I.M.E. 61 Patriarh Evtimii Blvd., fl. 3, 1463, Sofia, Bulgaria Tel./fax: (+359 2) 952 62 66, 952 35 03 E-mail address: [email protected] Website: www.ime.bg

Socio-Economic Impact Analysis of Dundee Precious Metals’ Mining Projects in Bulgaria

Institute for Market Economics

Team: Krassen Stanchev, Ph. D. George Zahariev, Ph. D. Adriana Mladenova Dimitar Chobanov Metodi V. Metodiev

Sofia, January 2007

TABLE OF CONTENTS

PREFACE...... 4

I. INTRODUCTION ...... 5

1. Methodology Used and Sources of Information...... 5

2. Theoretical Background of Studying Mining Operations and Assessing Their Impact on the Economy ...... 6 2.1. Natural Resource-endowment Approach ...... 6 2.2. Theoretical Approaches...... 6

II. BULGARIA: ECONOMIC CONTEX OF THE COUNTRY...... 10

1. Business Environment...... 10

2. Macroeconomic Situation...... 14

3. Overview of the Mining Industry in the Country ...... 16

III. A STUDY OF DUNDEE MINING OPERATIONS IN CHELOPECH ...... 18

1. Chelopech Municipality at Glance – Demographic, Economic and Social Situation .. 18

2. History of Dundee’s Activities and Description of the Operations of the Mine in Chelopech...... 19

3. Economic Impacts of the Mining Operations in Chelopech...... 21 3. 1. Economic Impacts on a Local Level...... 21 3.2. Economic Impacts on a Regional Level...... 24 4.3. Economic Impacts on a National Level ...... 26 3.4. Fiscal Benefit Streams from the Mine in Chelopech ...... 29

4. Social Impacts of the Mining Operations in Chelopech ...... 31

IV. PROSPECTIVE DUNDEE PRECIOUS METALS’ PROJECTS IN BULGARIA .. 34

1. Project Outline for Expansion and Redevelopment of the Chelopech Mine...... 34

2. Krumovgrad Gold Project...... 37 2.1. General Information on Krumovgrad Municipality...... 37 2.2. Economic Impacts...... 40 2.3. Social Impacts ...... 41 Institute for Market Economics, www.ime.bg

V. STUDY OF THE PROPOSED TECHNOLOGY TO BE USED IN THE MINING OPERATIONS – CYANIDE USE IN GOLD AND COPPER PRODUCTION ...... 44

1. Cyanide in Gold Extraction...... 44

2. Handling of Cyanide ...... 45

3. Cyanide in Solutions...... 45

4. Attenuation of Cyanide Concentrations in the Environment ...... 46 4.1. Treatment ...... 46 4.2. Recycling...... 47

5. Risk Management for Cyanide in the Mining Industry ...... 47

6. Finding on Dundee Projects ...... 47

VI. GOVERNANCE AND MINERAL ROYALTIES...... 49

1. Governance ...... 49

2. Mineral Royalties ...... 50 2.2. Types of Royalties and Assessment Methods...... 50 2.3. Government and Investor Royalty Preferences...... 52 2.4. Royalties in Selected Countries...... 55 2.5. Implications of Royalty...... 58 2.6. Tax Regime in Bulgaria ...... 59 2.7. Recommendations and Best Practices...... 59 2.8. Concluding Remarks on Royalties...... 61

VII. CONCLUSION...... 63

REFERENCES...... 64

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PREFACE

The purpose of this study is to give a thorough and overall analysis of the operations of the Dundee Precious Metals Inc. (Dundee) in Bulgaria and present the economic and social impacts of its present and prospective mining activities.

The introduction of the study presents general purpose of this study, the methodology used and the sources of information. It includes a theoretical approach of studying of socio- economic impacts of mining projects on a country. The second part of the report provides a description of the country context by assessing the general business climate and presenting the macroeconomic situation of the country with a focus on the mining and quarrying industry development. In the third part of the report we outline and assess what economic and social effects the Chelopech mine has had on national, regional and local level. We also present an analysis of the operation of the mine from a fiscal point of view. In part four we present a summary of two project ideas for (1) expansion and redevelopment of the Chelopech mine, and (2) the construction of a gold mine in Krumovgrad and evaluate the prospective effects on all levels of the economy of these projects. In part five we analyze the proposed technology to be used in the projects (cyanide use in gold and copper production) and evaluate it from both environmental and health-and-safety point of view. In part six we analyse the governance context and tax regime of the country. We present the rates of royalties imposed on mining activities in different countries and outline the best world practices in taxation. This part includes our commentaries on the proposal for amendment of the ordinance for evaluation of the concession fees for mine exploration in Bulgaria. We end up this section by making some policy recommendations and summarizing the main findings. The last part concludes.

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I. INTRODUCTION

We identify different kinds of impacts generated by the presence of the mine, both of a financial (e.g. salaries, fiscal revenues) and non-financial character (e.g. education, infrastructure development, social community improvement, etc). We have divided the impacts into economic and social but they are related to each other and a cutting line cannot be put between these two categories.

With this study we try to present a comprehensive picture of the effects of Dundee’s activities in Bulgaria and make a realistic and impartial evaluation of its presence in the economy.

1. Methodology Used and Sources of Information

The proposed methodology on evaluation of the socio-economic impacts of the mining projects of the company consists of the following elements: 1. preparation of an economic impact analysis of the mine on the local, regional and national economy referring to direct, indirect and induced effects, 2. development and preparation of an analysis of the benefits and costs of economic development in terms of their impact on the social patterns and the environment of the local communities, and 3. an integration of these two activities into an overall analysis of the economic, social and environmental benefits and costs of the mine development for the local population and national economy.

Economic Impacts

The term "economic impact" refers to short-term changes in employment, earnings, and regional output that occur in the regional economy as a result of development projects or of a particular business enterprise. Multipliers capture the impact of each dollar generated by an enterprise or development activity on the regional and national economy.

Economic impacts materialize within the region’s industries and households when goods and services meet the demands of governments, consumers, businesses, or investors. There are three main components of economic impacts. These three components are: direct, indirect and induced economic impacts which amount to the total economic impacts.

Direct economic impacts are defined as those which are directly associated with a change in regional economic activity. In this case, direct economic impacts are defined as the direct expenditures associated with the mining and processing of ore and other operational activities as well as investment activities and construction of new facilities.

Indirect expenditures include the increased economic activities of other businesses that service those directly involved in mining and construction.

Induced economic impacts are those increases in economic activity associated with the increased disposable income created by an economic development of the region and increase of its production activity. Thus, induced economic impacts occur due to the effects of direct and indirect impact expenditures being re-spent within the region.

Total economic impact is the sum of direct, indirect and induced impacts.

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Social Impacts

By "social impacts" we mean the consequences to human populations of any actions that alter the ways in which people live, work, relate to one another. The general social status of people includes such characteristics as quality of life, level of education, health and social security provisions, etc. The term also includes cultural impacts involving changes to the norms and values of people within a community.

The analysis of the social impacts includes: 1) a description of the social characteristics of a community, and 2) description of effects of social changes (social impact assessment).

Sources of Information

The official statistics is provided by NSI (central office and regional office for Sofia district), Bulgarian National Bank (BNB), National Employment Agency, Agency for Economic Analyses and Forecasts (AEAF) to the Ministry of Finance, World Bank, social impact study conducted by the Vitosha Research on the region of Krumovgrad, official documents and financial reports and releases of Dundee Precious Metals as well as press releases in the Bulgarian media concerning Dundee operations.

2. Theoretical Background of Studying Mining Operations and Assessing Their Impact on the Economy

2.1. Natural Resource-endowment Approach In the past years, the economic, social and environmental dimensions of mining have been subject of various researches and analysis. The crucial point of all of this researches and analysis is how mining can enhance the socio-economic development of the host country. The leading question is: does mining industry contribute to socio-economic development and how its contribution could be enhanced? Much of the literature has focused on the problems rather than solutions and potential benefits for the host economy, as a whole. Consequently, it is not of much practical help in designing improved policy or filling gaps in knowledge. The main objective of this section is to answer the following questions: What are the critical determinants that play a crucial role of enhancement socio- economic development? How can, both policy makers and mining industry, develop steady socio-economic enhancement?

2.2. Theoretical Approaches Here, we are going to briefly reviewing the major theoretical approaches concerning resource- extracting industry. 2.2.1. Economic Phenomenon – Dutch disease In the past, mainstream economic theory widely supported the opinion that resource extraction can create detrimental macroeconomic effects – the Dutch disease. Dutch disease is an economic concept that tries to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector. The theory is that an increase in

6 Institute for Market Economics, www.ime.bg revenues from natural resources will reindustrialize a nation's economy by raising the exchange rate, which makes the manufacturing sector less competitive. However, it is extremely difficult to definitively say that Dutch disease is the cause of the decreasing manufacturing sector, since there are many other factors at play in the economy. While it most often refers to natural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment. How does this happen? Let's take the example of a country that discovers oil. A jump in the country's oil exports initially raises incomes, as more foreign exchange flows in. If the foreign exchange were spent entirely on imports, it would have no direct impact on the country's money supply or demand for domestically produced goods. But suppose the foreign currency is converted into local currency and spent on domestic nontraded goods. What happens next depends on whether the country's (nominal) exchange rate—that is, the price of the domestic currency in terms of a key foreign currency—is fixed by the central bank or is flexible. If the exchange rate is fixed, the conversion of the foreign currency into local currency would increase the country's money supply, and pressure from domestic demand would push up domestic prices. This would amount to an appreciation of the "real" exchange rate—that is, a unit of foreign currency now buys fewer "real" goods and services in the domestic economy than it did before. If the exchange rate is flexible, the increased supply of foreign currency would drive up the value of the domestic currency, which also implies an appreciation in the real exchange rate, in this case through a rise in the nominal exchange rate rather than in domestic prices. In both cases, real exchange rate appreciation weakens the competitiveness of the country's exports and, hence, causes its traditional export sector to shrink. This entire process is called the "spending effect”. At the same time, resources (capital and labor) would shift into the production of domestic non-traded goods to meet the increase in domestic demand and into the booming oil sector. Both of these transfers would shrink production in the now lagging traditional export sector. This is known as the "resource movement effect." However, in the contemporary economic theory we can separate two distinctive approaches about the effect of so-called Dutch disease. Is the damper on the lagging traded goods sector really a problem? Some economists say no if the higher inflows are expected to be permanent. In these cases, they say, Dutch disease may simply represent the economy's adaptation to its newfound wealth, making the term "disease" a misnomer. The shift in production from the tradable to the non-tradable sector is simply a self-correcting mechanism, a way for the economy to adapt to an increase in domestic demand However, no matter if the natural resource is permanent or no there are several clear areas, which are crucial for short and long run economic stability. If the government manages to cope with these issues that will be the base for future socio-economic development.

These areas include broadly sound macroeconomic policies, as following: Reasonable low inflation; Stable exchange rates; Aggregate fiscal sustainability;

However, contemporary studies show that in a stable macroeconomic environment, with prudent monetary and fiscal policy, and limited government intervention, mining sector does not cause “Dutch Disease” to the economy, just the opposite – it contributes to the sustainable economic growth of the region and the country.

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However, different studies suggest that when mining companies encounter favourable conditions for renewed investment and growth, their activities support improved overall GDP growth. Also, researches show that income gains (partly associated with a resurgence of mining activity) can definitely contribute to broadly generalized improvements in poverty levels and to social welfare more generally.

2.2.2. Government Approach

Governance is at the heart of the development process: the overall framework of governance within which mining industry development takes place is a major determinant of its contribution to sustainable socio-economic development. Reinforcing the point just made is a conclusion recently derived by Douglass North (2004). It suggests that institutions and policy choices represent local beliefs, values, history and conditions. As a result, institutional change and policy reforms cannot simply be imposed and certainly not by external authorities. In fact, institutional choices and governance structures tend to vary considerably across economically successful countries, including those that are labeled as industrialized countries. The contemporary studies that examine the socio-economic impacts of mining industry emphasize on a few distinctive problematic issues: 1. The adequacy/fairness of the tax regime for mining in the host country - low tax rate and tax adequacy is crucial point to attracting and retaining foreign direct investments and boosting economic development. 2. The revenue allocation system. Does this constrain or support the efficient and effective use of public resources, including those generated by mining? While mining’s contribution to the total tax-take is one important dimension of a country’s benefits from resource extraction, the allocation of revenue between different government entities and different vertical tiers of government attracts as much if not more attention. The fiscal revenues from mining can provide significant leverage with respect to poverty reduction spending, particularly since mining normally entails very modest government expenditure. For sure the legal stipulations and government practices for revenue reallocation and public financial management systems vary greatly across the different countries. These allocations in turn condition the impact of public spending on economic and social development and thus the impact of mining revenue. 3. Environmental damage – possible adverse impacts of the mining operations on the local environment and health-and-safety conditions of the communities that live near the mining areas. 4. Transparency – when we are talking about transparency, especially, of revenue payments from mining industry to governments is an important step toward the greater accountability and informed debate that are essential for better governance and foundation of accountability between policymakers and industry. New mining activities create many local challenges and opportunities. Population numbers are likely to increase, giving rise to a need for new infrastructure to meet the extra demands

8 Institute for Market Economics, www.ime.bg on housing, water supply and sanitation. Mining and especially open-pit mining1, produces physical damage however carefully it is conducted. Large numbers of people are likely to be displaced from traditional economic activities, including agriculture and pastoral land use. Mines also have a finite life, but what is important is that local communities should use today’s prosperity (based on mining) to build economic capacity that can mitigate the loss of livelihoods and other benefits once the mines close. The link to central government is indirect, mediated from bottom-up through the country’s political-administrative and its legal and regulatory system. We can specify five higher-level characteristics of efficient governance: 1. State Strength: legitimate and capable state authority at all levels of government. This includes a government whose policy decisions are credible and broadly accepted, and an administrative apparatus than can implement these policies; 2. Limits to State Strength: institutional checks and balances that support the legitimacy of government and the professionalism of the administrative apparatus and guard against the abuse of state power at all levels of government; 3. Compatibility of formal and informal institutions, rights and rules; 4. Legitimacy of formal economic institutions supporting a stable economy; 5. Technical capacity: of the public sector, the civil service and policy decision makers at all levels of government.

However, governance describes the capacity (or efficiency) of a country’s formal and informal institutions to design, implement and enforce public policies that benefit the wider public and improve the effectiveness of the private sector. Finally, we should stress that above all more needs to be done (especially from government and his authorities) to translate the potential benefits of mining activities for broad-based socio-economic development into reality.

1 Open-pit mining, or opencast mining, refers to a method of extracting rock or minerals from the earth by their removal from an open pit or borrow. The term is used to differentiate this form of mining from extractive methods that require tunneling into the earth. Open-pit mines are used when deposits of commercially useful minerals or rock are found near the surface.

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II. BULGARIA: ECONOMIC CONTEX OF THE COUNTRY

1. Business Environment

Business environment has many components, which interact with each other and influence economic performance of the country. The World Bank Doing Business approach will be used for making an overall assessment of the Bulgaria’s business environment. It consists of several indicators concerning different aspects of this issue. The ease of doing business includes starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across the borders, enforcing contracts and closing a business.

Economies differ significantly in the way in which they regulate the entry of new businesses. In Bulgaria the process is not enough straightforward and affordable. It includes burdensome steps like registering in the commercial register, publishing in the State Gazette, minimal capital requirements, which make the process slow. However, the process of registering a company is being reformed at the moment in order to make the procedure of starting business easier. At present, it takes more than a month to start a new business legally.

Official business in the country is still heavily regulated. Companies should comply with inspections, licensing, and many other regulations. The number of licensing regimes is still too large although attempts are made to reduce them. To comply with all regulations, in Bulgaria it takes 50% more time and about four times more money than the average for the developed countries.

The scope of “one-stop-shop” and e-government is still too small in terms of institutions and authorities that provide these types of services. Moreover, government officials are not prepared to provide them which leads to low quality of public services. The “silent consent” principle was not implemented in the country. As a result, there is a room for corruption of the public administration officials, while regulation becomes a tool for constraining competition in certain industries.

Another determinant of the business environment is the legislation concerning hiring workers. There are issues related to regulation of term contracts, working week duration, night and holiday work, which restrict agreements and prevent market forces from equating supply and demand for labor. The employment contracts must be registered at the National Social Security Institute and the total cost of hiring a worker is relatively high.

