Tonga Offshore Mining Limited (TOML) Letterhead Template
Submission This submission is made by Tonga Offshore Mining Limited (TOML), which is a member of the Nautilus Minerals Group of companies. TOML holds exploration rights to 75,000km2 of polymetallic nodules ground in the Clarion-Clipperton Zone (CCZ) under a contract with the ISA, which was signed 11 January 2012. TOML is sponsored by the Kingdom of Tonga. TOML’s exploration activities have been made known to the ISA through formal technical reporting, ongoing correspondence and through its physical presence at the ISA’s annual meetings in Jamaica. TOML’s response to the “Discussion Paper on the Development and Implementation of a Payment Mechanism in the Area for consideration by Members of the Authority and all stakeholders” follow. Once again, TOML very much appreciates the opportunity to be involved as a member of the stakeholder in the development of a exploitation regulatory framework. Contact details for TOML are to be found in the footer of this submission. The primary contact for TOML is Mr Paul Taumoepeau, [email protected]. Introductory Comment The comments provided below should be read in the context of our view that the ISA should be mindful of existing legislation and regulation that will already apply to activities in the AREA, particularly legislation used by sponsoring nations. Any legislative framework should seek to avoid ambiguity in this regard and strive to implement a simple but practical mechanism that enables development to take place in a cost effective and sustainable way.
General comment
Tonga Offshore Mining Limited
The discussion paper clearly contains multiple perspectives, as is appropriate at this stage, with little indication for the authors preference on how to deal with key competing issues. Our comments below reinforce our view that the outcome applicable in the first decade need to be simple, transparent (which includes being widely understandable i.e. simple) and
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
encouraging to developers. General comment
These comments in no way dilute the comprehensive feedback we provided to the initial stakeholder questionnaire.
20 General
It appears to be a fundamental assumption that the primary Common Benefit of Mankind (CBM) objective is best served by “optimum revenue collected for the Authority”. This loses sight of the fact that the other contributors towards “optimum benefit” to the most people will come from the use of the metal produced and also the fact that many environmental and social benefits by sourcing of the metal from a more sustainable operation. This does not replace the need for cash benefits to flow, but should get recognition as a significant part of the CBM.
20 General
The ISA’s responsibility to Common Benefit of Mankind (CBM) includes facilitating mining in the Area as soon as possible; to do that it must provide as smooth a path as possible for companies willing to take the risk to pioneer this opportunity. This means setting a period of lower taxation during the first 5 to 10 years of production. And modifying to suit after this stability period, with the benefit of actual data to analyse and set royalties. To attempt to optimise revenue from the outset of the industry emergence will stifle its growth and be counter to the holistic obligation of CHM: 1) Add supply of metal onto global market for the benefit of global economies and consumers; 2) Grow the industry size to grow the ISA’s revenue. Key to achieving this is far simpler than usually made out and must stick to 3 simple golden rules (abridged below from www.MiningNewsPremium.net The three golden rules of mining royalties – Monday, 9 December 2013.): 1) Simplicity of payment mechanism (royalty applied at appropriate point of sale) “Keep it Simple – so a 10 year old can understand it: Even Phd economists struggle to articulate the nuances of an economic rent-based approaches to mineral royalties. Such systems are elegant in theory – and economically the most efficient, too. But in practice, they are open to many forms of abuse by both taxer and taxee (among other issues, they can rely on complex accounting edicts and agreed cost of capital). Perhaps more critically, even if the Phd economist “get” economic rent-based royalties, the broader public [and investor] does not; making the mechanism lack transparency and building distrust and increased polarisation of stakeholder viewpoints. Simple revenue based royalties as a percentage are far less prone to abuse – and can be explained to a 10 year old. Many Jurisdictions fail here.” As per our previous submission we remain convinced that a royalty levied on wet metric tonnes is both simple and effective because in the early decades of this industry much experimentation will be required to optimise value from the nodules.
Tonga Offshore Mining Limited
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
Contractors will have a variety of value propositions given the polymetallic nature of the nodules and the multiple processing options. 2) Plan ahead for transparent royalty review: “Things change over time in the minerals world. The minerals sector is highly volatile in price terms. New discoveries [such as CCZ nodules] are made that change the shape of cost curves... A transparent system is therefore needed such that mineral royalties can be periodically reset to accommodate movement in price and cost curve. The Chinese economic miracle has been based upon successive five-year plans. Something similar is needed for mineral royalties – for example, being subject to periodic five-year review – critically with certainty at all times in between. Many governments are prone to review royalties every time the price moves rather than at set five-year intervals. This destabilisation of the sector must stop. Five years is not a long time in mining – especially when it can take a decade or more to get a new project up and running.” 3) Be prepared to let Royalties differ between Nodules, Crusts and SMS deposits. They have different commodity mixes and different project fundamentals.
