Tilton, 2004).<sup>42</sup> It then scales its tax upward according to the size and presumed profitability of the larger projects, capturing resource rent flows as they occur. The tax has nevertheless been measured to be still somewhat regressive and distortionary and it likely suppresses some exploration activity (Davis and Smith, 2020). Industry leaders see a recent proposal to add a royalty to the tax rate as a tax on more than resource rent; they claim the royalty would cause them to reconsider investment plans already announced under the current tax regime.<sup>43</sup>

# Section 5: Empirical Findings from Copper Projects in Selected Countries

The model of mining companies’ project advancement presented above suggests that decisions on project investment first happen at the exploration stage and then at each subsequent stage when an investment commitment to advance the project further is needed. Firms will not advance a project any further if their evaluation shows a project stage has a negative after-tax NPV. The analysis also demonstrated how the results of successive evaluations as the project advances are adjusted to account for perceived political risk in the country context in which the project takes place. This adjustment is typically made by applying a higher discount rate as a proxy for rigorously adjusting individual components of t projected cash flow. The implication of this is that a mining project located in a country with low perceived political risk is more likely to advance than an identical mining project in a country perceived to have high risk. An empirical analysis of the impact of political risk on project advancement is presented below using data on copper projects in selected countries. This shows that political risk alone has had a profound impact on the investment in mining projects from the exploration stage through final commitment to build the mine.

## A. Project Grade and Country Characteristics

The compensating factor at a project with higher costs due to higher political risk is faster and higher revenue. The principal way a project can produce faster revenue is through reduced bureaucratic delays. Higher revenue during operations is principally through a higher quality deposit, which is manifest as higher metal grade throughout project life. In politically risky countries, exploration therefore will only take place in regions where large, high-grade deposits are likely to be found and relatively easy to permit. The result from these exploration efforts is binary – either the deposit is found and advanced to production, subject to some minor variance between what was searched for and what was found, or it is not found, and the exercise is terminated.

There is a density function of metal grades on the Earth’s surface. Figure 13 shows two representations of this distribution, with the right panel representing minerals like copper where hydrological processes concentrate them (Henckens et al. 2016).<sup>44</sup> The mineralogical barrier is the limit between economic rock (ores) and waste (common rocks) in a best-case scenario that abstracts from taxation or political risk distortions. Firms have the option of searching only for the highest-grade deposits or searching for any and all deposits that may be economic. Under political risk, the search shifts to the right, whereby political risk sterilizes what would otherwise be potentially economic deposits. It is possible to gain an inference

> 42 Chile has long been held up as a model for mineral project taxation.

> 43 <u>https://www.reuters.com/markets/commodities/mining-giants-warn-chile-mining-royalty-would-impactinvestment-2022-10-19/.</u>

> 44 Yale geologist Brian Skinner is credited with first proposing these graphics, known as the Skinner curve.

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