The presence of minimum wage is also an obstacle to hiring new workers. This is particularly important for low productivity workers who do not have enough skills or experience. The effect of minimum wage for them is negative. In the period of 2003-2007, the minimum wage increased from BGN110 to 180 (over 63%, while the growth of average wage was 30%).

The difficulty of firing workers is lesser than the average in the developed countries. Termination of contracts is possible due to redundancy; there is no need for approval or notification from the third party to fire a worker. The employer must notify labor unions before firing a group of redundant workers but needs no approval to do this. Firing cost is equal to about 8.7 weeks of wages, which is more than three times lower than the OECD average.

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Protection of property rights is also important for the smooth functioning of the market and providing security for the foreign investors. Unfortunately, neither the efficiency of the judicial system nor that of the police forces is good. Contract enforcement is not guaranteed entirely, collecting receipts is expensive and prolonged process. Introduction of private bailiffs is a step forward but the way their activities are regulated would reduce the positive impact of them.

Property registries are aimed at helping government collect more taxes but they are useful in defining and publicizing property rights. Registering property in Bulgaria includes more procedures than the average for the developed countries but is cheaper in terms of days needed and costs as a percent of property value. Some of the steps are related to providing documents that are available in registries of other administrative bodies, which may slow down the process. As a whole, the regime is relatively good for the business environment helping to secure property rights and creating incentives to invest.

Access to credit is a very important indicator because companies often point it out as one of the greatest barriers to operation and growth. In Bulgaria, bank credit registry is maintained by the Bulgarian National Bank. Recently, the scope of data was expanded covering loans with lower size than BGN10 000. Public registry covers about 20% of adults.

As a whole, the regulation of credit relations is close to the average for the region but it needs to be improved to reach the standards of developed countries. It cannot provide enough security to investors and facilitate lending. Stronger legal rights and more information sharing are needed in order to let financial markets deepening and reaping the fruits of more efficient investments.

The design of bankruptcy systems should be such that they could be able to help reorganize viable companies and close down unviable ones. The system in Bulgaria is inefficient: it takes more than three years to close a business, which is far behind the average for the OECD countries. Moreover, the process is expensive and the recovery rate is relative low. Thus unviable businesses linger around for years not allowing assets and human capital to be reallocated to more productive uses. This is associated mainly to inefficient judicial process that leads to unwillingness of banks and other lenders to push for a formal bankruptcy resolution.

Bankruptcy laws are not always the best solution for enforcement creditors rights. They could even exacerbate legal uncertainty and delays in developing countries. Private negotiations of debt restructuring under contract law, efficient enforcement of secured debt contracts outside insolvency under collateral law and private enforcement will do better. Generally, the freedom to fail secured by an efficient process puts people and capital to its most effective use resulting in more productive businesses and more jobs.

Tendencies during the last years in terms of taxation are higher indirect and lower direct taxes. The major reason for this policy is the EU membership of Bulgaria and the necessity for meeting the minimum requirements for indirect taxes and, particularly, excise duties on petrol, alcoholic beverages and tobacco. The result is significant increase of prices of taxed goods and bigger incentives for evasion. Moreover, the conjuncture on the international markets led to higher quotes of crude oil, aggravating the effect of higher excise duties.

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Although the rate is still 20%, there was actually indirect change in the base for value added tax given that it is formed after accounting for excise duty. Apart from this, the VAT regime was changed by adopting so called VAT account, which forced the companies to hold part of their funds in bank accounts at lower returns. This measure proved unsuccessful in terms of higher receipts and will be removed in 2007.

On the other hand, the situation in direct taxation is getting better. The corporate income tax has been lowered from 23.5% in 2003 to 15% in 2006 and 10% in 2007. The allowed rates of depreciation for durable assets were increased enabling companies to reduce its taxable profit. Presently, Bulgaria is one of the lowest corporate tax rate countries, which is a good incentive for domestic and foreign investment.

Payroll tax was decreased by 6 percentage points in 2006 but it is still perceived as one of the key obstacles for business. It is too early to assess the change properly, but preliminary data suggest that formal employment and growth rate of wages in the private sector have risen. Still, higher minimum and maximum thresholds for payroll tax lead to rising effective cost for payroll taxes. The overall effect of direct taxes policy is promoting business activities and investment in the country.

Another crucial feature of business environment is sound money. It is provided by the currency board arrangement through irreversible fixing of Bulgarian lev to the euro. The Bulgarian National Bank which is the institution serving as currency board has firm commitment to exchange lev for euro and reverse using the fixed rate. It must cover at least 100% of the monetary base by foreign currency reserves. Central bank is not allowed to lend to government and can refinance commercial banks only in case of liquidity crisis. Thus, money supply is determined entirely by market demand not allowing the central bank and government to print money.

During the last years, there were minor improvements in business environment. Part of the explanation could be found in the European Union accession, which is a strong incentive for changes. There is still much to be done in order Bulgaria to become really favorable for businesses and people. In this relation, policies directed toward expanding economic freedom and reducing the government interference in the economy would help for creating better environment and for higher living standards.

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Table 1: Selected indicators for business environment Doing business indicators Bulgaria Region OECD Starting a business Procedures (number) 9 9.4 6.2 Time (days) 32 32 16.6 Cost (% of income per capita) 7.9 14.1 5.3 Min. capital (% of income per capita) 91.3 53.9 36.1 Dealing with licenses Procedures (number) 22 21.4 14 Time (days) 226 242.5 149.5 Cost (% of income per capita) 270.5 564.9 72 Employing workers1 Difficulty of Hiring Index 50 34.2 27 Rigidity of Hours Index 80 50.7 45.2 Difficulty of Firing Index 10 37.1 27.4 Rigidity of Employment Index 47 40.8 33.3 Hiring cost (% of salary) 30.1 26.7 21.4 Firing costs (weeks of wages) 8.7 26.2 31.3 Registering property Procedures (number) 9 6.4 4.7 Time (days) 19 102 31.8 Cost (% of property value) 2.3 2.7 4 Getting credit Legal Rights Index2 6 5.5 6.3 Credit Information Index3 4 2.9 5 Public registry coverage (% adults) 20.7 1.7 8.4 Private bureau coverage (% adults) .. 9.4 60.8 Protecting investors4 Disclosure Index 10 4.7 6.3 Director Liability Index 1 3.8 5 Shareholder Suits Index 7 6 6.6 Investor Protection Index 6 4.8 6 Paying taxes Payments (number) 27 48.3 15.3 Time (hours) 616 423.0 202.9 Total tax rate (% profit) 40.7 56.0 47.8 Trading across borders Documents for export (number) 7 7.4 4.8 Time for export (days) 26 29.2 10.5 Cost to export (US$ per container) 1233 1450 811 Documents for import (number) 10 10 5.9 Time for import (days) 25 37.1 12.2 Cost to import (US$ per container) 1201 1589 883 Enforcing contracts Procedures (number) 34 31.5 22.2 Time (days) 440 408.8 351.2 Cost (% of debt) 14 15 11.2 Closing a business Time (years) 3.3 3.5 1.4 Cost (% of estate) 9 14.3 7.1 Recovery rate (cents on the dollar) 34.4 29.5 74 Source: World Bank Doing Business

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1 All the subindices have several components. And all take values between 0 and 100, with higher values indicating more rigid regulation on the labour market. 2 The index ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit. 3 The index ranges from 0 to 6, with higher values indicating the availability of more credit information, from either a public registry or a private bureau, to facilitate lending decisions. 4 The index ranges from 0 to 10, with higher scores indicating better protection for investors.

2. Macroeconomic Situation

In 2006, gross domestic product is expected to reach BGN47.3 billion in current prices and its real growth to be 6%. The main contributor is investment measured by gross fixed capital formation that grows by 20.8% in real terms till the middle of the year. The source of this is the private sector responsible for over 90% of total investment. The most dynamic development is in manufacturing industry, real estate operations and construction where investment almost doubled in real terms.

High investment growth led to an increase in current account deficit while the share of saving in GDP keeps relatively constant arising from the almost unchanged share of final consumption in GDP and decrease in net income and net transfers from abroad. Government’s policy for realizing higher total saving through budget surplus is not successful because of the crowding-out effect of private saving.

The growth rate of export of goods and services is 11.4% thus increasing its share by 4.8 percentage points and reaching 66.2% of GDP. The growth rate of import is still higher (8 percentage points) reaching 86.2% of GDP. There is a deceleration in consumption growth rates from 6.2% in 2005 to 5.8% to the middle of 2006 determined by the collective consumption which increase is 0.7%.

On the supply side, manufacturing and services are industries contributing to higher gross value added (GVA). GVA’s real growth in manufacturing is 8.9% while in services it is 5.3%. GVA in agriculture is lower by 1.7% in real terms leading to change in the structure of GVA. Still, Bulgarian economy is dominated by services creating 59.8% of total GVA.

During the period January-September 2006 industrial sales grew by 8.9%. The fastest development in mining of metal ores, manufacturing of other non-metallic mineral products, manufacturing of fabricated metal products, except machinery and equipment, is determined mainly by strong external demand. On the other hand, industrial production rose by 6.7% with similar dynamics like in sales.

Higher economic activity and lower direct taxes lead to higher employment rate and lower unemployment rate. The National Statistical Institute data for the third quarter of 2006 show that the labor force is higher by more than 100 thousand people than the corresponding period of 2005. Activity rate is higher by 1.6 percentage points while employment rate – by 1.7 percentage points. The total number of employed people reaches 3.2 million (increase by 102.7 thousand) while the number of unemployed is 310 thousand, thus the unemployment rate is 8.8%.

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This positive development is determined by the creation of new jobs in private sector and maintaining ones in public sector. As a whole, the economic activity rate is still low as it is close to 50% while the number of discouraged persons is over quarter million. As an opportunity for further improvement could be pointed reduction of subsidized employment programs by the state budget that create temporary low productive jobs diverting resources from their most efficient use.

During the third quarter of 2006 average nominal wage grew by about 11.7%, which is faster than the previous years. Real wage (nominal wage deflated by the consumer price index) grew by 4.7%. The average wage of employees is 354 leva, in public sector it is 436 leva while in private it is 318 leva. Growth rate in private sector (14%) exceeds this in public sector (9.3%) but the nominal increase, which is 39 lv and 37 lv respectively, is not sufficient to allow closing the gap between the two sectors.

During the observed period, the growth of wages is the highest in mining and quarrying, trade and real estate activities. The main determinants of higher wages are the growth of money supply, higher labor productivity and lower payroll tax. One should note that the official data could be quite different from the actual. It is possible part of shadow economy to be registered leading to higher reported growth.

Change in average consumer price index for the first nine months of 2006 relative to the corresponding period of 2005 is 7.7%. Although in September 2006, the change in the CPI relative to September 2005 is 5.6% substantial contribution for this having non-foods increasing by 11.1% and catering – 6.2%, while food prices are higher by 2.3% and services by 3.9% compared to September 2005. Factors for inflation in 2006 are higher money supply, increased excise duties on fuels, alcoholic beverages and tobacco as well as the rise in administratively set prices.

The overall development of Bulgarian economy is good. Strong investment suggests that the productivity will continue its growth, which is a base for sustainable economic growth. Still, the level of real incomes of Bulgarians is only one third of the average for the EU25, which makes Bulgaria the poorest country in the European Union.

Table 2: Main macroeconomic indicators Main macroeconomic indicators Unit 2003 2004 2005 2006* Real sector GDP (current prices) mill. BGN 34 546.6 38 275.3 41 948.1 21 306.0 Final consumption mill. BGN 30 314.5 33 222.4 37 163.9 19 167.6 Gross fixed capital formation mill. BGN 6 694.4 7 969.4 9 971.1 5 341.6 Exports of goods and services mill. BGN 18 500.3 22 191.7 25 505.9 14 098.4 Imports of goods and services mill. BGN 21 778.9 26 114.5 32 449.4 18 360.3 GDP real growth rate (%) 4.5 5.7 5.5 6.1 Final consumption (%) 6.6 5.1 6.8 5.8 Gross fixed capital formation (%) 13.9 13.5 19.0 20.8 Exports of goods and services (%) 8.0 13.0 7.2 11.4 Imports of goods and services (%) 15.3 14.1 14.6 15.3 GVA - agriculture mill. BGN 3 498.2 3 589.7 3 341.4 1 093.1 GVA - industry mill. BGN 8 972.1 9 908.9 10 968.6 6 176.4 GVA - services mill. BGN 17 757.0 19 670.5 21 712.8 10 819.6 GVA - agriculture (real growth) (%) -1.0 3.0 -8.6 -1.7

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GVA - industry (real growth) (%) 6.8 5.8 7.3 8.9 GVA - services (real growth) (%) 4.0 5.7 6.6 5.3 Industrial sales (real growth, base year 2000) (%) 21 44.9 53.9 58.0 Industrial production (real growth, base year 2000) (%) 22 42.8 52.3 54.1 Inflation (end of period) (%) 5.6 4.0 6.5 8.2 Inflation (period average) (%) 2.3 6.2 5.0 8.1 Employed persons (period average) thousand 3 166.5 3 226.3 3 276.1 3 074.0 Average monthly wage BGN 273.3 292 320 337 in public sector BGN 343.1 367 398 410 in private sector BGN 232.5 254 283 304 Unemployed persons (end of period) thousand 500.7 450.6 397.4 308.9 Unemployment rate (%) 12.7 12.0 9.9 9.3 Fiscal sector Consolidated budget revenues mill. BGN 14 072.0 15 854.6 17 982.6 9 580.0 Consolidated budget expenses mill. BGN 14 071.1 15 199.0 16 997.0 8 172.6 Cash balance mill. BGN 0.9 655.6 985.6 1 407.4 Government and government guaranteed debt mill. BGN 16 643.7 15 559.0 13 386.5 12 582.0 Financial sector Broad money (М3) mill. BGN 16 566.5 20 394.4 25 259.6 26 546.7 annual change (%) 19.6 23.1 23.9 - Claims on non-government sector mill. BGN 9 487.4 14 109.8 18 662.6 20 207.1 annual change (%) 48.3 48.7 32.3 - Base interest rate (period average) (%) 2.68 2.61 2.04 2.4 Exchange rate USD/BGN (period average) 1.7 1.58 1.6 External sector Current account mill. EUR -972.3 -1 131.3 -2 427.0 -1 824.6 Exports of goods and services mill. EUR 6 668.2 7 984.9 9 466.3 7 221.8 Imports of goods and services mill. EUR -9 093.8 -10 938.4 -13 809.2 -9 392.6 Financial account mill. EUR 2 325.1 2 910.9 2 727.5 2 568.7 Foreign direct investment in Bulgaria mill. EUR 1 850.5 2 727.5 2 326.0 1 937.4 Overall balance mill. EUR 630.3 1 399.6 569.3 689.8 *Note – data for 2006 are for the first half of the year. Source: the Bulgarian National Bank, the National Employment Agency, the Ministry of Finance, and the National Statistical Institute.

3. Overview of the Mining Industry in the Country

The mining industry in Bulgaria has a turnover of about 1,37 billion levs in 2004 and its share of the national gross value added accounts to 1.62%. Dundee Precious Metals is one of the main investors in the mining sector and is among the most significant contributors to the capital formation and investments in this sector of the economy.

Table 3: Mining and quarrying (million levs) 1999 2000 2001 2002 2003 2004 Gross output at basic prices 890 1003 1037 1037 1117 1363 Intermediate consumption 554 617 634 624 678 829 Gross value added at basic prices 336 386 403 412 440 534 Source: NSI

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Table 4: Percentage contribution of mining and quarrying to economic indicators 1999 2000 2001 2002 2003 2004 share of GDP 3,7% 3,7% 3,5% 3,2% 3,2% 3,6% share of GVA 1,7% 1,6% 1,5% 1,4% 1,5% 1,6% share of employment in the industry 5,45% 4,82% 4,49% 4,14% 3,88% 3,57% share of FDI (on cumulative basis) 0,79% 0,78% 0,86% N/A 1,27% 1,41% Source: NSI

The average annual salary of a worker employed in the private mining sector in 2004 is 5600 levs as opposed to 3391 levs on average for the private sector in the economy. Also, mining and quarrying contributes to the export volumes of the country. The output of the mining industry is usually exported. In 2004 the gross output of the mining sector has grown up by 22% on an annual basis, which is faster than the nominal rate of growth of the economy. At the same time, the volume of the output of the sector grows by 19% in 2004 compared to 5.6% real annual economic growth of the country. In 2004 labour productivity per employee in the mining and quarrying sector is 17.17 thousand levs while the labour productivity per employee in the economy as a whole is 10.21 thousand levs (measured as the generated GVA to the number of employed).