Get this right and all other things being equal; the ISA has an opportunity to be a preferred jurisdiction for investment. Importantly this will have consequential benefits for Common Heritage of Mankind in terms of: a) metal availability to global economies and consumers; b) environmental and social protection of terrestrial habitats; and c) rapid and responsible growth in Interantional Seabed Authority revenue for appropriate allocation of investment in Common Heritage of Mankind. Get this wrong by giving equal consideration to a host of highly academic theories, and development will continue to languish despite all our desire to realise this once in a generation opportunity to pioneer a better way. 20 c
We endorse this recognition of the importance given to treating the wide range of potential developers equally. Those that produce metal safely, sustainably and efficiently should be allowed to prosper. Those that do not, do not belong in the endeavour for long. We do not agree that the ISA needs to develop a complex understanding of the different drivers and approaches of the multiple participants. By simply setting the equal playing field, described above in the 3 golden rules of mining royalties, the ISA should allow competition and flexibility of ideas to find the best way forward. The ISA cannot be expected to develop the expertise to understand every participants approach in enough detail to make reasonable decisions. Adam Smith’s invisible hand is the ISA’s
Tonga Offshore Mining Limited
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
most powerful decision making tool. The ISA can influence how harsh that invisible hand is; we recommend initially encourage participation and then encourage and reward efficiency but the industry has emerged. 20 d
Conspicuous by its absence, is the fact that in ideal rent models the State would contribute money during the excessive loss making times, if they are increasing take from the more profitable times; That is “fair” yet inapplicable. This part of “rent models” is seldom included and this asymmetry of States sharing in periods profits but not in periods of losses, is one of the fundamental issues with practical application of rent. Nearly all attempts to implement resource rent taxes are hence perceived as very unfair by the mining investment community. Other factors that often make practical application of resource rents “unfair” to developers is that very real and significant costs are often unfairly ring-fenced from the accumulation pool. Not to mention issues on agreeing what rate should be applied to the accumulation pool. Few understand the cost of capital required to develop a new deposit style, with new mining method, in unproven political jurisdiction. Perception of what a “fair” profit is for those putting up the money is nigh on impossible to appreciate for most of the populous. The concept of “fair”, like beauty is far too subjective in this context. Fairness is best achieved through the simplicity and certainty of a transparent and understandable agreement between the taxation agent, the tax payers and the stakeholders that engage in the discussion over the relative “fairness” of that relationship.
Table 1
Tonga Offshore Mining Limited
It is important to remember that Countries often provide key port and transport infrastructure to facilitate mining. This infrastructure is usually a legacy benefit to the State after mining. So taxation rates often partly reflect the services provided by the State to the Mining Industry, in a development partnership. The ISA is probably not proposing to contribute much by the way of to deep sea mining infrastructure yet, beyond the dispute resolution chamber. This concept should impact the position that the ISA aspires to holding on this taxation ranking table.
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
General comment
Tonga Offshore Mining Limited
The discussion paper clearly contains multiple perspectives, as is appropriate at this stage, with little indication for the authors preference on how to deal with key competing issues. Our comments below reinforce our view that the outcome applicable in the first decade need to be simple, transparent (which includes being widely understandable i.e. simple) and
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
encouraging to developers. General comment
These comments in no way dilute the comprehensive feedback we provided to the initial stakeholder questionnaire.
20 General
It appears to be a fundamental assumption that the primary Common Benefit of Mankind (CBM) objective is best served by “optimum revenue collected for the Authority”. This loses sight of the fact that the other contributors towards “optimum benefit” to the most people will come from the use of the metal produced and also the fact that many environmental and social benefits by sourcing of the metal from a more sustainable operation. This does not replace the need for cash benefits to flow, but should get recognition as a significant part of the CBM.
20 General
The ISA’s responsibility to Common Benefit of Mankind (CBM) includes facilitating mining in the Area as soon as possible; to do that it must provide as smooth a path as possible for companies willing to take the risk to pioneer this opportunity. This means setting a period of lower taxation during the first 5 to 10 years of production. And modifying to suit after this stability period, with the benefit of actual data to analyse and set royalties. To attempt to optimise revenue from the outset of the industry emergence will stifle its growth and be counter to the holistic obligation of CHM: 1) Add supply of metal onto global market for the benefit of global economies and consumers; 2) Grow the industry size to grow the ISA’s revenue. Key to achieving this is far simpler than usually made out and must stick to 3 simple golden rules (abridged below from www.MiningNewsPremium.net The three golden rules of mining royalties – Monday, 9 December 2013.): 1) Simplicity of payment mechanism (royalty applied at appropriate point of sale) “Keep it Simple – so a 10 year old can understand it: Even Phd economists struggle to articulate the nuances of an economic rent-based approaches to mineral royalties. Such systems are elegant in theory – and economically the most efficient, too. But in practice, they are open to many forms of abuse by both taxer and taxee (among other issues, they can rely on complex accounting edicts and agreed cost of capital). Perhaps more critically, even if the Phd economist “get” economic rent-based royalties, the broader public [and investor] does not; making the mechanism lack transparency and building distrust and increased polarisation of stakeholder viewpoints. Simple revenue based royalties as a percentage are far less prone to abuse – and can be explained to a 10 year old. Many Jurisdictions fail here.” As per our previous submission we remain convinced that a royalty levied on wet metric tonnes is both simple and effective because in the early decades of this industry much experimentation will be required to optimise value from the nodules.
