5% royalty in my opinion is not competitive. It is anywhere from 15% of profits to 25%. It could be more in a high cost operation. If a company makes 25% of total income in profit before tax, and taxes are 35%, then 5% off the top is 20% of earnings. The company earns 13% of total cash flow after taxes. Or to put it another way which is much more revealing, the Ecuadorian government would make more money than the mining company, from their mining of the gold in this regime. The company earns 13% and the Ecuadorians earn .05 plus 0.35 X 0.25 = 0.0875 = 0.1375 or 13.75%.
It is hardly an incentive to invest money in their country. If you include their salaries, etc, which if they earn even 5% of cash flow, they make 18.75% after tax to the companies 13%. At higher tax levels it is ludicrous.
In North America the employees might earn 25% of cash flow in a highly efficient mine. Say one at 0.15 OPT where there are ten tons produced for every man employed. Men here are paid $350 per day or more. It works out to 25% of cash flow for labour. In Ecuador you would pay less perhaps by 15 times, but hire more men too, perhaps by 3 times. So 5% is fair. In fact you have to hire some higher priced help even in that country and your admin is the same or more, so perhaps a higher figure should be used. We could use 8%.
Even at a 50% profit level on gross income in Ecuador, the company ends up earning 30.88% after tax. The government earns 22.5%. Include the employees at 8% and you have the Ecuadorians earning 30.5% overall. What did the Ecuadorians put in and what do they get? They did not "put in" the mine itself as they did not discover it. Canadians and other investors did that. And they paid Ecuadorians to find it. Employment benefited the country while they were exploring, and not in a small way. Development spin offs of a mine are major too. Local people earn from cash spend by miners, and services provided. Local business builds. Look at Peru, Chile and Brazil. What did they get out of Canadian miners and explorers, mill men and miners. Ever hear of Brascan? Canadians built the power system of Brazil. We built the iron ore industry of Argentina. As a matter of fact the average diamond driller and underground contract miner in Brazil for the past 30 years was Canadian. 28 billion dollars of investment money was funneled through Toronto to build the copper industry of Chile. What did Canadians get out of that? Does Correa know that? I will bet two farthings and a Rolls Royce he has no clue. I could even introduce him to the bankers who did that. I have drinks with them once in a while in TO.
There is no point in going overseas as our taxes back home are 30% and our royalties 3% -- unless other costs are much higher. Well they are in start up, labour and environmental. But given the intransigence of the Ecuadorian government lately, their greedy cash grab, the unnecessary delays as they dithered over mining law, I am not so sure this is much of a factor anymore.
If these countries want to provide incentive, it would behoove them to provide a clear advantage tax wise and security for a long lived mine. They don't seem to have learned that lesson. Chile seems to proved security in the past 20 years, but they don't have that much silver and gold, if you discount Pascua Lima. Big discount there I will warrant.
I would advise Correa and his government to look at Quebec. 3% royalty, 30 per cent overall taxes, (inclusive of 20 percent local provincial taxes), and incentives to investors in local mines of 148% off their income tax. Plus alternatively to the investor kick back you can get money from the government directly to explore.. 50% over your dollar you put in. How does Ecuador stack up? Not that competitive.
If I were Ecuador I would go one better. 2% royalty, 25% taxes like Peru, and a 2 year tax holiday on start up. No import tax and no limit on export of minerals, royalties paid. All I would require is that they get 15% of their services from Ecuador, and hire 60% Ecuadorian nationals. Constrain all environmental review and consultancies of locals to 9 months and binding government arbitration. Then the mining companies will be lined up a blocks deep to get into the Corriente Belt and Ecuador will not have to fear the global recession that has plunged many resource exporting countries into near bankruptcy. Don't let Laffer laff at you.
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