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III. A STUDY OF DUNDEE MINING OPERATIONS IN CHELOPECH

1. Chelopech Municipality at Glance – Demographic, Economic and Social Situation

In order to assess the impacts of the present business activities of Dundee in Chelopech we present the area where the mine is located. A socio-economic snapshot of the region is provided together with a comparison with the rest areas in the same district. We also present the characteristics of the mine and its financial inputs to local communities.

Chelopech is a village in the Western part of Bulgaria, located 75 km east of the capital Sofia. It is the principal and only settlement in the Chelopech Municipality, Sofia District. The village of Chelopech is located in a mountain region, on the Southern side of the Balkan Mountains. The ore output is the main branch of the local producing structure. Chelopech is one of the biggest and richest copper and gold deposit in Europe, and its operation is one of the main reasons for the stable economic situation in the region.

Table 5: Chelopech Municipality Selected Indicators Year of latest Indicator available Number data Territory, of which 2005 4,44 sq. km Forestry 2005 51,13% Agricultural land 2005 40,99% Population 2005 1740 Population under working age 2005 260 Population in working age 2005 1055 Population over working age 2005 425 Employed 2003 864 Share of employment in industry 2003 86.11% Percentage of employment as a share of the population in working age 2004 85% Average annual salary (lv) 2004 8030 Number of registered unemployed 2004 87 Level of unemployment 2005 8,89% Public (municipality's) agricultural land 2003 6356 decares GDP per capita BGN 2001 4091 GDP per capita PPP $ 2001 7507 Production of industrial entities (thousand lv) 2003 47 734 Number of economic entities 2003 27 Gross production of economic entities (thousand lv) 2003 48 309 Revenues of economic entities (thousand lv) 2003 79 036 Net sales of economic entities (thousand lv) 2003 59 725 Costs of economic entities (thousand lv) 2003 85 723 Fixed Tangible Assets (thousand lv) 2003 46 110 Net sales per capita (lv) 2003 35,22 Sources: NSI, NAMRB, UNDP 2003

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Table 6: Chelopech compared to Sofia district and state averages Year of latest Indicator Number available data

Average annual salary as a % of average annual salary in Sofia district 2004 236% Average annual salary in the private sector as a % of average annual salary in the private sector in Sofia district 2003 245% Rank of the municipality in Sofia district according the level of the annual salary 2003 1st place GDP Rank from all Bulgarian municipalities 2003 20th place/264 GDP Rank in Sofia district 2003 3rd place Population as a share of overall population in Sofia district 2005 0,66% Number of economic entities as a share of overall number of entities in Sofia district 2003 0,37% Production of industrial entities as a share of overall production in Sofia district 2003 3,5% Gross production of economic entities as a share of gross production in Sofia district 2003 2,8% Revenues of economic entities as a share of revenues in Sofia district 2003 3,1% Net sales of economic entities as a share of sales in Sofia district 2003 2,4% Costs of economic entities as a share of costs in Sofia district 2003 3,5% Fixed tangible assets as a share of assets in Sofia district 2003 4,2% Net sales per capita as a % of average net sales in Sofia district 2003 327% Rank by Human Development Index from all Bulgarian municipalities 2003 29th place /264 Rank by Life Expectancy Index from all Bulgarian municipalities 2003 167th place /264 Rank by Combined Education Index from all Bulgarian municipalities 2003 49th place/264 Sources: NSI, NAMRB, UNDP 2003

2. History of Dundee’s Activities and Description of the Operations of the Mine in Chelopech

Underground mining of Chelopech deposit has been undertaken since 1959. The mine has been operated on and off over the years. The most recent operator was Navan Mining during the 90s. However, the mine was only operating at 50% of its capacity when Dundee bought it in September 2003 and it was highly decapitalized.

Dundee Precious Metals is a closed-end investment company, managed by Goodman&Company, Investment Counsel Ltd. that provides the investors with an opportunity to invest in a portfolio of precious metals related and mineral investments.

Chelopech Mining EAD is a Bulgarian subsidiary of the Canadian Dundee Precious Metals Inc. (DPM). Currently Chelopech Mining EAD operates Chelopech mine and deals with mining and processing of the mined ore to concentrate and its follow-up marketing abroad.

In the beginning of 2005, DPM received certificate for a first class investor issued by InvestBulgaria Agency for its project “Modernization and Increase of the Production and Processing of Copper/Gold Ores in Chelopech Mine”.

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The first phase of the project for the development of the mine is already finished. Over 50 million USD are invested in the mine during this stage of the project that include the following: Bring the throughput to 15 million tones per year; Bring a decline ramp, which will allow easier access to the ore body; Upgrade the mill capacity to 1.5 million tones per year; Upgrade the tailings pond area to better handle higher production rates; Unfill drill the resource

The current process includes mining of copper-gold ores and processing them to produce copper-gold concentrate. The capacity at present of the underground mine is 900,000 tpa. The current mill has a capacity of to process 850,000 tpa of ore to concentrate. Mineral reserves as of end 2005 (both proven and probable) account to 21.7 million tones of ore, which can be processed to 2.5 million ounces of gold and 300,000 tones of copper.

Table 7: Ore production from the mine in Chelopech between 1999-2006 year 1999 2000 2001 2002 2003 2004 2005 2006 Ore production (tons) 632 124 624 295 692 074 612 885 522 291 624 310 911 179 925 526 % change - -1,2% 10,9% -11,4% -14,8% 19,5% 45,9% 1.6%

As it can be seen from the table, when Dundee Precious Metals acquires the ownership of the mine in Chelopech at the end of 2003 and began operatations in 2004, it put an end of a negative tendency of a decreasing annual production of ore from the mine. The favourable conditions on the commodity markets concerning the growing price of gold and copper for the last three years is also an incentive for the enhanced production but the investments that were made by Dundee for developing of the mine are crucial for the economic and business revival of the copper and gold deposit in the municipality.

Concentrate production in 2005, amounting to 67,755 tones, is 31% more than the 2004 levels. Dundee tries not only to increase the production and processing of the ore from the mine but also to decrease the costs and make the activities of the company more effective so that more resources are available for both local development and environmental protection. The aim of the company is to maximize the value per share of the company, which means that the firm is engaged in corporate social responsibility activities and health and safety operations and invests in high-quality equipment and machinery.

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3. Economic Impacts of the Mining Operations in Chelopech

Figure 1: Mining projects flow and effects

Source: ICMM, The Analytical Framework - The Challenge of Mineral Wealth: using resource endowments to foster sustainable development, August 2006

3. 1. Economic Impacts on a Local Level

There are several channels through which Dundee’s operations affect the local economy:

Job creation

Dundee Precious Metals Inc. (Dundee) through its subsidiary Chelopech Mining AD currently employs 775 people in its mine in Chelopech. The share of the hired workers from the local community (residents in Chelopech municipality) to the overall number of employees is around 25%. The level of unemployment in the municipality as of end 2005 (8.89%) is lower than both Sofia district and state averages (respectively 10.94% and 10.73%). The population of Chelopech municipality in 2005 is 1703, so the number of directly employed in the mine has a substantial impact on the local community development and standards of living.

Chelopech municipality is not only characterized by low levels of unemployment, but also by high rates of economic activity. In 2003 according to official statistics the employed are 864,

21 Institute for Market Economics, www.ime.bg which as a share of the population in working age is 85%. The same parameter for Sofia district is much smaller – the number of employed to the population in working age is 38% for 2003.

Dundee stands as the major employer in the municipality. By providing employment opportunities to the local community it guarantees relatively high standards of living and lower poverty rates, which is the main prerequisite for the development of the region and its positive economic and social prospective.

Also, the mining project generates employment through social investment activity, for example by funding a private school, and different business development initiatives.

The structure of employment in the municipality differs from the general picture on a district and state level. The share of employment in the industry in Chelopech stands for 86,11%, while the pattern of employment in Sofia District is as follows – 39.8% employed in services, 31.9% employed in agriculture and 28.3% employed in industry.

The indirect and induced employment refers to the generation of employment in the contractors of Dundee and opening of new work places as a result of the higher economic activity in the region. The mine generates a number of additional jobs as a result of investments by the company. Also, the running of the mine has stimulated jobs induced from ways in which employees spend their earnings, e.g. in shops, transport or services.

Higher income per capita and higher standards of living

Official statistics provided by NSI show that the average annual salary in Chelopech municipality is more than twice higher than the average salary on a district and state level. The average salary per year in Chelopech is 8030 lv in 2004 which amounts to 236% of the average level in Sofia district (3398 lv) and 229% of state level (3509 lv). As for the private sector, these percentages are even higher.

Given the high rates of average salary and the employment potential of the company we can conclude that Dundee plays a crucial role in formation of the sustainable economic and social conditions in the municipality. The operation of the mine leads to higher average disposable income per capita in the area and thus, the mine acts as an economic spur for the local community.

However, higher wages and more demand mean higher levels of inflation. The effect of the mine could result in a condition in which a family could make up harder its living in the region in comparison to an average level in another area in the district which is less developed. The mine affects not only the consumption levels but also the patterns of consumption in the municipality. This may lead to changes in the relative prices of some local goods and services. However, such an effect is not observed in the municipality, as the inflation rates are compatible with the region and country averages.

Induced business activity

Higher disposable income per capita allows for higher levels of consumption. Also, as a result of the operation of the mine in Chelopech and higher than average net earnings per capita, more financing is available to people and businesses to operate.

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These are the spill over effects of the operation of the mine, which mean that the income in the form of wages and compensation to workers is further multiplied and more wealth is created in the local economy.

Dundee builds a sustainable domestic supply chain through procurement policies and activities that focus on building the capacity of local suppliers. For example, Dundee places contracts with local businesses when possible, it has been investing in the development of local businesses through social investment programmes and it shares skills, facilities and expertise with local business.

Revenue generation and granting for the government budget

As a result of the operation of the mine the Chelopech municipality is less dependent on the central state budget inflows and the local authority has the capacity to collect enough money to meet its duties in providing some local activities and the activities delegated by the central government. The relatively high disposable income per capita and low levels of unemployment allow for more collections in the form of local taxes and fees. Also, Dundee provides the municipality with an annual grant, which in 2006 amounts to 41.53 % of the overall budget in the municipality for local activities. Thus, the municipality does not depend that much on redistribution from the central budget to make capital expenditures and build and maintain infrastructure or to provide activities in the spheres of educational, healthcare and social services.

In 2006 Chelopech municipality does not receive any complementary subsidy from the central budget for delegated activities by the state. All projected expenses are covered by the income tax collections, which the central government redistributes to local authorities by law. In 2007 the law on the government budget does not provide any complementary redistribution to Chelopech which means that the money that are expected to flow into the budget as a result of the income tax levies is enough for covering up the expenses.

Below is presented a summary of the budget of Chelopech municipality for 2006.

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Table 8: Budget of Chelopech Municipality, 2006 (in Bulgarian levs) I. Local activities Revenues 517329 100% Municipality taxes 47436 9,2% Revenues from property (rents) 49200 9,5% Municipality fees 101733 19,7% Fines and penalty interests 37291 7,2% Sale of land 45000 8,7% Grants and aid 199354 38,5% Net transfer from the central budget 29400 5,7% Operations with financial assets 7915 1,5% Expenses 509975 100% Capital expenses 197500 38,7% Subsidies for enterprises 14700 2,9% Compensations and social assistance 1000 0,2% Maintenance costs 235630 46,2% Salaries and social security 61145 12,0% II. Delegated activities Revenues 431 729 100% Transfers from the central budget 431149 99,9% Operations with financial assets 580 0,1% Expenses 431 729 100% Salaries and social security 368464 85,3% Maintenance costs 36203 8,4% Subsidies for NGOs 27062 6,3% Source: Chelopech Municipality, IME calculations

Infrastructure, physical capital development and improvement

Dundee is engaged in various activities that directly improve local infrastructure (especially telecommunications). Also indirectly, by granting money to the municipality, it assists the capital formation in the region. In 2006 the capital expenditures account to 39% of the budget for all local activities provided by the municipality. This number, in terms of the other municipalities in the country, is among the highest.

Through its special funds Dundee engages in different activities that aim to build capital in the municipality.

3.2. Economic Impacts on a Regional Level

Employment generation

The mining and milling activities in the mine affect not only the employment levels in the municipality of Chelopech but also the municipalities that are adjacent to Chelopech. Due to its small sizes, Chelopech cannot meet the needs of the mine for workforce. The municipalities that are most affected by the mine in terms of workers hired by Dundee are Zlatitza, Pirdop, Chavdar, Mirkovo, Anton. The population in these municipalities in 2003 is 23,523 while people in working age are 13,349. Dundee hires 673 from these municipalities which means that 94% of the workforce directly involved in the operation of the mine are residents from the region.

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The other mining and processing companies in the region are: Elatsite Copper AD in Mirkovo, which is a mining and processing company of copper and gold ore; Union Miniere Pirdop Copper AD in Pirdop and Zlatitza, which is a processing company of copper concentrate and products.

Other resources for development in the region are agriculture. Currently, the types of plants that are grown in the region are wheat, maize, sunflower, potatoes, etc. However, the arable land in the region is around 38%, which is below the national average level (57%). Due to pollutions of the land and natural resources in the past, some of the land cannot be used for growing plants.

According to the definition of the World Bank, people working for the operating company at the mine are direct employees, while people working for firms to which the operating company has contracted out certain tasks are indirectly employed.

The indirect impacts on employment from the operation of the mine refer to the maintenance of jobs in the contractors and suppliers of Dundee, which are directly involved in the process of delivering goods and services to the mine in Chelopech. As such, indirect employment is created as a result of mine-related investment and spending. Given the data and information that we possess, we can conclude that the indirect employment supported by the operations of Dundee in Chelopech accounts to 850 people directly employed in the contractors of Dundee that are involved in providing services and goods to the mine.

The spending of employees with jobs created by direct and indirect employment and social provision generates induced employment in the local economy. This employment results from household spending on items such as: - housing; - food and clothing; - leisure activities; - personal services, such as hairdressing and cleaning; - business services, such as banking; - transport; - utilities; and - public services, such as education and healthcare.

Various studies and researches conducted in a number of mining countries in the world such as Canada, Chile, Ghana, Tanzania, Peru etc. assume that induced employment should be between 165 to 250 per cent of the sum of direct and indirect employment. This estimate falls within the bounds of published research on multiplier effect on employment for large mines in developing countries. However, induced employment tends to be much higher in developing countries than developed ones, and where the wages paid by an employer are significantly higher than local standards. In developed countries, induced employment multipliers would be expected to be around 100%. We can estimate that besides the people that are working in the mine Dundee contributes also to the employment of 850 people indirectly employed in the contractors of the company and around 2500 people induced employment. As a whole, 3350 additional jobs are created as a result of the Dundee’s operations (indirect and induced employment). The indirect

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employment multiplier stands for 110% (of the direct employees) while the induced employment multiplier is assumed to be 150% (of the sum of direct and indirect employees).

Building and improvement t of infrastructure – roads, telecommunication services, technology

Building infrastructure plays its positive impact and has spillover effects on the other areas around Chelopech municipality. Building transport and telecommunication infrastructure has positive externalities for the region as a whole and is a prerequisite for sustainable economic and social development of the region.

Generation of GDP – multiplication effects of investments and income of people on the regional economy

The local communities gain not only from direct and indirect effects from providing work to people in the region but also from induced effects that lead to greater economic activity in the region. The investment and construction activities of Dundee feed the local construction industry, transportation, service and other sectors in the regional economy. The multiplier effect depends on the share of workers from the region directly involved in the operations of the mine and their marginal propensity to consume of goods and services from the region. If we take the assumption that at least 50% of the net earnings (after taxes, fees and social securities) are consumed in the region (on food and local services), the multiplier is 2. This means that the each lev (net of taxes) earned as a result of the Dundee’s activities generates 2 levs for the regional economy.