Tonga Offshore Mining Limited
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
Contractors will have a variety of value propositions given the polymetallic nature of the nodules and the multiple processing options. 2) Plan ahead for transparent royalty review: “Things change over time in the minerals world. The minerals sector is highly volatile in price terms. New discoveries [such as CCZ nodules] are made that change the shape of cost curves... A transparent system is therefore needed such that mineral royalties can be periodically reset to accommodate movement in price and cost curve. The Chinese economic miracle has been based upon successive five-year plans. Something similar is needed for mineral royalties – for example, being subject to periodic five-year review – critically with certainty at all times in between. Many governments are prone to review royalties every time the price moves rather than at set five-year intervals. This destabilisation of the sector must stop. Five years is not a long time in mining – especially when it can take a decade or more to get a new project up and running.” 3) Be prepared to let Royalties differ between Nodules, Crusts and SMS deposits. They have different commodity mixes and different project fundamentals.
Get this right and all other things being equal; the ISA has an opportunity to be a preferred jurisdiction for investment. Importantly this will have consequential benefits for Common Heritage of Mankind in terms of: a) metal availability to global economies and consumers; b) environmental and social protection of terrestrial habitats; and c) rapid and responsible growth in Interantional Seabed Authority revenue for appropriate allocation of investment in Common Heritage of Mankind. Get this wrong by giving equal consideration to a host of highly academic theories, and development will continue to languish despite all our desire to realise this once in a generation opportunity to pioneer a better way. 20 c
We endorse this recognition of the importance given to treating the wide range of potential developers equally. Those that produce metal safely, sustainably and efficiently should be allowed to prosper. Those that do not, do not belong in the endeavour for long. We do not agree that the ISA needs to develop a complex understanding of the different drivers and approaches of the multiple participants. By simply setting the equal playing field, described above in the 3 golden rules of mining royalties, the ISA should allow competition and flexibility of ideas to find the best way forward. The ISA cannot be expected to develop the expertise to understand every participants approach in enough detail to make reasonable decisions. Adam Smith’s invisible hand is the ISA’s
Tonga Offshore Mining Limited
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
most powerful decision making tool. The ISA can influence how harsh that invisible hand is; we recommend initially encourage participation and then encourage and reward efficiency but the industry has emerged. 20 d
Conspicuous by its absence, is the fact that in ideal rent models the State would contribute money during the excessive loss making times, if they are increasing take from the more profitable times; That is “fair” yet inapplicable. This part of “rent models” is seldom included and this asymmetry of States sharing in periods profits but not in periods of losses, is one of the fundamental issues with practical application of rent. Nearly all attempts to implement resource rent taxes are hence perceived as very unfair by the mining investment community. Other factors that often make practical application of resource rents “unfair” to developers is that very real and significant costs are often unfairly ring-fenced from the accumulation pool. Not to mention issues on agreeing what rate should be applied to the accumulation pool. Few understand the cost of capital required to develop a new deposit style, with new mining method, in unproven political jurisdiction. Perception of what a “fair” profit is for those putting up the money is nigh on impossible to appreciate for most of the populous. The concept of “fair”, like beauty is far too subjective in this context. Fairness is best achieved through the simplicity and certainty of a transparent and understandable agreement between the taxation agent, the tax payers and the stakeholders that engage in the discussion over the relative “fairness” of that relationship.
Table 1
Tonga Offshore Mining Limited
It is important to remember that Countries often provide key port and transport infrastructure to facilitate mining. This infrastructure is usually a legacy benefit to the State after mining. So taxation rates often partly reflect the services provided by the State to the Mining Industry, in a development partnership. The ISA is probably not proposing to contribute much by the way of to deep sea mining infrastructure yet, beyond the dispute resolution chamber. This concept should impact the position that the ISA aspires to holding on this taxation ranking table.
2nd floor Kupu House Fatafehi Road Nuku’alofa Tonga South Pacific
PO Box 893 Nuku’alofa Tonga South Pacific
[email protected]
T +676 21 733 F +676 21 734
BMS-TOM-COR-TEM-0000-001
