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Government Greed May Kill Off This Nation’s Mining Potential

I've written over the past year of my high hopes for one of the world's most under-explored -- and high potential -- nations.


This African island has some of the most prospective geology anywhere on Earth. And the little bit of work conducted to date across the country has unearthed world-class nickel, graphite, and titanium mines -- as well as strong potential for gold, coal, vanadium, and rare earths.

But news last week suggests an exploration boom isn't in the cards here anytime soon. In fact, this may be a spot for project developers to actively avoid. Related: Is Apple Banking On Fuel Cell Technology?

Those developments came from Madagascar's newly-elected government. Which said that it is eyeing a slate of measures designed to increase the national take from mining projects.

As reported by Reuters, such measures could include the government taking a direct 10 percent stake in new mining projects -- apparently as a free, carried interest.

Few details were released on how this rule might be applied. But the wording certainly makes it sound like mining developers will come out on the short end of the stick -- making project economics poorer here. Related: The Biggest Red Herring In U.S. Shale

The Madagascar government is also reportedly proposing to raise mining royalties to between 4 and 5 percent, up from a current 1 to 2 percent.

Such a move is very disappointing for a government that had been looking to attract more investment to the mining sector. The prospect of a mandatory carried interest from the initial stages of exploration is likely to be a non-starter for most companies -- no matter how good the country's potential might be. Related: Two Big Oil And Gas Finds In Unexpected Places

Importantly, it appears that the 10 percent carried interest would only be applied to new projects -- sparing existing mines like Sherritt's Ambatovy nickel operation.

Still, this is a solid step backward for Madagascar. If these developments do indeed come to pass, they will make this an exploration locale to avoid.

Here's to choosing wisely,

Dave Forest

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  • Frank Texas on September 09 2015 said:

    Please note that cheap royalties do not really stop production of minerals if it is worth producing. We have 6.75% or 1/16 non participating royalty in Texas for non hydrocarbon or carbon minerals on government land. This means that the fair government gets 1/16 of the value without the reduction of any operating costs. So another country Madagascar edges up to the Texas model from the common model used elsewhere is not so catastrophic.

    On hydrocarbons, Texas charges over 20% net royalty, that is after costs.

    In Mexico the government receives 50% of the in-ground value for minerals.

    Other governments like Madagascar, moving in that direction for taxation common in Texas or Mexico does not mean a sudden abandonment of the mining sector in Madagascar or elsewhere. Mining companies have this idea that they are the rescuers of some land. Regardless of the company, at some point the mine is done and the company leaves the area. The people remain.

    Reducing the growth or rather the size of government might be a better solution than increasing overall the taxation of anyone. However a 1 to 6 percent increase in the resource tax is not a deal killer. Oil companies would love to be taxed at 6% instead of the 20 - 50% + they are used to paying.

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