4.3. Economic Impacts on a National Level

Table 9: Economic Effects of Chelopech Mining in Bulgaria for the period 1999-September 2006 (thousand levs) Chelopech Mining Ltd. 1999 2000 2001 2002 2003 2004 2005 Sept.2006

Retained Gross Production 30 381 41 422 22 414 42 394 24 125 49 270 101 402 120 769 % change 36.3% -45.9% 89.1% -43.1% 104.2% 105.8% % of gross production of the mining industry 3.41% 4.13% 2.16% 4.09% 2.16% 3.62% - - % of gross production of the industry sector 0.17% 0.18% 0.09% 0.16% 0.08% 0.14% - - % of GDP 0.128% 0.155% 0.075% 0.131% 0.070% 0.129% 0.242% 0.346%

Gross Value Added from the operating activities of “Chelopech Mining” 5 649.1 9 832.4 -2 635.3 20 075.4 8 585.3 16 970.1 34 498.7 68 295.3 % change 74% -127% -762% -57% 98% 103% % of GVA of the mining industry 1.68% 2.55% -0.65% 4.87% 1.95% 3.18% - - % of GVA of the industry 0.11% 0.14% -0.03% 0.24% 0.10% 0.17% - - % of GVA of the economy 0.03% 0.04% -0.01% 0.07% 0.03% 0.05% 0.10% 0.23%

Export of “Chelopech Mining” 26 889 42 368 25 001 24 445 25 251 38 875 89 431 109 648 As a % of the overall export 0.25% 0.28% 0.15% 0.14% 0.14% 0.18% 0.35% 0.46%

Investments made by “Chelopech Mining” 3 278 10 075 3 056 10 977 1 696 27 619 39 243 60 785 As a % of investments in the economy 0.08% 0.21% 0.05% 0.17% 0.02% 0.31% 0.33% 0.58%

Concession fees from “Chelopech Mining” 521.4 1 264.3 1 292.1 1 316.5 1 050.4 1 715.0 2 688.0 2 430.7 % of revenues from concession fees in the budget 10.53% 13.44% 8.34% 8.33% 4.27% 6.33% 11.44% - Sources: NSI, Chelopech Mining Reports, IME calculations

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It can be seen from table 9 that after 2004, when Dundee bought Chelopech Mining EAD the economic importance of the mine has grown on a national level. The economic impacts of the mine on the Bulgarian economy have intensified.

Generation of government revenues

The total direct budget revenues that go to the central budget are corporate tax collections, royalties, taxes on employment, excise and import duties, fees. In the other section of the report is presented the fiscal impact of the Dundee’s operations in more detail.

The company generates revenue for the state budget through the following sources: - Corporate income taxes, royalties and concession rents; indirect taxes, excise duties; - Taxes on salaries of employees, and social security contributions from employees and their employers; - Dividend taxes; - Import duty and purchase tax on vehicles and others; - Electricity and water charges; - Transportation services paid to the national railway monopoly – BDZ.

Realization of exports

Dundee exports all of its production abroad. Its final product in the mine and mill in Chelopech is a copper and gold concentrate. Due to its high degree of arsenic, the concentrate cannot be processed in the nearby processing plants – Elatsite Copper AD and Union Miniere Pirdop Copper AD.

In absolute terms, in 2004 and 2005 Dundee exported copper and gold concentrates worth of 73 million USD.

Mining contributed between 0.14 and 0.46 percent of Bulgaria’s export income during the period 1999-2006. The contribution of exports on a relative basis fell between 2001 and 2004 but it increased back in 2005 and 2006.

The contribution of Dundee to exports directly affects in positive direction the trade balance and current account of the economy. The growing misbalance between exports and imports and its negative net values is often cited as a thread to the Bulgarian economy.

Foreign Exchange Generation

The company is a major gross foreign exchange earner. The company’s contribution to the nation’s gross foreign exchange earnings grew by over 100% in 2005. In absolute terms, the company generated about 52 million USD in 2005.

Contribution to investments in the economy

Capital formation is a major driver of enhanced economic growth of the countries. Dundee, through its investments in buildings, facilities, machinery and equipment helps to build capital in the economy. That leads to greater factor productivity in the economy, which in return directly increases the real growth of the economy.

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Investments from Dundee Precious Metals account for 0.33% all investments in the country in 2005 and 0.58% of all investments in the first three quarters of 2006.

Investment climate improvement also can be used as a catalyst for attraction of more foreign investments in the country. The image of the company abroad and its popularity among investors helps for drawing attention on Bulgaria and places it on the map of the world mining destinations on one hand, and on the other – it is becomes a place for earning sustainable profits.

Spending on environment

Dundee finalized the following agreement with the Bulgarian government in 2004: Dundee will reduce its royalty by 50% for a seven-year period with a minimum royalty equal to 1993 levels. The 50% reduction is deposited into a fund that is dedicated to environmental projects in the region because Dundee uncovered potential problems that may exist in the future. The fund is used as a guarantee against environmental and health damages in the region as a result of the operation of the mine and it amounts to more than 2.3 million USD at present.

Contribution to GDP and economic growth

The induced business activity and its multiplication effects on the Bulgarian economy as a whole come not only as a result of the income generated by employees, managers and contractors from the operating activities of Dundee, but also by the investments that the company has made in the economy. All kinds of capital formation through building of facilities, buying equipment and machinery, software as well as the know-how that the company has in managing such projects is a spur of economic activity. Direct net earners are construction companies as well as producers and official representatives and importers of equipment and machinery and service centres and repair shops.

Retained gross production of an operation is that portion of the gross production that is retained in the economy of the host country. In 2005 the retained gross production of the company amounts to 101 million levs, which represents 0.25% of the country’s GDP. In the first three quarters of 2006 the gross production retained in the economy is 120 million levs which amounts to 0.35% of the GDP. The retained gross production of the company in 2004 is equal to 3.62% of the gross production of mining and quarrying sector. The GVA from the company’s activities in the period 2004 - September 2006 is estimated to 120 million levs.

Any major investment project constitutes an economic ‘shock’ and is likely to have wide- ranging economy-wide effects. Any direct effect arising during the construction or operating phases of the project is likely to have additional, indirect effects on the economy, which occur either at the same time or subsequently. The fact that the initial spending effects may be magnified leads to what are known as ‘multiplier effects’.

In order to monetarize the direct spillover effects on the economy we should assess the size of the multipliers in the economy. However, the activities of companies are characterized by complex structures, they represent a roundabout process and it is impossible either to predict it or to depict all links and internal connections that exist.

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However, based on theory and the observed macroeconomic parameters we can assess a possible range of multiplication effects for the economy as a result of the operation of Dundee in the economy. The effects that are transmitted from the mine to the other parts of the economy depend on the features of the existing economy-wide interdependence. The expenditures for realization of the project feed through and stimulate other activities and sectors in the economy, and also affect the level of the distribution of incomes.

Output multipliers are applied directly to initial expenditures injection of the project and it is based on the notion that the initial expenditure on a sector’s output will cause an increase in total gross output that is greater than this initial expenditure.

Income multipliers are applied to the income generated by the initial expenditure injection and is based on the notion that the initial expenditure injection will generate a total amount of income that is greater than the initial (direct) income creation.

Different studies show that the multipliers that take into account direct and indirect effects as well as induced impacts range among the following numbers: 2.0 for mines in Florida and Nevada, 2.3 estimated for a mine in New Zealand and 6.7 estimated for a mine in Chile.

We take 2 for the multipliers size in order to assess the indirect and induced effects of the operation of Dundee on the national economy. According to our estimates, Dundee’s operations would represent more than 0.7% of the national GVA (gross value added) in 2006 in the economy if indirect and multiplication impacts are considered.

The direct and induced GVA in the period 2004 - September 2006 as a result of the operations of Dundee in Chelopech is estimated to be at least 360 million levs.

3.4. Fiscal Benefit Streams from the Mine in Chelopech

The company generates revenue for the state budget through the following sources: - Corporate income taxes, royalties and concession rents, services, excise and import duties, local taxes and fees; - Grants for the local government; - Taxes on salaries of employees, and social security contributions from employees and their employers; - Indirect taxes on personal consumption generated by employees in the mine; - Corporate taxes from domestic suppliers, taxes on salaries of their employees involved in supplying goods and services to the mine and indirect taxes on consumption of these workers.

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Table 10: Realization of Fiscal Benefits to the State of “Chelopech Mining” for the period 1999-Sept. 2006 (thousand levs) Fiscal Effects from: 1999 2000 2001 2002 2003 2004 2005 2006/9 Total I. Chelopech Mining 1. Revenues in the government as a result of the operation of the company Corporate taxes 457.0 144.0 -286.0 1 155.0 -866.0 -823.0 1 638.0 7 450.3 8 869 Social security paid by employer 2 058.6 2 010.4 2 320.7 1 931.4 1 986.4 2 678.2 3 424.4 2 309.3 18 719 Royalty (concession rent) 521.4 1 264.3 1 292.1 1 316.5 1 050.4 1 715.0 2 688.0 2 430.7 12 278 Import duties 18.1 231.3 63.5 50.6 121.6 735.2 397.6 422.9 2 041 Excise duties 57.0 106.4 135.1 119.5 113.5 280.0 425.3 491.6 1 729 Local taxes and fees 0.2 0.2 0.4 0.4 0.5 3.7 3.0 32.0 40.4 Withholding taxes 143.2 453.0 497.6 117.9 525.7 298.2 549.6 162.8 2 748 Grants for Chelopech and Chavdar municipalities 125,2 83,5 97,8 77,4 121,7 198,8 275,7 686,1 1 666 Other tax payments 80.3 209.9 138.7 687.6 1 208.8 -287.8 0.0 0.0 2 037 Total (1): 3 461 4 503 4 260 5 456 4 263 4 798 9 402 13 986 50 128 2. Budget Revenues from Taxing on Employees’ Salaries Personal income taxes 1 117.9 1 010.3 1 157.8 961.2 903.5 1 328.5 1 472.3 1 149.5 9 101.2 Social security paid by employees (that go to the national budget) 148.5 410.0 458.5 472.6 470.2 632.1 815.6 781.0 4 188.7 Indirect taxes paid by employees on consumption 605.1 555.0 553.1 607.6 647.4 915.4 1 050.1 1 100.7 6 034.3 VAT 465.5 409.6 414.6 386.5 400.0 575.8 634.8 676.7 3 963.5 Excise and import duties 123.8 132.7 125.5 146.7 172.4 227.4 301.3 290.2 1 520.0 Local taxes and fees (garbage fee, property taxes, taxes on vehicles, etc.) 15.76 12.63 13.05 74.35 74.99 112.16 113.99 133.83 550.76 Expenses saved by the government by not providing of social assistance and unemployment compensations 59,14 59,47 59,81 52,16 51,16 66,91 71,62 83,70 503,96 Total (2): 1 928 2 034 2 229 2 094 2 072 2 943 3 410 3 115 19 826 II. Contractors and suppliers of Chelopech Mining Revenues generated by local companies 18 127 22 883 21 302 28 354 21 659 31 314 53 002 35 695 232 336 Rate of return in the economy 5.8% 5.5% 6.0% 5.6% 6.4% 6.2% 6.6% 6.4% Profit of local companies (assessment) 1 051 1 259 1 278 1 588 1 386 1 941 3 498 2 284 14 286 Collections from income taxes (3): 361 352 300 373 326 379 525 343 2 958

Labour expenses on salaries and social security as a % of the gross product in industry and services sector 19.30% 19.08% 19.26% 19.14% 18.91% 18.70% 18.50% 18.00% Labour expenses made by the local suppliers 3 499 4 365 4 104 5 426 4 096 5 857 9 805 6 425 43 578 Collection from taxation on labour and consumption – personal income tax, social security, VAT, etc. (4): 1 894 2 345 2 115 2 964 2 240 3 188 5 138 3 264 23 146

TOTAL (1+2+3+4) 7 643 9 234 8 905 10 886 8 901 11 307 18 474 20 708 96 058 Sources: NSI, Chelopech Mining Reports, IME calculations

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Fiscal effects by operation of Chelopech Mining in Bulgaria for the period 1999- September 2006

Total fiscal benefits for the national and local government budget from taxation on company profits, employees and domestic suppliers of the company for the period 1999 - September 2006 amount to 96.058 million levs. That equals to an average of: − 0.037 % of GDP of Bulgaria per year − 0.089 % of the national budget revenues per year

Direct fiscal revenues from taxation on the operation of the company and taxes on employees in the company for the period 1999 - September 2006 amount to 69.954 million levs, which is equal to an average of: − 0.027 % of GDP of Bulgaria per year − 0.065 % of the national budget revenues per year

Fiscal revenue collection from taxation on corporate profits and labour of Chelopech Mining’s domestic suppliers for the period of 1999 - September 2006 amount to 26.106 million levs, which is equal to: − 0.010 % of GDP of Bulgaria per year − 0.024 % of the national budget revenues per year

As it is seen from the table fiscal benefits for the state from operation of the mine in Chelopech doubled per year after Dundee Precious Metals bought the mining company and began investing in high-quality machinery and facility and expanded its operations.

4. Social Impacts of the Mining Operations in Chelopech

Positive impact on employees’ families

There is a number of people who are likely to depend financially on the Chelopech mine’s wage earners in the area of Chelopech and the adjacent municipalities. We can calculate an estimate of the number of such dependents by combining the number of jobs with the average family size in the area. The people directly employed in the mine are 775 at present. If we take an average family size of 2.5 that is the countrywide average (including wife, children, other family members), we estimate that the overall number of dependents on wages earned in the mine is 1937 people. This number can be further multiplied by the dependents of the wage earners indirectly employed in contractors and suppliers of Dundee – estimated to 2125 more people.

Poverty line reduction

As a result of the generation of more income by residents, more employment opportunities, induced economic activity in the region as well as more revenues for the local government bodies, the poverty line in the region is set to decrease in comparison with average district and national level.

The overall index of human development (IHD) in 2003 (latest available measure) for the municipality of Chelopech is 0.806, which is above the Sofia District average of 0.767. That places the municipality on the 29th place in the country according to this parameter and on the first place in the district. Also, the municipality is on the first place in the region according to

31 Institute for Market Economics, www.ime.bg the educational index – 0.94 for the municipality as compared to 0.891 for the district as a whole.

Increasing value to society through (1) increasing standards of life, (2) increasing standards of health care and (3) increasing education standards.

The mine has also spurred investments in education, health, infrastructure and community development, which in turn has created some additional jobs. We have, however, not been able to quantify the exact number of such investment-generated employment in Chelopech.

The company is maintaining a private English language school in Chelopech. The net expenses (expenses minus revenues) through the years are as follows:

Table: 11: Net expenses for funding a private English language high school Year 1999 2000 2001 2002 2003 2004 2005 2006 Total Net spending 132,779 174,532 160,159 180,647 127,276 168,653 219,342 244,558 1,609,582 (lv)

Less emigration in the region and incentives for immigration of educated people

As a result of the operation of a firm that is a branch of an international, widely known company, educated people may prefer to stay in the municipality or to come back instead to emigrate. Also, the company currently employs 43 people from Sofia, which means that they spend some of the money earned in the mine on buying local goods, and services and thus they directly contribute to the economic and social development of the region.

Community development and improved governance

Dundee helps local community build social infrastructure and institutions that correspond to higher standard of living in the region. The company strives to improve local governance by inducing dialogue in solving important issues and transparency its collaboration with representatives from the local government.

Dundee has been constantly investing in enhancements to the social infrastructure of host communities in order to underpin their sustainability and assure a positive and sound business environment that is crucial for the success of the company in the medium and long term.

Investment in human capital

When hiring people Dundee provides different types of training and education. Provision of training with modern technologies and development of English-speaking and commercial skills is of great benefit for the employees for their future prospects and professional realization.

Environmental impact and health and safety provisions

The project area includes a number of sites with already negatively impacted landscape as a result of previous emissions. Most susceptible to those impacts is the forest landscape along the Balkan Mountains slopes in immediate proximity to the site, and in particular the vegetation. Susceptible to the impacts is the agricultural landscape in the base of the pan

32 Institute for Market Economics, www.ime.bg valley. The aquatic and sub-aquatic landscape of the river, its tributaries and tailings dams have transformed into anthropogenic landscapes due to their levels of pollution and transfer of pollutants directly discharged there.

Since it has begun mining operations in Chelopech, Dundee strictly observes all national and EU directives concerning the application of Best Available Technique and ecological norms. An extensive range of precautionary measures are taken into consideration by the company. As a result, the present mining and processing operations in Chelopech do not generate waste gas emissions.

Social Provision

Through its special projects and and initiatives Dundee tries to preserve the cultural values and traditions in the region. At the same time, it gives people opportunity to see new things and gain new skills and competencies.

The types of provision can be classified as: - Physical infrastructure (roads, utilities); - Education; - Health; - Local enterprise development; and - Community development.

