Romania has secured a very good deal with Roşia Montană
The Roşia Montană mine, with an anticipated production of 17 tonnes of gold per year, will catapult Romania to the top of the gold producing countries in Europe. This will be double the production of the next largest producer, Finland.
Romania has more to gain from Roşia Montană than just becoming the highest ranked gold producer in Europe; with the value of gold already rising once again and the prospect of a world recovery now in view, the timing could hardly be better to benefit from the economic impact of a project of this size.
In total, 78% of the total financial benefits of the project will accrue to Romania. Having joined the EU in 2007, Romania has successfully begun to reduce poverty and unemployment rates, but the country remains one of the EU’s less well developed nations, with its sights set firmly on the future.
In addition to the taxation revenues and other benefits from the increased economic activity and investment, a 6% royalty rate ensures that the state receives a fair share of its natural resource, without taking on any of the risks associated with the mining business. A fall in profits for the company will not impact its payments to the government.
But is the 25% state ownership and the royalty rate enough? We certainly think so. Raw Materials Group, now part of RMGIntierra, is an international, independent, resources intelligence company, with over thirty years of documenting and analysing the global mining sector. We recently evaluated the Roşia Montană project.
Our conclusions are clear; the Romanian Government has secured a good and fair deal, in terms of both royalty and state ownership. In comparing royalty rates for gold with those across other European countries, Turkey and emerging gold producers, we find Romanian royalty rates are already high. Turkey, with a comparable gold production to Roşia Montană, applies a 4% royalty rate, while Finland and Sweden (currently the largest gold producers within Europe) apply no royalty rates at all. Bulgaria applies 2% to 8% on revenues (and not on production as the case would be in Romania).
Our research, authored by Professor Magnus Ericsson, in discussing the Romanian royalty rate, concludes: ‘This level of royalty, which is a tax irrespective of profits of the company, is among the highest in Europe’.
Our research stresses that any deal which puts short-term returns to Romania above long-term benefits would run the risk of damaging the country’s investment prospects. Mining is a fiercely competitive global industry, we point out that if mining is to be seen as a growing value added sector in the long term, short term gains from increasing royalty rates may damage the country’s long-term reputation for stability and its ability to attract foreign direct investment.
In comparing the levels of state ownership, our study makes similar conclusions. In examining over 300 mining projects in Europe, our research found some level of state ownership in just 7% of them. Other major gold producers such as those in Canada, Australia and the US had no state ownership whatsoever. In surveying 23 EU countries, plus Turkey, we found little incidence of state ownership in general, and where it was present, the control over production was hardly ever with the state. Some states, indeed, invest their own money heavily in local infrastructure and services in order to create a more welcoming environment for inward investment.
Our findings make it clear that if the Romanian share, either in state ownership or on royalty rates were to be any higher, the returns for overseas investors may well be insufficient to attract new foreign direct investment into the country’s mining industry.
That would be a major missed opportunity since one of the biggest benefits to Romania from the Roşia Montană project will be the revitalisation of its dilapidated mining sector by drawing in foreign capital and expertise. The successful start of the Roşia Montană project will encourage other investors to bring much needed capital and in turn employment and financial gains to the country.
Boosting the mining industry will bring widespread economic benefits to many other sectors too. In the light of which Romania’s deal on Roşia Montană adds up to a very solid bargain for the Romanian state and its people.
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