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Official Gazette

Monday, September 27, 2021

Vietnam’s untapped mineral wealth

Updated: 14:54’ - 25/06/2010

Ban Phuc Nickel Mines LLC General Director Robert D. Guest spoke to Vietnam Law & Legal Forum about mining legislation and its impacts on foreign investment as the National Assembly discussed the draft Law on Minerals this month

Vietnam is regarded as having rich natural resources. Do you think that the country has fully tapped this potential and effectively exploited its minerals?

Without doubt Vietnam has not fully tapped its true potential. One has only to look at how neighboring countries like China and Laos, which share very similar geology, have been able to find and develop significant copper, nickel, tin and gold mining projects to an internationally accepted standard. By comparison Vietnam only has one modest copper mine and several small-scale gold operations.

The mining industry has been at the forefront of the industrialization of many of the world’s most successful economies. Countries like Australia, Canada, South Africa, Chile, China, Brazil, Sweden and the United States have all benefited enormously from prudent development of their mineral resources. In other emerging nations like Indonesia, Kazakhstan, the Philippines and Laos mining is playing an ever increasing role in the nation’s growth and economy.

As a country considered rich in minerals, Vietnam has the potential to emulate this success and use investment in the mining industry to bring much needed foreign direct investment (FDI) to bring employment, infrastructure, services and economic stability to many of the lesser developed mountainous provinces, many of which are remote and have little appeal to foreign investment.

Encouraging the growth of modern, world-class mining operations would appear to offer an ideal opportunity to substantially increase FDI and bring development to many of the rural communities. Unfortunately, however, Vietnam does not appear on the lists of countries that are considered attractive for mining investment by the international community[1] and this raises concerns over the level of FDI that can be realistically expected.

Domestic analysts blame rampant licensing for unqualified investors and the absence of a national mining strategy for ineffective mining activities. What do you think about these problems?

Rampant licensing is a real issue but in reality I think that this has been confined to just one of the sub-sectors within the entire mineral sector. Most countries with advanced mining industries recognize three sub-sectors, namely:

a) Coal & fossil fuels (including brown coal, coal seam methane, oil shale, etc.);

b) Industrial minerals (granite, sand, marble, limestone, gravel, etc.) - these occur throughout the country and are widely used in infrastructure and real estate construction. They are mined as quarries or small open pits which often only operate whilst there are projects in close proximity to the source;

c) Metallic minerals (copper, aluminum, gold, nickel, chrome, iron and mineral sands).

I believe that much of this ‘rampant’ licensing has occurred in industrial minerals which by nature can be developed very rapidly and for relatively little capital outlay. These offer the potential for opportunists who use influence to obtain the licenses and then seek to make quick and easy money by on-selling the rights to others. This is not a healthy situation and the government is right to be concerned however it also needs to recognize that there are genuine investors and operators who are prepared to abide by the law and the changes in the law should ensure that they are not chased away and indeed are actively encouraged.

This is particularly true in the case of metallic minerals which are much more complex, occur in smaller concentrations which require much greater technology to find, extract and separate from the unwanted minerals. This is the ‘high value’ sector with the potential to develop multiple projects of national significance including ‘mega projects’ that stimulate the development of many of the remote parts of the country and the law should enable bone fide mining companies to invest and operate safely and efficiently.

Unfortunately the Mineral Law of Vietnam does not distinguish between these different sectors and attempts to provide ‘one law for all’. This inevitably leads to compromise and the recent drafts appear to subject the metallic sectors to constraints which are inappropriate for their level of risk and complexity of activities.

In view of the above issues, what are your comments on the latest draft Mineral Law?

The new Mineral Law is due to be passed in 2010 and whilst this offers hope that positive changes will be made, drafts released to date have not been well received by investors who are looking for more recognition of the high risk nature of the industry.

Draft 6 embraces some positive changes but in essence still follows the current Law in that it does not adequately distinguish between the sub-sectors and tries to provide a ‘one law for all’. This is a major weakness in that it will severely hamper the development of the metallic sector. The draft also envisages the inclusion a process of ‘auctioning’ of mineral prospects which something that has been tried unsuccessfully elsewhere in the world. It does not provide sufficient detail on how this process will be carried out and exactly what rights will be awarded to a successful bidder.

What are possible impacts of the Mineral Law on foreign investment in the mining industry?

Most potential foreign investors are comfortable with the law on foreign investment and would consider committing funds if the mining law provides them security over their investment for the full duration of the exploration, feasibility, construction and operation phases. Unfortunately, the current law does not provide the same protection as other countries and foreign investors have largely stayed away.

With the current law, investors are concerned with the followings:

     Security of tenure: There is no automatic right for investors to proceed from exploration to mining;

     Taxation of minerals lacks fiscal stability;

     Application should be processed on a first in, first served basis;

     Time frames for each phase of operation are unrealistic;

     Prospecting area limitations are too small to justify use of latest technology;

     Poor inter-ministry understanding of the mining law and inconsistent interpretation of the law;

     Absence of a lead agency with the authority to effect timely and definitive resolution of disputes;

     Processing of applications and renewals is time-consuming and inconsistent with international practice.