Social and business support programmes are already initiated in Chelopech and the adjacent municipalities. Since August 2004 the company Chelopech Mining EAD has provided financial support to various local projects in the field of public works, municipal infrastructure, social activities, etc. which were approved by the Municipal Council at Chelopech. Additionally, the company provides financial support, donations and technical assistance to many other local initiatives and projects of Chelopech and the adjacent municipalities – Chavdar, Zlatitsa and Pirdop.

Dundee has provided about 400,000 levs to Chelopech municipality till now and above 100,000 levs to Chavdar municipality. Also, the other donations of the company account to more than 100,000 levs. Almost 1 million USD are spent by Dundee for various social programmes and initiatives in the local community.

In 2006 Dundee sent an open letter to the Ministry of Economcs of Bulgaria with a proposal to have its royalty rate increased from 1.5% to 2.15% of the metal value of the ore mined on condition that the additional levy of 0.65% goes directly to the local budgets of Chelopech and Chavdar municipalities. Still, there is no formal response to this proposal.

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IV. PROSPECTIVE DUNDEE PRECIOUS METALS’ PROJECTS IN BULGARIA

1. Project Outline for Expansion and Redevelopment of the Chelopech Mine

Dundee Precious Mining projects to increase mine production and to construct a facility to produce copper and gold metals for direct sale to end users. The process will also convert the arsenic present in the concentrate into an environmentally stable form suitable for safe disposal into a TMF.

The Chelopech expansion project comprises: expansion of mine production capacity to 2.0 million tonnes per year; following the commissioning of the plant, together with suitable exploration success it is proposed to expand the operation further to 3 Mtpa capacity. the mine will produce 21,700 tonnes of copper metal and 130,000 ounces of gold bullion per annum; modernization of the existing flotation concentrator to handle the capacity; building an MPF that incorporates POX, CIL and SX/EW to treat the copper/gold concentrate and produce copper and gold metals; upgrade of the existing TMF and construction of a new facility for storage of POX- CIL tailings; the life of mine for the operation is expected to be a minimum of 9.3 years from commissioning of the new facilities (till 2021).

The estimated ramp up completion of the project is in late 2008. During the next 2007 and 2008 166 million USD are projected to be invested for expansion of the mine and milling in Chelopech (both capital and operational costs of the project).

The initial capital injections include investments in the following items: - Definitive feasibility study - Hydrometallurgy - Project management, permitting and reproduction - Land acquisition - Surface infrastructure - Concentrator upgrade - Tailing management facilities - Oxygen plant - Mining equipment and structures - Surface decline Nadejda - Kapitalna shaft upgrade

The operational costs throughout the project are grouped by the following categories: - Underground capital development - Exploration drilling - Mining equipment - Surface decline Nadejda - Process plant - Surface infrastructure - Environmental rehabilitation - Administration

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The expansion of the project will lead to additional employment of approximately 50 new workers (full-time jobs), which means that the direct employment in the mine will grow to 830 people. According to our estimations indirect and induced employment as a result of the operation of the mine will increase to 3500 people least.

However, there is no alternative of the expansion of the mine. Should the project not realize, Dundee will have to close down its operations due to economic reasons. This will lead to: Losses of some 300 million levs direct fiscal revenues for the central and local government as a result of the operation of the mine; Losses of 4300 jobs (direct, indirect and induced employment) Losses of development opportunities and lower standard of living for the local community; Loss of benefits associated with induced business activity and multiplication effect of the operation of the company on the local and regional economy; Loss of economic growth and additional value added retained in the Bulgarian economy; Loss of capital formation, exports and foreign currency generation in the Bulgarian economy; Loss of all social benefits that are provided on a local and regional level – community development and improved governance, investment in human capital, social provision such as education, health, etc. Loss of funds aimed at environment preservation in the region;

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Table 12: Projections of Chelopech Mining fiscal contributions to the state in the period 2007-2020 (thousand levs) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 I. Chelopech Mining 1. Revenues in the government as a result of the operation of the company Corporate taxes -186,8 -5343,2 1295,0 671,0 -359,1 -465,5 -233,7 103,4 185,3 267,8 350,4 1664,7 1879,7 3039,7 Social security paid by 3156,1 1138,6 3067,8 2991,0 3065,8 3142,4 3221,0 3301,5 3384,1 3468,7 3555,4 3644,3 3735,4 3828,7 employer Royalty (concession 2545 829 3654 4588 4383 4383 4383 4383 4383 4383 4383 4383 4383 4383 rent) Import duties 610,3 600,7 85,4 83,5 42,0 29,2 29,2 29,2 36,5 29,2 29,2 29,2 7,3 0,0 Excise duties 784,6 479,6 1548,5 2046,3 2075,6 2123,9 2131,9 2136,6 2140,9 2145,1 2149,3 1995,7 1983,0 1844,9 Local taxes and fees 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 51,2 Withholding taxes 225,9 130,3 408,3 539,5 547,3 560,0 562,1 563,4 564,5 565,6 566,7 526,2 522,8 486,4 Grants for Chelopech and Chavdar 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 914,8 municipalities Total (1): 8 101 -1 199 11 025 11 885 10 720 10 739 11 059 11 483 11 660 11 825 12 000 13 209 13 477 14 548 2. Budget Revenues from Taxing on Employees’ Salaries Personal income taxes 1089,1 406,2 1135,2 1152,3 1181,1 1210,6 1240,9 1271,9 1303,7 1336,3 1369,7 1403,9 1439 1475 Social security paid by employees (that goes to 1067,4 476,5 1563,8 1836,9 1882,8 1929,8 1978,1 2027,5 2078,2 2130,2 2183,4 2238,0 2294,0 2351,3 the national budget) Indirect taxes paid by employees on consumption (VAT, 1568,3 601,5 1 730,0 1 808,8 1 854,0 1 900,3 1 947,8 1 996,5 2 046,4 2 097,6 2 150,0 2 203,8 2 258,9 2 315,4 excise duties, local taxes and fees) Expenses saved by the government by not providing of social 83,7 31,32 87,885 89,64389,643 89,643 89,643 89,643 89,643 89,643 89,643 89,643 89,643 89,643 assistance and unemployment compensations Total (2): 3808 1 516 4 517 4 888 5 007 5 130 5 256 5 386 5 518 5 654 5 793 5 935 6 082 6 231 II. Contractors and suppliers of Chelopech Mining Revenues generated by 34309,4 13171 48438 60429 61417 62481 62659 62837 63015 63193 63371 63549 63727 63905 local companies Collections from 220 84 310 387 393 400 401 402 403 404 406 407 408 409 income taxes (3):

Labour expenses made 6176 2 371 8 719 10 877 11 055 11 247 11 279 11 311 11 343 11 375 11 407 11 439 11 471 11 503 by the local suppliers Collection from taxation on labour and consumption – personal 3217 1 244 4 611 5 798 5 893 5 995 6 012 6 029 6 046 6 063 6 080 6 097 6 114 6 131 income tax, social security, VAT, etc (4): TOTAL (1+2+3+4) 15 346 1 645 20 463 22 957 22 013 22 264 22 728 23 299 23 627 23 946 24 278 25 648 26 081 27 320 Sources: NSI, Chelopech Mining Reports, IME calculations

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Table 12.1: Summary of the estimations of fiscal benefits to the state from “Chelopech Mining” EAD (thousand levs)

Fiscal streams 1999-2006 2007-2020 1999-2020

Budget Revenues as a result of the operation of the company 55 366 150 532 205 898 Budget Revenues from Taxing on Employees’ Salaries 20 864 70 721 91 585 Revenues from contractors and suppliers of Chelopech 27 307 80 363 107 670 Mining and their employees Total: 103 537 301 616 405 153

2. Krumovgrad Gold Project

Dundee through its subsidiary “Balkan Mineral and Mining” EAD has conducted geological survey and discovered gold deposits in the municipality of Krumovgrad. The mineral reserves total to 4.9 million tons of ore, which can be processed to 794,000 ounces of gold and 416,000 ounces of silver. The administrative center is at a distance of 310 km from Sofia and 48 km from Kardjali town. The nearest border control point is Kapitan Andreevo - 130 km. The nearest port Bourgas is at 310 km.

The projected total investment capital cost for the project is USD 75 million. To date, USD 18 million has been invested in Krumovgrad.

The Company estimates that royalties paid to the Bulgarian State over the lifespan of the project will total US $5 million (if there are no amendments in the ordinance and methodology for calculation of royalties).

Project development will entail purchase of: All land, including buildings and structures, located within the territory required for the mine site, plant and related facilities; Occupied and unoccupied residences, and adjacent land parcels, within the project area; Land for new road rights of way to the mine site; Land to compensate the private owners, which are included in the Resettlement Plan.

Project engineers have minimized the size of the project footprint as much as possible and have explored all viable alternative project designs to minimize land-take, but in total the footprint and anticipated buffer is approximately 200 hectares.

The case of Chelopech mine serves as an evidence that the mining operations contribute to economic and social improvements in the local, regional and national economy as a whole. Through its subsidiary “Chelopech Mining” Dundee Precious Metals have stated its commitment to a sustainable development activities reflected in various social investments in line with strategic priorities for economic advance of the region.

Focusing on the effects of mining in the region of Chelopech municipality and its adjacent municipalities, provides encouraging evidence. Driven by rapid mining expansion, the region’s economic growth has been faster than across the state as a whole.

2.1. General Information on Krumovgrad Municipality

Krumovgrad Municipality is part of Kardjali District, which falls completely on the territory

37 Institute for Market Economics, www.ime.bg of the Eastern Rhodopes. To the south it borders on the Republic of Greece. Deposits of minerals have been found, but have not been developed. Momchilgrad is the nearest railway junction at 32 km.

Agriculture occupies major place in the economic structure of the Municipality. Forests occupy approximately 49 % of the total area of Kroumovgrad Municipality and agricultural land – 48.9%. A greater part of the forestry belongs to the State Forest Fund. Tobacco production provides means of livelihood for the major part of the population – over 33% of the employed are occupied in the tobacco-growing industry.

The other industries that are developed in the district are cattle breeding and sheep breeding, clothing and shoe-making. There are also construction companies and numerous micro- companies occupied in trading. Also, the sector of tourism has the potential to develop in the area due to the natural environment and peculiar cultural-historical heritage.

Table 13: Krumovgrad Municipality Selected Indicators Year of latest Indicator Number available data Territory, of which 2006 843,319 sq. km Forestry 2006 46,90% Agricultural land 2006 47,00% Population 2003 19347 Number of settlements 2006 79 Population under working age 2003 3758 Population in working age 2003 11470 Population over working age 2003 4119 Hired workers 2003 2 854 Percentage of hired workers as a share of the population in working age 2003 25% Average annual salary (lv) 2003 2633 lv Average annual salary (lv) in the private sector 2003 1960 lv Number of registered unemployed 2003 1867 Level of unemployment 2004 17,59% GDP per capita BGN 2001 2024 GDP per capita PPP $ 2001 3714 Production of industrial entities (thousand lv) 2003 3 680 Revenues of economic entities (thousand lv) 2003 17 385 Fixed Tangible Assets (thousand lv) 2003 1 059 Expenses for environmental preservation (thousand lv) 2003 205 Number of households in the municipality 2003 6 068,00 Average number of members per household 2003 3,2 Ratio of mechanical increase of population 2003 -10,8% Ratio of natural increase of population 2003 0,4% Number of dwellings per 1000 people 2003 520 Sources: NSI, NAMRB, UNDP 2003

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Table 14: Krumovgrad compared to Kardjali district averages Year of latest Indicator Number available data Average annual salary as a % of average annual salary in Kardjali district 2003 88,8% Average annual salary in the private sector as a % of average annual salary in the private sector in Kardjali district 2003 82,3% Average annual salary as a % of the state average annual salary 2003 80,3% Rank of the municipality in Kardjali district according the level of the annual salary in the private sector 2003 7th (last) place GDP Rank from all Bulgarian municipalities 2003 127th place /264 Population as a share of overall population in Kardjali district 2003 12,0% Number of registered unemployed as a share of total unemployed in Kardjali district 2003 15,20% Production of industrial entities as a share of overall production in Kardjali district 2003 1,9% Revenues of economic entities as a share of sales in Kardjali district 2003 3,3% Fixed Tangible Assets as a share of assets in Kardjali district 2003 3,8% Rank by Human Development Index from all Bulgarian municipalities 2003 188th place /264 Rank by Life Expectancy Index from all Bulgarian municipalities 2003 128th place /264 Rank by Combined Education Index from all Bulgarian municipalities 2003 239th place /264 Sources: NSI, NAMRB, UNDP 2003

The presented indicators in the above two tables have been selected for evaluation of the present condition of the municipality. The values for the last observed period have been presented. However, no regular measurements and studies of these indicators have been made in this municipality. The evaluation of the indicators shows that the municipality is in an unstable situation and is less developed than the average state level.

The main obstacles that it faces are high local unemployment, poor level of development of communications and other infrastructure, delayed construction of a wastewater treatment plant.

According to a report by the UNDP (United Nations Development Programme) “Rural Regions: Overcoming development disparities” in 2003 Kroumovgrad is listed in the ranking of the 20 municipalities in Bulgaria with the highest indicator of Turkish population prevalence and also in the ranking of the 20 municipalities in Bulgaria with the lowest indicator in terms of educational coverage.

The local community is heavily dependent on tobacco-growing industry – around 90% of the household livelihood revenues in the municipality come from tobacco growing. In practice, there are almost no other opportunities for making up one’s living in the municipality rather than agriculture, and more specially -tobacco-growing. However, this sector of the economy is heavily regulated by the government and is dominated by big government intervention.

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The main features of the tobacco-growing business in Bulgaria are as follows: Tobacco farmers are mainly concentrated in regions with high prevalence of Turkish ethnical population. Tobacco producers are heavily subsidized in comparison with other entrepreneurs – as a result tobacco production is not efficient and a lot of farmers will not receive direct payments under CAP as they fail to meet the requirement of minimum 1 hectare per farm. As a result, tobacco-growing is not competitive; it lacks investments in efficient equipment and is very labour-intensive. Tobacco growers usually just make up their living by engaging in this business but maintain a very low level of living.

2.2. Economic Impacts

Increased employment

Krumovgrad’s 2004 official unemployment rate of 17,6% is about twice the national average. According to a sociological study conducted by Vitosha Research the rate of hidden unemployment is much higher, reaching to 50% of the local working age population. Therefore, the direct, indirect and induced employment effects will play a positive role on the local labour market and will increase the rate of actual and official employment in the region.

The estimated multiplier effect on the job creation of Chelopech Mining Project as a result of the operation of the firm and its sub-contracted firms and suppliers, as well as the induced business activity in the region and higher consumption rates, is 110 % indirect employment of the number of employees in the mine and 150% induced employment (of the sum of direct and indirect employment). That means that the multiplier effect of the project leads to approximately 4,5 indirect and induced jobs for every direct employee of the mine. However, Kroumovgrad municipality is relatively less developed than Chelopech municipality and the studies and papers submitted on the topic suggest that the multiplier effect will most likely be above 4,5. As a general rule, induced and indirect employment tends to be much higher in developing regions than in developed ones. In less-developed areas wages paid by the mining companies are significantly higher than local norms, which further has higher induced impact on the local community. The company has set objectives to maximize the opportunities for local suppliers and subcontractors concerning the procurement of goods and services.

Overall, the project will provide approximately 300 positions during the construction phase, and approximately 200-250 longer-term positions during the 10-year operation phase. Some 50 positions are expected during the closure and rehabilitation phase. Provisions are made for at least 75% of the workforce to be from the Krumovgrad region which means that the project will provide employment to approximately 225 local residents (during the construction-phase) and at least 150 during the operation. Taking into account all effects, we can estimate that some 1100 – 1500 jobs will be created in the region as a result of the project realization.

Improved Physical Infrastructure and Social Services

Krumovgrad has a weak infrastructure base compared to the national standards. Apart from the town of Krumograd the municipality’s road network is inadequate, the water distribution system is constrained, telecommunications are challenged, and power supply is intermittent. With just one hospital and one specialized primary health care facility, residents of Krumovgrad enjoy, moreover, inferior access to health care. The municipality’s declining

40 Institute for Market Economics, www.ime.bg population has led, finally, to a sharp decrease in the municipality’s educational coverage. Over the last ten years 16 of 31 schools in the municipality have closed. Today Krumovgrad hosts one early primary school (i.e. levels 14), eleven elementary schools, and in the municipal center, a secondary school and a vocational training center The investment for the project will boost infrastructure development and municipal utilities, including schools, medical centers, housing, electricity, water supply, and roads. Increased municipal revenue from developed economic activities will also further social service improvements. The impact of the project on availability of and access to facilitating social and physical infrastructure in the Municipality will be positive and significant in the long-term, facilitating sustainable diversification.

