CHAPTER 19 ISSUES AND TRENDS IN PRIVATIZATION IN THE INTERNATIONAL MINERAL INDUSTRY

• Jurisdiction: Derecho Internacional

Mineral Development in Latin America
(Nov 1997)
CHAPTER 19
ISSUES AND TRENDS IN PRIVATIZATION IN THE INTERNATIONAL MINERAL INDUSTRY
William F. Cahoone
Behre Dolbear & Company, Inc.
Denver, Colorado

Before I begin my paper today, I would like to show you a slide that will set the tone for privatization — and that is, CAUTION! Georgius Agicola even as early as 1556, exhibited a word of caution with regards to the mining industry. Let us not forget the lessons of history!

"Moreover, a prudent owner, before he buys shares, ought to go the mine and carefully examine the nature of the vein, for it is very important that he should be on his guard lest fraudulent sellers of shares should deceive him".

— Georgius Agricola, De Re Metallica 1556

INTRODUCTION

The demise of communism and the concurrent general discrediting of socialism have led to a movement toward free market economies in many less developed countries (LDCs). The driving forces behind these actions are the recognition that free market economies and the accordant development of private enterprises are essential to increasing employment within the country, raising the standard of living within the country, and bringing in capital for internal uses such as infrastructure improvements.

Monetization of state-owned assets has focused on industries which are of interest to Western corporations because these entities generally have the financial capacity to undertake such investments. Since many LDCs are oriented toward the development of natural resources, natural resource-related industries are among the first industry groups to be monetized. The mining industry in particular, accordingly, has been the initial privatization target in many LDCs.

The purpose of this paper is to review issues and trends in the privatization of the international mineral industry. This paper is based upon Behre Dolbear's experiences as a consultant to national governments, government-owned mining companies, or to mining companies attempting to acquire government-owned assets. A partial list of countries Behre Dolbear has worked with, or in, on privatization efforts appears as Table 1.

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TABLE 1

BEHRE DOLBEAR — PRIVATIZATION EXPERIENCE

Argentina	Mexico
Bolivia	Mongolia
Czech Republic	Nigeria
Chile	Papua New Guinea
Colombia	Peru
Egypt	Philippines
Ethiopia	Rumania
Republic of Georgia	Russia
Indonesia	Suriname
Kazahkstan	Thailand
Kyrgyzstan	Venezuela

TYPES OF PRIVATIZATION

Privatization can occur under different names, e.g. monetization or capitalization. Regardless of the term used, a privatization constitutes a sale or transfer by other means of a government-owned asset into the free market, or private sector.

When focusing on the mining industry, privatizations can include assets such as:

• Explored or unexplored mineral lands, including claims or concessions;

• Active and/or inactive mines;

• Concentrators;

• Smelters and refineries;

• Working interests, royalties, and long-term contracts; and

• Captive railroads and port facilities associated with mineral operations.

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Attachment 1 presents some recent privatizations and notes the method of property transfer which include:

• Asset Sales — An asset sale is generally the simplest and most straightforward way of transferring a property. Essentially, it is the sale of all, or part, of a mining property to a third party. The sale of Tintaya in Peru to Magma Copper (now part of BHP Minerals) exemplifies an asset sale.

Asset sales are frequently combined with equity sales.

• Equity Sales — The equity sale consists of the transfer of all, or part, of the stock of government-owned entity. The stock may be transferred either in a privately-negotiated transaction, or spun off to investors in a public offering. The proposed, multi-billion dollar sale to the public of the shares of CVRD in Brazil is an example of an equity sale.

• Joint Ventures — Joint ventures are frequently utilized when, because of issues of patrimony, government ownership of all or part of the mineral property is required. The investor receives the right to extract and sell its share of the minerals produced. Cyprus' effort at El Abra can be characterized as a joint venture.

Caution is required into entering into joint ventures as it is essential to pre-define:

• The amount of interest acquired and the timing of that acquisition;

• The amount to be paid and the method of payment (a lump sum, in increments, out of production, etc.); and

• The distribution of cash flow from the property.

• Combinations of the above — Due to political priorities, it is not uncommon for governments to seek a combination of asset sales, equity sales, and joint ventures as the

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vehicles for privatizing mineral resources. An example in which Behre Dolbear has actively participated is the on-going "capitalization" process at Corporacion Minera de Bolivia (COMIBOL) which combines aspects of asset sales and joint ventures among its tin, zinc, and other mineral properties.

The capitalization process involves bidding by interested parties for the various COMIBOL properties. The cash from the winning bidder earns a 50 percent equity interest in the property and gives the purchaser a 5-year management contract for the property. An interesting twist is that during the 5-year period, the acquirer's interest is frozen, but the monies bid are used by the acquirer to develop the property rather than being given to the government. Dividends are distributed pro-rata.

The management contract can be renewed after the 5-year period. The acquirer can also increase its interest beyond 50 percent at that time.

AREAS OF CONCERN AND ISSUES

Regardless of the form of the privatization, four areas of concern need to be addressed before any firm enters into agreements with government-owned entities:

• Legal issues;

• Political issues;

• Financial issues; and

• Technical issues.

Legal issues include five areas:

• The legal framework of the country involved — Is the country a republic, a monarchy, a dictatorship, etc., and how does the system of government affects mineral development;

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• Ownership of the minerals — Is the ownership of mineral rights vested with the national government, state/provincial/local entities, or other entities;

• Security of tenure — How strong will your company's hold on the mineral property be, or will it be subject to challenge if the government or individuals in the government change;

• Legislation...