec’s Plan Nord includes all lands north of the 49th parallel and to the north of the St. Lawrence River and the Gulf of St. Lawrence. This represents 72% of Quebec’s land mass.

Plan Nord will be carried out over a 25-year period. The Government of Quebec expects the plan to be an $80-billion program; $33 billion of which will be in the mining sector. Bringing in energy and an integrated transportation network will provide access to the areas with the greatest potential for development.

Quebec recently proposed to allow local communities the right to veto certain mining activities. Time will tell how negative this will be for the industry.

Industry outlookCanada is the global leader in production of potash and uranium and a major producer of coal, nickel, colbalt, titanium, diamonds, zinc, molybdenum and salt. Canada’s mineral-processing industry is significant, with more than 30 nonferrous metal smelters and refineries.


Community and the environmentThe Mining Association of Canada spurred the Towards Sustainable Mining (TMS) initiative. First launched in 2004, this initiative was created to improve the mining industry’s performance by aligning industry actions with the priorities and values of Canadians. The initiative has been evaluated by independent experts against comparable initiatives in Canada and around the world and has been found to be “best-in-class”. The initiative includes public reporting by individual mine sites against a series of performance metrics addressing issues such as tailings management, First Nations and community engagement, energy and climate change, crisis management, health and safety, and biodiversity. The initiative is guided by an independent community that consists of Aboriginal, NGOs, organized labour, community and financial sector representatives. Public reporting is subject to third party verification.

It is important that mining companies work with First Nations, even going as far as to put into place formal agreements. Such agreements, generally known as impact benefit agreements, are signed between mining companies and First Nations and may contain commitments regarding education, training, jobs, business contracts and financial payments.

Infrastructure

White Canada has excellent infrastructure in the southern part of the country, many of the frontier areas of mining in Canada lack infrastructure. One example is the Ring of Fire which is located in the muskeg swamps of the James Bay lowlands, approximately 500 kilometers northeast of Thunder Bay. This region is home to discoveries of copper, chromite, zinc, nickel, platinum, vanadium and gold. To date, over 30,000 claims have been established in the Ring of Fire, with approximately 35 prospecting companies in the region. The Ring of Fire is a very promising opportunity but will require a rail or road to bring the metals to market.

Human Capital

Canada’s mining companies are challenged to find skilled workers. The workers must typically reside in northern communities that are not densely populated. In addition to competing with other traditional miners, the mining companies must also compete with companies building and operating oil sands projects which also have substantial demand for such workers.









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Political overview

Canada remains a politically stable market with strong rule of law and a competitive business environment, particularly in the natural resources sector. Prime Minister Stephen Harper, in the third term of rule by his Conservative government, now enjoys a majority of seats in Parliament for the first time. In addition, all three major opposition parties are undergoing major restructuring and leadership changes. As such, Harper has firm command of the national landscape. Major political conflict is limited, with federal-provincial, regional, and First Nations relations the primary framework for policy disputes, particularly in the area of natural resources.

Throughout 2012, Canada will remain vulnerable to US economic slowdown as Canadian trade remains overwhelmingly concentrated with the US. The current lack of strong economic growth in the US is undermining the Canadian export sector, especially the manufacturing sector in Ontario and Quebec, as well as the forest products sector in BC. The manufacturing sector is also under pressure from a strong Canadian dollar, with the value of the loonie increasingly correlated with oil prices. The rise of the “petro-dollar” is exacerbating regional economic disparities in Canada, reflecting a boom in the Western Canadian resources sector and, to a lesser extent, in Atlantic Canada.


Across Canada’s natural resources sector, a key theme in 2012 will be market diversification to Asia. The Harper government and Western Canadian Premiers are very focused on expanding natural resources exports to Asia. This is driven in part by the economic slowdown in the US, but also by environmental opposition that is challenging the approval of key infrastructure like the Keystone XL pipeline that would connect Alberta’s oil sands with the US Gulf Coast refining complex. While oil and gas export market diversification is receiving most of the attention, exports of forest products, potash, coking coal, and metals to Asia are already expanding rapidly. In an effort to facilitate diversification to Asia, the Harper government is promoting the opening up of new westward infrastructure, the most prominent being the Gateway pipeline. But the complex regulatory process for managing environmental permitting is inefficient, leading to lengthy approvals that undermine investor confidence. The Harper administration is committed to reducing duplication and streamlining approvals for all types of natural resources investments, but so far specifics have been few. The surprise rejection by the Harper government of a takeover bid by BHP Billiton for Canadian mining giant Potash Corp in late 2010 raised questions

about what the exact guidelines for defining the net economic benefits of a particular foreign acquisition would be under the Investment Canada Act. So far, the government has not followed up on promised clarification of the guidelines.

The Arctic will remain a focal point in the coming year as natural resources development is booming across the region. Whether iron ore development in eastern Nunavut, or the recent plan announced by the Charest government in Quebec to expand development of the region’s natural resource endowment, such developments remain environmentally controversial and Canada is paying close attention to energy developments offshore in the Artic regions of Greenland, Russia, and the US.

Canada


The PwC Mining Centre of Excellence (CoE) for the Americas located in Canada aims to strengthen client service, improve efficiencies in delivering consulting, deals, tax and assurance solutions, and offer added value to mining companies.

PwC achieves this by bringing together teams with strong mining industry experience to effectively understand your business, and by enabling better connectivity, knowledge transfer, and resource sharing among our member firms in the Americas.

Mining companies will increasingly benefit from the PwC Mining CoE’s operations, which enable them to get enhanced access to deeper expertise, as well as more seamless and advanced international service.

Value proposition

To help your company maintain a competitive position, our Americas Mining group offers services and specific solutions to confront the most challenging industry issues including:

• Improved business performance through lasting cost savings

• Enhanced enterprise value through sound execution of transactions of significant assets or enterprises

• Minimized tax costs related to mining activities in the Americas

• Better control of business processes using expanded internal audit function, especially for capital projects

• Improved stakeholder relations supported by independently verified reporting on Corporate Social Responsibility

Contact the mining industry lead in your geography to discuss your unique business concerns.

PwC Mining Centre of Excellence (CoE)

PwC Americas’ Mining Territory LeadersCanada

John GravelleMining Leader for the Americas& Canadian Mining Leader+1 (416) 869 [email protected]

Arturo LopezAmericas’ Mining Centre of Excellence,Consulting Lead Partner+1 (416) 941 [email protected]

Argentina

Leonardo Viglione+54 (11) 4850 [email protected]

Bolivia

César Lora+591 (2) 240 [email protected]

Brazil

Ronaldo Valiño+55 (21) 3232 [email protected]

Central America & Dominican Republic

Ramón Ortega+1 (809) 567 [email protected]

Fabián Mendy+1 (809) 567 [email protected]

Chile

Colin Becker+56 (2) 940 [email protected]

Colombia

Alan Hails+57 (1) 668 4999 ext. [email protected]

Ecuador

Carlos Cruz+593 (2) 829 330 ext. [email protected]

Mexico

José Almodóvar+52 (55) 5263 6000 ext. [email protected]

Peru

Fernando Gaveglio+51 (1) 211 6500 ext. [email protected]

United States

Steve RalbovskyUS Mining Leader & Global Mining Tax Leader+1 (602) 364 [email protected]

Venezuela

Miguel Salazar+58 (212) 700 [email protected]

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www.pwc.com/ca/mining

mining in the americas

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