Induced business activity in the local economy

The municipality is characterized by a negative population growth due to the natural growth patterns in the local community as well as emigration waves of educated people who seek better jobs and higher earnings outside the region. The employment opportunities that will be created as a result of the realization of the project will reverse to a certain point these negative effects. More people will prefer to stay in the municipality due to the job places that will be opened and the favorable remuneration conditions in the company as compared to the average level in the area. As a result of the higher consumption in the region and induced procurement of local goods and services, demand will increase for various goods, which is a factor of economic growth.

Generation of fiscal revenue for the local and state economy

The company contributes to the fiscal revenues through payment of direct and indirect taxes, fees and royalties as well as by taxation of the subcontractors of the company as well as its employees. Also, the budget dependency of the local authorities from the central budget will lessen.

Diversification of economic activities in the region

At present tobacco growing dominates the scope of business activities in the region. As a result of the project, people will have greater choice to make up their living and more financing will be available to people and businesses as a result of the positive development of the area.

Multiplication effect of investments to the national economy

The project development and its positive effects will not only contribute to the local and regional economy, but also to the state and gross value added through the supply chain of the company, its exporting activities and procurement volumes of goods and services.

2.3. Social Impacts

The positive social effects on the local economy can be summarized as follows:

Poverty line will decrease due to higher income per capita as a result of new the employment opportunities in the area and the mine induced businesses within the region;

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Employment structure will diversify which will allow for local residents to specialize in different activities and not rely entirely on tobacco-growing activities; Dependents on employees will also gain from the development of the project – the dependents on the workers employed in the mine are estimated to some 800 people (the average household in the municipality is 3,2 persons), while the number of the dependents on those indirectly employed as a result of the project realization falls in the range between 2400-3500 people. Educated people may prefer to stay in the municipality or to come back instead to emigrate; Education levels will improve as a result of the investments of the company in different educational initiatives such as organizing courses on IT or English learning, etc.; Also, the company will provide its employees and the local community with training on IT, English, and development of commercial skills; Health services will most likely improve due to providing more funding to the local authority as a result of the company’s presence in the municipality; Local governance will improve through transparency and inducing dialogue in solving important issues; Cultural values will be preserved through different social activities and initiatives organized by Dundee; Health and safety standards will be strictly met;

Concerns

The project will alter the livelihood activities and quality of life of up to 22 households in the project area that will be directly affected by the project development.

The project will displace land uses and thereby potentially alter the livelihood activities, economy and quality of life of up to 74 homeowners, owning residences but not living on the project area, and as many as 200 private agricultural parcel owners in the project area.

Proposed solutions

With respect to private landholdings, the Company will support the resettlement of village households through the preparation and implementation of a Resettlement Action Plan (RAP) that meets international best practices such as World Bank Operational Policy Involuntary Resettlement (OP 4.12). The objectives of the RAP is to identify the range of people affected by the project, and outline the justification for their displacement by detailing eligibility criteria for affected parties and establishing compensation rates for lost assets. Also, other forms of assistance will be provided to rehabilitate the livelihoods of affected households. The aim is to mitigate the adverse impacts of displacement and creating development opportunities for project-affected people.

The State property in the project area comprises agricultural and forestry land. The Ministry of Agriculture and Forests manages the process. There is also property owned by the Municipality within the project area. The Company will purchase public land from the relevant authority under the terms and conditions required by law and regulations.

Also, engineers of the company ensure that the potential productivity of end land-uses will be similar to existing conditions and will permit re-incorporation of this land into the livelihood activities of nearby residents.

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Although not explicitly required by Bulgarian legislation, Dundee offered to establish and finance a 5 million USD investment fund to micro finance business development in order to foster sustainable development within the Krumovgrad municipality. The goal of the fund is to replace the jobs lost post mine closure. In addition, DPM offered an investment of two hundred thousand USD per annum as a contribution to the implementation of municipal projects in the field of education, healthcare, communal services and infrastructure.

The Environmental Impact Assessment of the project concludes the following:

No negative health impacts are expected for the population of Krumovgrad to be caused by emissions of harmful gases, dust and noise, and, indirectly, along the food chain. The chosen gold processing technology does not envision release of gas, liquid or solid waste to the environment that will have a negative impact on the environment and on human health, either in the neighbouring municipalities in Bulgaria, or in Greece and Turkey. The proposed technology for extraction of gold ore and the technical and technological solutions are listed among the best available techniques and technologies. It is the most extensively used technology in modern gold mining operations, providing over 90 % of the world production of gold.

Dundee also provided a list of guarantees to the local community, which referred to the environmental protection, healthcare and safety: full environmental bond for mine closure (not required by law); general liability insurance against any loss by the community arising from mine operations; relocation of town water supply upstream of mine operation; public monitoring through the establishment of a Council, which will observe the implementation of all; procedures and their compliance with the permits and the relevant legislation; staff training on the safe management and use of cyanide; cyanide destruction well within the limits specified in EU norms; possible relocation of the TMF.

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V. STUDY OF THE PROPOSED TECHNOLOGY TO BE USED IN THE MINING OPERATIONS – CYANIDE USE IN GOLD AND COPPER PRODUCTION

1. Cyanide in Gold Extraction

This section has been prepared in response to public concerns about the proposed use of cyanide for gold extraction in both the Chelopech and Krumovgrad projects. It is felt that better understanding of what is cyanide and how it is applied for gold extraction will help to better understand the risks and the proposed means to manage them.

The following is based on book of “M. J. Logsdon, K. Hagelstien and Terry I. Mudder, The Management of Cyanide in Gold Extraction, International Council on Metals and the Environment, 1999”. Other sources of information available from internet have also been used.

Cyanide is a general term for a group of chemicals containing carbon and nitrogen. Cyanide compounds include both natural and human made chemicals. Cyanide is one of only a few chemical reagents that will dissolve gold into water. It is a common industrial chemical that is readily available at a reasonably low cost. Cyanide has been in use in metal extraction since 1887 and is now safely used and managed in gold recovery around the world. Gold mining operations use very dilute solutions of sodium cyanide, typically in the range of 0.01% and 0.05% cyanide (100 to 500 part per million).

Cyanide is produced in large amounts, about 1.4 million tones per year, as one of the few basic compounds used mainly to synthesize a wide range of industrial organic chemicals such as nylon an acrylics. Gold recovery accounts for approximately 18% of the total world cyanide production.

Cyanide is naturally accruing molecule of carbon and nitrogen. Low concentrations of cyanide are present in nature, including for example a wide range of vegetables, fruits and nuts. In addition, cyanide is present in much of the every day environment, to which we are exposed, for example in road salt, cigarette smoke and automobile exhaust and as a stabilizer in table salt.

Cyanide is not persistent. Natural physical, chemical and biological processes transform it into other, less toxic chemicals. Even though cyanide is a deadly poison when digested in sufficiently high dose, it does not give rise to chronic health or environmental problems when present in low concentrations. Over time, natural processes such as exposure to sunlight can reduce the concentration of toxic forms of cyanide in solutions to very low values.

The mining industry employ strict risk management systems to prevent injury or damage from the use of cyanide. Cyanide in mining solutions is collected, either to be recycled or destroyed, after gold is removed. Managing risks associated with the use of cyanide involves sound engineering, careful monitoring and good management practices. Effective communication and emergency planning programs are an essential part of risk management.

Cyanide is used in mining to extract gold and or silver from ores that cannot be treated through simple physical processes such as crushing and gravity separation.

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Gold mining operations use very dilute solutions of sodium cyanide (NaCN), usually in the range of 0.01% and 0.05% cyanide. The sodium cyanide dissolves into water where, under mildly oxidizing conditions, it dissolves the gold contained in the ore. Either zinc metal or activated carbon is then added to the solution to recover the gold by removing it from the solution. The residual solution may be re-circulated to extract more gold or routed to the waste treatment facility.

There are two general approaches to leaching gold from mined ore using cyanide: tank leaching and heap leaching. Tank leaching is the conventional method.

2. Handling of Cyanide

Cyanide is naturally occrring molecule of carbon and nitrogen. Low concentrations of cyanide are present in nature, including for example in a wide range of vegetables, fruits and nuts. In addition, cyanide is present in much of the every day environment, to which we are exposed, for example in road salt, cigarette smoke and automobile exhaust and as a stabilizer in table salt.

Mining companies store sodium cyanide in secure areas that are kept dry, cool, dark and ventilated. In the storage area, cyanide packages are placed on pallets in their original containers above watertight floors usually made of concrete, with proper containment in the unlikely event of spillage.

The users of cyanide hold special training programs for all employees who work with or around it. Modern industrial safety programs at gold mining operations have been extremely effective at minimizing accidental cyanide poisoning at mine sites. A search of industrial accident records in Australia, Canada, New Zealand and the United States has revealed only three accidental deaths in which cyanide was implicated at gold mine sites in the past 100 years.

3. Cyanide in Solutions

After gold is extracted via the hydrometallurgical processes, three principal types of cyanide compounds may be present in wastewater or process solutions: free cyanide, weakly complexed cyanide and strongly complexed cyanide. Together, the tree cyanide compounds constitute “total cyanide”.

“Free cyanide” is the term used to describe both the cyanide ion (CN-) that is dissolved in the process water and any hydrogen cyanide (HCN) that is formed in solution. The solid sodium cyanide briquettes dissolve in water to form sodium ion and the cyanide anion (CN-). The cyanide anion then combines with hydrogen ion to form molecular HCN. This HCN can then volatilize and be dispersed into the air. When the pH is greater than 10.5, there is little hydrogen ion present and nearly all of the free cyanide is present as CN-.

These forms of free cyanide are important because they are considered to be the most toxic cyanides. However, they also happen to be forms that are readily removed from solutions through both engineered treatment processes and natural attenuation mechanisms.

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Natural processes alone can reduce the free cyanide concentration from solutions in areas open to the atmosphere often to levels below regulatory concern or even the limits of detection. In the gold plant, however, operators maintain the solution pH at values near 10.5 in order to prevent volatilization. This preserves cyanide in the gold extraction system.

While cyanide-bearing solutions are used in mining because they react with gold, they also react with other metals. Chemical analysis of the process solutions and wastewater derived from the processing indicate that most of the cyanide in solution is chemically linked with metals other than the small amounts of gold or silver. When chemical elements combine in solution to form soluble species, chemists refer to them as “complexes”. Some complexes are very stable, whereas others are easily destroyed. Analytical chemists are able to define the relative stability of cyanide complexes of different metals with great precision. It is particularly important to be able to distinguish both accurately and precisely between the various cyanide compounds to ensure the selection of an effective detoxification methodology.

The rate at which complexes dissociate and release free cyanide into solution depends on several other factors, including the initial concentration of cyanide complex, the temperature, the pH of the solution, and intensity of light, especially ultraviolet radiation..

4. Attenuation of Cyanide Concentrations in the Environment

Once gold has been recovered, the solution becomes barren of gold but still contains cyanide. The processes that decrease the concentration of cyanide in solution are called “attenuation”.

Over the past two decades, the chemical and mining industries have made significant advances in handling cyanide solutions so that they will not harm public health or the environment. Two technologies are used, usually in combination: treatment and recycling.

4.1. Treatment Four general forms of cyanide solution treatment are in use:

Natural degradation – The principal natural degradation mechanism is volatilization with subsequent atmospheric transformations to less toxic chemical substances. Chemical oxidation – The process for cyanide treatment include the SO2/Air process (developed by the Canadian mining company INCO) and the H2O2 (hydrogen peroxide) treatment process (pioneered by Degussa). Both methods of chemical oxidation are capable of producing residual concentrations of cyanide that meet stringent discharge standards. Both processes require testing on representative samples of site-specific materials prior to the final design. Precipitation of stable cyanides can be achieved by deliberate addition of complexing agents such as iron. Biodegradation of cyanide is the basis for industrial wastewater treatment systems. Advantages of the biological treatment process are its simple design and operational process control, low chemical costs and capacity of treating all forms of cyanide and its by-products.

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4.2. Recycling While the technologies for cyanide management have centered on cyanide destruction in single-pass systems, it is possible to recover and re-use cyanide, thus minimizing the total amount of cyanide used and reducing operational costs. Recycling lowers cyanide concentrations in waste solutions and decrease the cost of cyanide destruction. Cyanide recovery and recycling has been used since the 1930s.

5. Risk Management for Cyanide in the Mining Industry

There are four major risk scenarios that need to be addressed through site-specific plans: Exposure of humans or ecological receptors to cyanide spilled during transportation accident. Exposure of workers, particularly HCN gas in enclosed areas. Exposure of humans through releases of cyanide in solution to surface or ground water that may be ingested. Exposure to ecological receptors, such as birds or fish, to cyanide-bearing solutions.

Effective management systems involve four formal steps:

1. Plan: Written plans are prepared to detail the proper handling procedures and the accident response with respect to cyanide transportation, receiving, storage, solution preparation, processing and waste management. 2. Execute: For a program to be effective, there must be a commitment to execute the written plans routinely and continuously. In addition each employee’s responsibility for executing and documenting the actions required by the plans must be spelled out in detail. 3. Review and document: Part of the management’s responsibility is to audit performance on a routine basis. The responsibility for reviewing and documenting performance is usually given to persons who are not part of the line operation and who report to the corporate level of authority. 4. Take corrective action, if necessary: When deficiencies are discovered during reviews or daily, operations appropriate corrective action should be taken.

Mining companies inventory control systems, maintain worker training and industrial hygiene programs, as well as build and maintain process-solutions and waste management systems that are specifically designed to mitigate and prevent exposure to cyanide. Costs as well as risks are reduced when the amount of cyanide used in an operation is kept to the minimum level needed to achieve production goals.

6. Finding on Dundee Projects

Cyanide occurs naturally in the environment, in our food and in our bodies. It is harmless unless we get a toxic dose all at once. It cannot accumulate or build up in a system until it reaches a toxic level. Large quantities of cyanide compound are used safely every day to make common products for our use. Cyanide in the environment is diluted and degraded into harmless substances by natural processes.

The dangers inherent in the use of cyanide are real. But they are dealt with safely by industry every day all over the world.

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The proposed projects for Chelopech mining and Krumovgrad mine take into account the best practices for use of cyanide available today.

The study of the EIA statements of the projects of Dundee (“Expansion of Processing of Copper-Gold Ore from Chelopech Deposit” and “Krumovgrad Gold Project”) with particular emphasis on the environmental concerns lead to the following conclusions: • Both EIA statements confirm to Bulgaria’s current primary and secondary legislation. In addition, the assessments have been prepared recognizing that Bulgaria is an EU accession state and seeks harmony in terms of its law and regulations with those of the European Union. • The questions related to cyanide use for gold extraction have been addressed by the company with up most concern for safety and environmental protection. The cyanide concentrations in the tailing will be well below the European standards.

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VI. GOVERNANCE AND MINERAL ROYALTIES

1. Governance

Four case studies of the impact of mining industry in Chile, Ghana, Peru and Tanzania (leading mining states) were conducted by ICMM’s Challenge of Mineral Wealth initiative (in collaboration with UNCTAD and the World Bank), which aims to identify ways to improve mining’s socio-economic impacts. The finding is that institutional capacity and sound governance are a prerequisite for fostering sustainable development by investments made in the mining sector.

Mining has led to significant job creation and greatest fiscal revenues in countries where governments keep taxes and royalties competitive so as to attract investments. The conclusion of the case studies is that prudent macroeconomic policies and good governance have underpinned the national and local benefits as of result of the operation of mines in the countries.

Figure 2: Macroeconomic perspective

Source: ICMM, Synthesis of four Countries Case Studies - The Challenge of Mineral Wealth: using resource endowments to foster sustainable development, August 2006

Figure 3: Rent-seeking perspective

Source: ICMM, Synthesis of four Countries Case Studies - The Challenge of Mineral Wealth: using resource endowments to foster sustainable development, August 2006

The World Bank uses six composite indicators of the quality of governance.

