Assessing the impact of windfall taxes on mining projects with flexible DCF and Real Option Monte Carlo simulation – an example from Mongolia

CIM Montreal 2007
Michael Robert Samis, David Laughton, Michael Paduada,
Abstract The current environment of high mineral and energy prices has motivated many governments to review their mining tax laws and in some instances modify existing taxes or create new ones. These reviews have been conducted throughout the mining world and include such countries as Peru, Mongolia, South Africa, and Canada. Their advertised objective is the legitimate desire that the host country receives fair compensation for the extraction of its resources as the domestic and global mining business environment changes with time. The common concern for both mining companies and their host countries should be that the proposed tax changes are done so that a vibrant and viable domestic mining industry is maintained.

This presentation considers the recent Mongolian minerals tax change whereby mine revenues generated from copper and gold prices above $1.16/lb and $500/oz respectively are subjected to a 68% windfall tax. Flexible DCF and Real Options Monte Carlo simulation is used to analyse the value and operating impact of the windfall tax on both higher-grade and lower- grade long-life mining projects. The analysis also considers the effect of applying the windfall tax in an unrestricted form as reported by the business press and its application with various offsetting deductions as proposed by the Mongolian parliament. The results show that the windfall tax and its final form has an important impact on both the value and operating policy of lower-grade mining projects and a less important value and operating impact on higher-grade mining projects. The presentation’s key conclusion for governments and mining companies is that the impact of mining tax changes can and should be assessed with advanced simulation valuation techniques and the results used to debate the tradeoffs associated with these changes.
Keywords: Taxation, Flexibility, Valuation, Real options, Mine design, Discounted cash flow, Windfall Taxes, Monte Carlo simulation
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