What are your recommendations to effectively enforce the Law, especially with regard to boosting foreign investment in the mining industry?

Resolving the security of tenure issue is critical. It must also reflect the reality of the industry where it commonly takes 8-10 years to find a mineral deposit of economic significance and then another 2-4 years to carry out all the studies necessary to commit to an internationally acceptable bankable feasibility study (covering the environment, community impact as well as engineering and metallurgical analysis). If the new Law does not recognize this reality then investors will by-pass Vietnam in favor of other countries whose laws recognize the high risk nature of the industry.

We suggest legislators give due consideration to the creation of a regulatory environment that:

     Ensures a favorable investment climate through provision of “investment certainty” and maintaining long-term continuity of low/competitive royalty rates;

     Stimulates the discovery of new mineral resources to increase mining reserves through provision of incentives for investment in exploration and mining development and introduction of new technologies to Vietnam. These incentives should recognize the high-risk nature of the industry;

     Improves the environmental law and strengthen the regulatory authorities;

     Encourages “legal mining” and discourages “illegal mining”;

     Provides for improved administration of the Mineral Law and streamlining of the mineral licensing system; and,

     Encourages beneficiation and down-stream processing of mineral products within Vietnam, through provision of incentives that recognize the high cost and long term nature of such investments.

Together with the passage of the Law, what further efforts should Vietnam make to improve the investment environment for foreign investors in the mining industry?

The fiscal regime in Vietnam is one of the highest in the world and many changes have imposed since June 2008. The changes which have had a major impact on the viability of both existing and future mining projects include:

Royalty[2]

     In 2007 royalties on gold and base metals was limited to a range of 0%-5% and stood at 3%;

     In early 2009 the range was increased to 10%-30% with gold fixed at 9% and base metals at 7%;

     In April 2010, the Ministry of Finance again raised royalties increasing gold to 12% and base metals to 10%;

     The methodology of determining royalties has also changed. Previously they were calculated on a basis of sales revenue less certain allowable operating costs. However, this has since been amended and now no deductions will be recognized. This translates into an additional burden for producers of between 3-5% over that applied under the previous methodology.

Since 2007 royalties have more tripled.

Corporate income tax[3]

In 2009 the Government reduced corporate income tax to 25% for all companies except those engaged in prospecting, exploring and mining  precious minerals which will now be subjected to an increase in company tax to somewhere between 32-50%.

Gold companies will now pay at least 7% more tax than any other business.

Export tariff[4]

     In 2007 the tariff payable on the export of certain minerals and ores was increased from 5% to 7%;

     In June 2008 this was increased to 20%.

Tariffs have tripled since 2007.

Environment and other fees[5]

     In May 2008 the Government imposed an ‘environment fee’ based upon a charge for every ton of ore extracted in metal mining activities;

     Recent drafts of the new Mineral Law include provision for the payment of a ‘resource compensation fee.’[6] Details of how this will be applied are not known.

These are new fees which did not exist in 2007.

Effective Tax Rate

In assessing the appeal of investing in a country mining companies calculate the “Effective Tax Rate” (ETR) that they would encounter if they discovered and developed a project in that country. The ETR is a measure of all mandatory fiscal obligations imposed upon a company/investor as a percentage of the likely revenue generated by the project. A study conducted by the World Bank in 2004 concluded that an ETR of between 40-50% is generally considered acceptable for a medium to large-size copper or other base metal mine. Countries that are the most successful in attracting significant FDI in mining like Sweden, Chile and Argentina all have ETRs of less than 40%.

An analysis of the fiscal changes introduced in Vietnam since 2007 reveals that the Effective Tax Rate on a new base metal mining project has risen from 45% in 2007 to more than 64% in 2010. When viewed against the World Bank data (see chart) it is clear that Vietnam is now one of the most heavily taxed in the World.

The preparation of a new Mineral Law provides an ideal opportunity to bring the mineral management framework more in line with international practice and address many of the investors’ concerns. However a new law alone is not enough and to be effective it must be accompanied by reductions in mining royalties and an internationally competitive tax structure.

Without these changes, the prospect that FDI in mining will increase and bring development and prosperity to the lesser developed mountainous areas of the country looks rather remote.-

 

Source: Mining Working Group of the Vietnam Business Forum

 



[1] Published by the Fraser Institute, United Nations Conference on Trade and Development.

[2] Circular No. 42/2007/TT-BTC, and Decree No. 05/2009/ND-CP.

[3] Law No. 14/2008/QH12.

[4] Decision No. 106/2007/QD-BTC, Decision No. 17/2008/QD-BTC and Decision No. 35/2008/QD-BTC.

[5] Decree No. 63/2008/ND-CP.

[6] Version 4 published on MONRE website.

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