Table 15: World Bank Governance Indicators in 2005 Range of Estimate (-2.5 to + 2.5), with higher values corresponding to better governance outcomes 2005 Bulgaria EU-27 NMS-10 Voice and Accountability 0.59 1.14 1.03 Political Stability/No Violence 0.16 0.71 0.74 Government Effectiveness 0.23 1.20 0.89 Regulatory Quality 0.63 1.22 1.11 Rule of Law -0.19 1.08 0.69 Control of Corruption -0.05 1.10 0.58 Source: World Bank, WGI

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Indicators show that Bulgaria is worse off than EU-averages and the ten new member states averages in 2005. It is way behind other EU members especially by “rule of law” and “control of corruption” measurements. However, the country has substantially progressed since 1996 in all indicators except “rule of law”.

Factors that determine the investment climate of a country in the mining sector are as follows: − Geological potential; − Political stability; − Level of corruption; − Tax regime; − Government regulations.

Mining is a risky activity due to: − Long gestation period; − Difficulty of prior anticipating of all effects; − Volatile community markets.

Therefore, political stability and predictability of tax regime and legislation system are crucial for potential investors when deciding where to invest.

2. Mineral Royalties

2.1. Purpose of Mineral Royalties

Although the structure and rates of mineral royalties vary widely, most are collected for the same reason, that is, payment to the owner of mineral resource in return for the removal of the minerals from the land.

A royalty is any tax type that exhibits one or more of the following attributes: • The intent of the tax is to make a payment to the owner of mineral as compensation for transferring to the taxpayer the ownership of that mineral or the right to sell that mineral. • The tax is special to mines and is not imposed on other industries.

2.2. Types of Royalties and Assessment Methods

Unit-based royalties. This is the oldest form of royalty assessment and is based on a fee levied per unit volume or weight and is called unit-based. A unit-based royalty is most often applied to minerals that are more or less homogeneous, such as industrial minerals (sand, gravel, cobbles, limestone, dimensional stone) or sold in bulk (coal, oil, iron ore, salt, phosphate, potash, sulfur). The most prevalent forms of unit-based royalty are based on making the measurement (weight or volume) at the mine mouth, before any significant processing or treatment could take place.

Unit-based royalties are straightforward compared with most other assessment methods because parameters subject to dispute, such as price, value and costs, do not come into the calculation.

Unit-based royalties are well suited to discriminate between scales of operation and its common to see a sliding-scale approach. Smaller operations that tend to be less efficient than

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larger operations may be assessed at a lower rate than large operations. In effect, sliding-scale unit-based royalty schemes recognize that too high a royalty may keep small, economically marginal projects from ever developing and that too low royalty tax may not adequately compensate the owner of a deposit that is being exploited at a high profit.

Value-based royalties. The most common way in which government assess a royalty is to calculate the product of a royalty rate times the value of the mineral. Such value-based royalties are sometime referred to as ad valorem royalties. The royalty rate may be uniform for all sales of that material or may vary according to a sliding scale based on the volume or cumulative value of material sold. Value of the mineral sold is most often determined as the value of the mineral in the following circumstances: • Contained in the ore at the mine mouth; • Contained in the first product sold (such as concentrates); • Recoverable; • Determined by the gross revenues derived from sales; • Determined by the gross revenues derived from sales less certain allowable costs, such as transportation, insurance and handling; • As reflected in a net smelter return (adjusted for smelter and refining charges).

Like the unit-based royalties, value-based royalties are payable irrespective of whether the mine is making a profit or losing money. However, unlike the unit-based royalties, value- based royalties fluctuate following commodity prices. Thus, when prices are high the government will enjoy more revenue than when prices are low.

The degree of complexity of calculating value-based royalties depends on how the value is defied. If value is defined simply as the revenue received from a sale the calculation is straightforward. However, often governments use different methods to determine the value. For example, reference prices may be used, such as the London Metal Exchange daily quotation for copper cathode. A problem with the price reference system is that what is being sold, such as concentrate, is not the same as what is being referenced such as cathode copper.

The picture becomes more complicated when the value begins to be adjusted to subtract out specific costs such as transportation, insurance and handling that are incurred from the mine site to the point of sale. Another common value is net smelter return (NSR), in which the taxable amount takes into account the return to the producer after smelting and refining charges and penalties are taken out.

Net Smelter Return (NSR) royalty

This type of royalty is determined as a percentage of the value received from the sale of product produced at the mine site. Costs associated with further downstream processing are deducted before calculating the base value for the NSR royalty. In the case of high-unit-value commodities such as gold or diamonds, these downstream costs are relatively insignificant, because the mine produces a nearly pure product. In mines that produce highly impure form of salable metal, the royalty received is truly a net value. In the case of base metal concentrates, the net smelter value would be net of smelting charges, refining charges, transportation charges, and any profit generated along this chain. For example, a company producing a concentrate containing 30% copper may receive payment equivalent to 65% of the value of the copper in the concentrate. This payment would represent the NSR base or net

51 Institute for Market Economics, www.ime.bg smelter revenue for the calculation of the royalty payment. None of the direct capital or operating costs at the mine site are deducted in the calculation of the royalty base.

The NSR royalty is by far the most common type of royalty in Canadian exploration and mine development agreements. The definition of the base for determining NSR royalties is generally well accepted within the industry. Although royalty rates as high as 5 percent have been noted in the past, values in more recent years tend to range from 1 to 3 percent of net smelter revenue.

The structure of NSR royalty provisions can be complicated by the incorporation of sliding rates based on production levels or mineral prices, advance payments, minimum payments, maximum payments, and so forth. In nearly all cases, however, the base for the determination of the royalty payment is the net smelter revenue.

Profit-based and income-based royalties. Very often investors favor taxation systems that are based on the ability to pay, that is, some measure of profitability or adjusted income. Unit- based and value-based royalties do not take into account the relative profitability of an operation because they simply look at the quantity of mineral produced or at some measure of the value of mineral produced and sold. The difference between profit-based and income- based systems is largely one of definition. A pure profit-based system will look at sales revenues from a single mine and deduct from those revenues allowed costs that are pertinent to that mine. An income-based system will not limit revenue to product sales but may include other sorts of revenues, such as sale of property, and may allow revenues to be aggregated by the taxpayer for all taxpayer’s mines. Statues that set out profit- and income-based royalty schemes tend to be lengthy and complex.

Hybrid systems. A variety of approaches combine the concepts of profitability with value- or unit-based royalties.

Royalty approaches Most approaches to royalty assessment fall within the three general categories – unit-based, value-based, and profit- or income-based. In addition, within each category are numerous specialized methods that are used to calculate the amount of royalty payable.

2.3. Government and Investor Royalty Preferences Companies prefer royalty approaches that are stable and predictable, are based on ability to pay, allow for early recovery of capital, respond to downturns in market price, do not distort production decisions such as cut-off grade or mine life and do not add significantly to operating costs.

From a government perspective, all forms of royalty have the potential to generate revenue necessary to fund society’s needs. Unit-based and ad valorem type royalties are certain to be paid in all the years when production takes place, whereas profit- and income-based royalties will be paid in years with profit or income. Unit-based and ad valorem royalties also satisfy the objective of providing revenue in the early years of a project, whereas a profit- or income- based type probably will not yield a return. Unit-based and ad valorem royalties are also transparent and easy to administer compared to profit- or income-based royalty taxes. This can be a large advantage if the agency responsible for administration is institutionally week. Governments have an interest in seeing that minerals are mined efficiently; unit-based and ad

52 Institute for Market Economics, www.ime.bg valorem royalties are neutral in this regard. Unit-based and ad valorem taxes can affect marginal undeveloped and operating mines

It is often stated that investors favor no royalty or if one is imposed, having it based on profit and income. However, because profit- and income-based taxes are not always paid, and are almost never paid in the early years of a project, significant pressure can be brought on a mine where an activist group turns hostile because of the perception that the population is being cheated out of an entitlement. In such an environment, some companies prefer to see a reasonable ad valorem royalty, particularly if a portion flows directly to the affected community. In effect, such royalty reduces overall project risk. Unit-based royalties reduce income, are not based on the ability to pay, prolong payback, do not respond to market conditions and can affect decisions about whether to mine or to continue mining. Ad valorem type royalties have most of the same disadvantages as unit-based royalties and, depending on how the value basis is determined, also can be difficult to calculate. However, given a choice between unit-based and an ad valorem royalty, most companies would prefer an ad valorem method because such methods are sensitive to price change. Clearly, profit- or income-based royalties satisfy most investors’ royalty preferences.

Consideration of Administrative Efficiency Sound formulation of royalty policy should take into account and balance a number of fundamental, but in some cases incompatible, objectives. A high degree of incompatibility exists between the objective of achieving economic allocative efficiency and that of administrative efficiency. Administrative considerations are also influenced by the government objective of maintaining stability in government revenue.

In terms of decreasing administrative efficiency, the most common royalties would be ranked as follows: 1. Unit-based royalties based on units of volume or weight. 2. Ad valorem royalties based on value of sales. 3. Hybrid royalties 4. Profit-based royalties.

By contrast, in terms of economic allocative efficiency, the ranking would be reversed.

The costs of administering royalties fall into one of two categories: Fixed costs, which are largely independent of the methodology used to calculate royalty, of the nature and value of the commodity mined, and of the scale of the operation, or Variable costs, which are a function of increasing methodological and administrative complexity and of the potential for ambiguity and disputes, which in turn lead to greater effort for compliance and verification by both the company and the government.

Governments that are intent on balancing administrative and economic allocative efficiency must consider the following: The unit price of the commodity mined, which determines the relative importance of projects of similar size in terms of their contribution to revenue and, therefore, the financial consequences of possible errors in computing royalty payable. The price volatility of the commodity mined, which affects the stability of the government revenue.

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The size of the mining operation, which if large, lowers the cost of administration per unit production.

Thus, it is not by accident that the majority of regimes apply unit-based royalties to low-value bulk commodities, even though such an approach, although administratively efficient, is generally recognized to be the most disruptive in terms rational economic decisions. Similarly, there is a strong rational to shift from unit-based to ad valorem royalties in the case of high value commodities or large volume operations. Both of those two methodologies generate above-the-line costs for the mining companies. As such, they influence the size of the mining reserves of a project and, consequently, its value and degree of financial feasibility. Both, ad valorem and unit-based royalties discriminate against less-profitable and marginal projects, even though some of these projects could have been, under a less economically disruptive royalty regime, larger producers and employers. Most low value bulk commodities, such as gravel, serve a local market, and the cost of transportation is a major factor. Prices are often set in the local market, so royalty costs can effectively be passed on the customers. Having a unit-based royalty is nearly free of costs from an administrative perspective because the royalty base is the same basis as the charge to customers.

As a consequence, regulatory regimes that use predominantly unit-based and ad valorem royalty systems generally feature provisions for royalty relief in case of cash-flow hardship brought about by, for instance, commodity price cycles. From an administrative point of view, relief provisions inevitably are more complex, result in higher compliance costs, and, in extreme cases, have the potential for abuse. Since the profit-based royalties are generally thought to be less economically disruptive, the question arises as to why they are rarely used.

The explanation clearly rests with the fact that profit-based royalties introduce the following: Profit-based royalties require significant additional administrative costs, which mostly relate to the difficulty and ambiguity in correctly determining the profit measure on which the royalty is to be based. The profit measure used is normally different from the traditional financial accounting measure of profit or that used to levy corporate income tax. Difficulties in determining the profit base at a project level rather than at a corporate level. The fact that royalties are normally levied at a project level introduces the questions as to which corporate items of expenditure should be legitimate deductions in the context of royalties. Exposure of risk-averse governments to: - the vagaries of commodity prices affecting revenue stability, - the project risk inherent in different mineral deposits, - inefficient (higher cost) project operators, and - risk arising from the higher or lower level of technical and management competence of various project proponents.

At the extreme, a combination of cyclically low prices and management incompetence could result in publicly owned mineral resources being depleted without the government collecting any royalty or income tax.

Because the profit base on which royalties are levied is generally very different from the corresponding financial accounting profit calculated according to acceptable accounting standards, companies need to keep a separate set of accounts or have special interrogation and reporting routines in their accounting systems to comply with royalty return requirements.

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A review of royalty rates may become necessary for a number of reasons: A new mining project may plan to extract a new commodity that has not yet been subject to royalty. Mining may resume for a commodity that has not been mined in the nation for a significant number of years, and the royalty rate of that commodity has been deleted from the relevant schedule in the regulations. Government has come to the conclusion that royalty collections, individually or in aggregate, are not in line with the desired proportion of economic rent that they originally intended to levy or that the proportion has become inadequate in light of evolving events or emerging needs. The royalty rates for specific commodities have moved out of line as an effect of inflationary trends.

Royalty rates are set in an empirical process that seeks the maximum revenue at the lowest economic and political cost. In this respect the type and frequency of industry-government communication and consultation are critical. Governments need to adopt the fundamental principle of “no surprises” if they are to avoid developing a reputation of sovereign risk, thus affecting investment in their country.

Royalty incentives, or relief by way of deferral or reduction of royalty, or exemption from royalty, may also be applied, on a temporary or indefinite basis, in special cases or in case of hardship.

2.4. Royalties in Selected Countries

2.4.1. Africa In most African nations it is standard practice to include royalties as part of the legal framework. Most African nations impose some form of royalty. Two notable exceptions are South Africa and Zimbabwe. However, both nations are considering imposing royalties. Many African countries that impose ad valorem-type royalty taxes allow some costs to be deducted from sales revenue when determining the royalty base Most countries with older mining laws have different royalty rates for different minerals. This variation flows from national sovereignty issues in which some minerals are perceived as being more important. Although it is not standard practice to design different royalty regimes for different scales of investment, it seems that holders of small-scale (ASM) mining rights are treated differently. This is mostly because of difficulties associated with formalizing the sector.. Standard practice is to allow for deferment or reduction of royalties in difficult times.

2.4.2. Asia and the Pacific

The Asia-Pacific region encompasses a rich diversity of nations with widely different cultures and government systems. In some nations (for example: China, Malaysia and Pakistan) provincial governments play an important role in mineral sector administration; in other the central government takes the lead. Most Asia-Pacific nations levy some sort of royalty, with the prevalent forms being unit-based (mainly for industrial minerals) and ad valorem-based royalty. Ad valorem

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rates tend to be low, typically 2-3 percent for base metals. The value basis varies from country to country but typically looks to a market value rather than an invoice value. Some of the nations in the region that have significant small-scale mining industries provide for special taxation of those miners. Although some nations allow deferment or reduction of royalties, or both, in difficult times, many do not.

2.4.3. Australia

Most royalties are levied at provincial level. The royalty systems tend to be highly detailed, with different minerals being subject to different valuation methods or rates. Most provincial- (state-) levied royalties are unit or ad valorem based, however, one state Northern Territories has moved to a profit-based system. Western Australia imposes higher royalties on raw materials (ore) than on products with value added (metal) in an effort to induce local processing. Some provinces allow for deferment or reduction of royalties, others do not.

2.4.4. Latin America

Two of the most important mineral-producing nations in the region are Chile and Mexico. Mexico does not impose royalties, while Chile imposes a 3% royalty of NSR. In Argentina, some provinces also do not impose taxes. Nations imposing royalties rely mainly on ad valorem-based systems, have “reasonable” rates, and tend to distribute them to mandated parties instead of adding them to the central treasury.

2.4.5. North America

Most Canadian jurisdictions levy a tax on mines based on profits or net revenue. Calculation procedures are complex compared with procedures under most ad valorem or unit-based systems and generally allow for special processing allowances to encourage further processing within the province or territory. Most commodities are taxed at the same rate and tax basis within any given jurisdiction. Graduated rates are applied in some jurisdictions; others have minimum profit thresholds above, which a uniformed rate of tax applies. In Ontario, new mines are offered a three-year tax holiday, subject to a Can$10 million limit on taxable profits. Remote mines in Ontario are taxed at half the rate of other mines and are given a 10-years tax holiday subject to the same Can$10 million limit on taxable profits. Saskatchewan offers the most diversity in royalty assessment, with a general profit-based system for most metallic and nonmetallic minerals and a sales-based royalty for uranium, potash and coal. Mine taxation in the United States is highly complex and is often tied to the type of land where minerals occur – federal, state, Native American, or private land – and to the mineral type. Because the mineral estate can be severed from the surface estate in some cases, determining the appropriate party is not always straightforward. The federal government does not levy royalty tax on most minerals in federal lands (with important exceptions, such as coal obtained though bidding). States often levy royalties on minerals in state-owned lands. These are usually ad valorem or unit-based approaches, although profit-based systems are also used. Nevada applies a sliding- scale rate based on net proceeds, with a floor value to implement the higher rate.

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Michigan has flat rates for coal and limestone but sliding scale rates for metallic minerals.

2.4.6. Eastern Europe and the CIS Countries

Bulgaria is competing for investments in its mining industry mainly with the countries from the former Soviet Block and the CIS countries established after dissolution of the Soviet Union.

Table 16 depicts the status of the world’s copper mining industry among the top ten producers and the CIS region, while Table 17 is similar but for gold output.

Table 16: Copper (world output in 2005 – 14,96 million tones of metal in the concentrates)

Country % Of World output Royalty, % Note Chile 36,0 3% of NSR Michigan – 2-7% of sales volume Nevada – 5% on net USA 7,8 Different for different states: income from sales >$4M; Arizona – 2% of sales This is equal to 2% of the 45-55$/t. Copper in the ore Indonesia 7,1 metal value in the ore produced produced 1-3% of gross revenue from Sales M$ 0-60 – 1%; 60-120 Peru 6,6 sales – 2%; >120 – 3% Varies for different states. Australia 6,0 From 2,7 to 5% of the metal value in the ore mined China 5,3 2% of gross revenue Max. 6% of net revenue from Russia 4,4 sales Varies from province to Canada 3,9 province 3% of the metal value in the Poland 3,4 ore mined 0,6 – 2% of net revenue from Currently considering 3% of Zambia 3,3 sales net income from sales Kazakhstan 2,7 2% of gross revenue 2,5% of the metal value in the Mongolia 0,9 ore mined % Of metal value in the ore Chelopech – 1,5%; Elatzite – Bulgaria 0,7 mined 1,5%; Asarel – 1% Max. 3,2% on net revenue Possible change to 1-8% of Turkey 0,3 from sales gross revenue Serbia & 0,1 3% of net revenue from sales Macedonia Greece 2% of gross profit on sales Romania 2% of net revenue from sales

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Table 17. Gold (world output in 2000 – 82,6 million troy ounces (2 573 tons) metal); (2005 – 80,9 million troy ounces, 2 518 tons)

Country % Of World output Royalty, % Note According to the contract in New law soon, which will South Africa 16,65 each case define 1-8% of gross income Michigan – 2-7% of sales volume Nevada – 5% on net USA 13,64 Different in each state income from sales >$4M; Arizona – 2% of sales From 2,7% to 4% of the Australia 11,45 Different in each state metal value in the ore China 6,96 2% of gross revenue Canada 6,04 Different in each province Max. 6% of net revenue from Russia 5,53 sales 1-3% of gross revenue from Peru 5,12 sales Approximately 1,2% of the $225-235/kg gold in the ore Indonesia 4,81 metal value in the ore mined mined at $600/troy oz. 3% of metal value in the ore Uzbekistan 3,28 mined 2% of metal value in the ore Papua-New Guinea 2,88 mined 2% of gross revenue from Kazakhstan 1,09 sales 2,5% of metal value in the ore Mongolia 0,46 mined Greece 2% of gross profit on sales Romania 2% of net revenue from sales 3,2% of net revenue from Turkey sales

Most of the top ten and the countries in the region levy ad valorem type royalties, both for copper and gold. The ad valorem rates vary between 1% and 3,2%. The top producers of copper and gold (Chile – copper and South Africa - gold) did not levy royalties till soon. However, Chile introduced a 3% royalty of NSR, while South Africa considers introduction of royalties in the near future. Most of the EE and CIS countries use ad valorem type royalties with a range within 1 to 3 persent.

2.5. Implications of Royalty

A mining country that relies on private firms to find and exploit its mineral resources must compete with other countries for investment. Its investment climate, which reflects how attractive the country is to domestic and foreign investors, depends ultimately on two considerations: first, the expected rate of return the country offers investors on their investments in domestic projects, and second, the level of risk associated with those projects. These two critical determinants in tern vary with the host of factors, including the country’s geologic potential, political stability, level of corruption, tax regime, and government regulations.

Because the producers of mineral commodities are often (though clearly not always) developing countries, consumers are largely developed countries (though not always), one

58 Institute for Market Economics, www.ime.bg might question the desirability of this redistribution of benefits. However, producing countries’ efforts to alter this situation would require collusion to restrain their competition and to artificially raise their returns. History suggests that such endeavors are rarely successful for more that a few years. Moreover, while these practices are in effect, they tend to encourage new supply and reduce demand, which ultimately have a depressing effect.

2.6. Tax Regime in Bulgaria

The current tax system in Bulgaria regarding the level of concession royalties on the mining operators is competitive in terms of world averages, but is complicated. The royalties are not calculated on NSR, as is the world pratice, but rahter on the metal value in the ore mined. Chelopech Mining pays 1.5% of the metal value in the ore mined, which translated into NSR, accounts to 2.4%.

The concession royalty regime in the country is based on the gross metal value in the ore mined and the profitability in the mining company. This approach is not an established one in the world. Most royalties in the world are based on a Net Smelter Return (NSR), which represents the world practice approach.

However, the proposed terms as of end 2006 in the Draft Ordinance on Determining Concession Royalties are regarded as totally unacceptable by the business in the mining sector of the country. Regulatory impact analysis has not been made of the proposed draft. Fees were first projected to increase several times which will adversely affect the mining operators in Bulgaria and will lead to closures of existing mines and lack of opening of new ones. As a result, significant slow-down should be expected in the growth of the mining industry in Bulgaria and no development of new mining projects.

Implication of the Proposed Royalties in Bulgaria: Proposed royalties will decrease the stability of the existing tax regime. More taxes force mining companies to accept more of the economic or market risk associated with new investment, while reducing the risk previously borne by the government. Introduction of such a high royalty would undermine the private sector’s confidence in the credibility of the government and increase perceptions of political risk. Losing greenfield as well as brownfield investments in the mining sector

2.7. Recommendations and Best Practices

All over the world the mineral sector regulatory and fiscal systems are undergoing major reforms. In an era of globalization, competition to attract exploration and mining investment has intensified. Nations are either replacing their mining laws or making major amendments to it. Nations are increasingly concerned with comparing their approaches to the mineral sector regulation and taxation to that of other nations. The trend has been for nations with relatively high tax to reduce tax levels, while nations with low tax levels to increase theirs. Part of this effort has been to look at various forms and level of taxes, including royalty.

Royalty is most commonly characterized as the payment due to the sovereign owner in exchange for the right to extract mineral substance. Across the globe, no tax on mining causes as much controversy as royalty tax. It is a tax unique to the natural resource sector and is

59 Institute for Market Economics, www.ime.bg sometimes based on the quantity of material produces or is based on measures of profitability, or value of the mineral resource produced.

The geological, economic, social and political circumstances of each nation are unique and an approach to royalty taxes that is optimal for one nation may be impractical for another. Although it is not possible to hold out one approach to royalty taxation is ideally suited to all mines within a country, it is possible to offer recommendations that can be applied in most situations. (James Otto, Craig Andrews and others, Mining Royalties: A global Study of Their Impact on Investors, Governments and Civil Society, The World Bank, 2006).

These include: 1. When designing a tax system, policy makers should be aware of the cumulative effects taxes can have on mine economics and on potential levels of future investments. When determining which taxes and levels of taxes to apply to the mining sector, policy makers should not only consider ways to achieve individual tax objectives, but also take into account the cumulative effects of all taxes. Such awareness must recognize the importance of each tax type in achieving specific objectives. The overall tax system should be equitable to both the nation and the investor and be globally competitive. 2. Nations should carefully weigh the immediate fiscal rewards to be gained from high levels of tax, including royalty, against the long term benefits to be gained from sustainable mining industry that will contribute to the long term development, infrastructure and economic diversification. 3. Mining companies should play a role. Governments will be able to arrive at better reasoned decisions if they are provided with quantitative assessments by companies on the effects of royalty taxes on issues such as potential over all investment, closure of marginal mines, and the implications of those closures on the national mineral reserve base. 4. A nation with a strong desire to attract investors should consider either forgoing a royalty tax and relying on the general tax system or recognizing investors’ strong preference to be taxed on their ability to pay. A nation seeking to differentiate itself from the nations it competes with for the mineral sector investment may find that a royalty tax based on income or profits is an investment incentive. Although profit- based royalty schemes are inherently more difficult to implement than other royalty schemes, governments that can effectively administer an income tax are better able to manage a profit or income-based royalty tax. 5. Governments that impose royalty taxes should do the following: Consult with industry to assess the effects that changes to the royalty system will have on the mining industry. Implement a system or systems that are transparent and provide a sufficient level of detail in the relevant law and regulations that make it clear how the tax basis is to be determined for all minerals. Select a royalty method or methods that are suitable for efficient and effective administration within the capacity of the tax-collecting authority. Give a high priority to strengthening both financial reporting and institutional capacity of administrative agencies responsible for levying and collecting mineral sector taxes. The government would thus be able to consider the complete range of royalty options rather than be limited to the simpler methods.

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Carefully consider all royalty options based on ability to pay (profit based systems). Avoid excessively high unit- or value-based royalty rates that will significantly affect production parameters such as cut off grade and mine life. Provide a means whereby mines experiencing financial duress may apply for a deferral or waiver of royalty, provided that clearly predefined criteria are met. Allow royalty payments to be deduced from income subject to income tax or allow royalty to be credited against income tax. Impose alternative measures on artisan and small-scale operators in cases in which the general royalty scheme would not be enforceable. 6. Policy makers and companies should consider the following means where by affected communities can share directly in the benefits of the mines: Recognizing that such benefits may be made available through a variety of means that may or may not include taxation. Balancing the overall mineral taxation system, including the royalty tax, in such a way that provides an incentive for companies to invest in sustainable development initiatives at the community and regional levels. Requiring mining companies to pay a share of royalty (or other mining taxes) directly to communities without the funds moving through the central tax authority, or alternatively, setting up a system in which the designated community share is paid centrally but is distributed in a transparent and timely manner. 7. Policy makers and companies should bear joint responsibility for treating royalty payments in a transparent manner that promotes public accountability. Overall, the aim should be for revenues generated by the mining sector to contribute to economic growth and social development. Particularly in developing countries, a lack of accountability and transparency in such revenues often exacerbates poor governance and contributes to corruption, conflict and poverty.

From a macroeconomic governance perspective, the optimization goal should be to maximize the net present value of the social benefits flowing from the mineral sector over the long term, including government tax receipts. This approach implies a balance, because if taxation is too high, investment and tax base will decrease as investors shift their focus to other alternatives, and if taxation is too low, the nation will lose revenue useful to serve the public welfare.

2.8. Concluding Remarks on Royalties

An examination of the royalty tax systems, in a number of countries around the world, revealed that most royalty methods could be classified as one of three types: unit-based, value based (ad valorem), or profit based. A very few nations apply hybrid systems that combine two of the three methods. The most prevalently used methods are the unit-based and value- based systems, but profit-based systems are increasingly being applied, particularly in diversified economies.

Unit-based methods are often applied to high-volume, low-value homogeneous “bulk” commodities such as construction minerals, bauxite, iron ore, phosphate, and potash. Unit- based royalties are well suited to discriminate between scales of operations, and it is common to see a sliding-scale approach. Unit-based royalties provide a certain and continuous revenue flow and are relatively easy to administer.

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Like unit-based royalties, value-based royalties are payable irrespective of whether the mine has profits or losses. However, unlike unit-based royalties they fluctuate following commodity prices. Value-based royalty may be easy or complicated to administer, depending on how the value defined, and when comparing value-based royalty rates in different jurisdictions, care must be taken to not compare rates in isolation unless the royalty base is identical. Value-based royalty may be uniform for all sales of that material or may vary according to a sliding scale based on the volume or cumulative value of material sold. A common value is net smelter return (NSR), in which the taxable amount takes into account the return to the producer after smelting and refining charges. For the purpose of calculating NSR, costs associated with further downstream processing are deducted before calculating the base value for the NSR royalty.

When considering any approach to royalty, governments need to take care that the approach selected can be administered efficiently and effectively.

In selection of royalty method and rate tax policy makers need to consider not only how the tax will affect individual mines but also how it will influence investors. In today’s global economy, investors have many nations to choose from when deciding where to invest in exploration and development. When comparing possible places to invest, companies will examine the overall investment environment as well as discrete criteria. In addition to geologic potential, factors of key importance will be those that threaten stability, such as political, ideological, and social risk, and those that threaten profitability, such as costs, environmental obligations, social obligations and taxes.

Unstable tax systems raise the risk that company economic projections and decisions may be based on faulty assumptions. Royalty methods and rates can be stabilized in a number of ways, including by special agreements and through the use of statutory rates rather than rates set by administrative law.

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VII. CONCLUSION

This study is a reflection of what Dundee mining operations in Chelopech have achieved in terms of contribution to the local communities and to the natinal economy and state budget.

Since 2004 Dundee through its subsidiary “Chelopech Mining” has made a unique contribution to the socio-economic development of the regions where the mining operations are located. As indicated in this study, the earnings per capita in Chelopech municipality and the other adjacent areas more than duplicate the national and district averages, and their socio- economic indicators such as poverty reduction, unemployment rate and the index of human development, are significantly above those of the rest of the country.

The net impacts to the country and the region are strongly positive as a result of the operations of Dundee. Our analysus shows that Dundee prospective project in Krumovgad will also bring substantial benefits to the local community as well as on a national scale.

The main results of the mining projects of Dundee in Bulgaria can be summarized to: (1) driver of economic growth; (2) poverty alleviation; (3) provision of sustainable employment; (4) infrastructure development and environment protection.

The impacts of mining activities are also fundamentally influenced by, and cannot be entirely unbundled from, the strength of local governance and local institutions. Prudent macroeconomic and fiscal policy and effective governance mechanisms are crucial for the successful realization of all positive benefits from investments in mining operations. Developing countries are in competition with each other, mostly because of domestic capital shortages. In these circumstances, royalties are a powerful fiscal instrument to either attract or discourage investments in the mineral sector.

Despite its positive macroeconomic development, Bulgaria should make further steps forward to improve its investment climate and governance indicators. If the country aims to attract more investors and manage successfully its resources endowment, it should provide greater transparency on the political scene and not discriminate the mining companies from the rest of the business through discretion in applying the administartive procedures or rule of law, but rather ensure and protect the property rights in the country.

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REFERENCES

1. Christine Ebrahim-zadeh, Dutch Disease: Too Much Wealth Managed Unwisely, Finance and Development a Quarterly magazine of the IMF, March 2003, Volume 40, Number 1. 2. EIA Statement “Expansion of the Processing of Copper-Gold Ore from Chelopech Mine to 3 Mtpa and Production of Metals from Concentrate” 3. EIA Statement of Krumovgrad Gold Project 4. Eyolf Jul-Larsen, Bréhima Kassibo, Siri Lange, Ingrid Samset, Socio-Economic Effects of Gold Mining in Mali. A Study of the Sadiola and Morila Mining Operations, CMI Report, R 2006:4. 5. James Otto et.al., Mining Royalties – A Global Study of Their Impact on Investors, Government, and Civil Society, The International Bank for Reconstruction and Development/World Bank, 2006. 6. Jeffrey D. Sachs, Andrew M. Warner, Natural Resource Abundance and Economic Growth, NBER Working Papers Series, December 1995. 7. International Council on Mining&Metals, UNCTAD Commodities Branch, World Bank, Synthesis of four Country Case Studies: The Challenge of Mineral Wealth: using resource endowments to foster sustainable development, April 2006 8. International Council on Mining&Metals, UNCTAD Commodities Branch, World Bank, Resource Endowment Toolkit: The Challenge of Mineral Wealth: using resource endowments to foster sustainable development, April 2006 9. International Council on Mining&Metals, UNCTAD Commodities Branch, World Bank, The Analytical Framework the Challenge of Mineral Wealth: using resource endowments to foster sustainable development, August 2006 10. M.J.Logsdon, K. Hagelstein and T.I. Mudder, The Management of Cyanide in Gold Extraction, International Council on Metals and Environment, 1999. 11. Tim Darden, Shawn Stoddard, William W. Riggs, Rangesan Narayanan, Thomas R. Harris, Economic Impacts of Mining and Mine Dewatering in Eureka County, Nevada, University of Nevada, Reno, Technical Report UCED 99/2000-20. 12. Thomas Akabzaa, Abdulai Darimani, Impact Of Mining Sector Investment In Ghana: A Study Of The Tarkwa Mining Region, January 20, 2001 13. World Bank Group Management Response, Striking A Better Balance – The World Bank Group and Extractive Industries: The Final Report of The Extractive Industries Review, September 17, 2004.

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