In 2010, Armenia produced 41,000 metric tons of copper and 5,400 metric tons of molybdenum. According to market analysis by Bloomberg, however, the 2011 worldwide deficit of copper stands at 635,000 tons—the largest since 2004—with its price exceeding 10,000 US dollars and demand continuing to grow at a rate of 4.2%. According to analysis by Morgan Stanley, the price of copper is to reach 11,000 US dollars per ton during 2011 while Barkley Capital projects 13,000 US dollars per ton by year’s end.

Prior to the global economic crisis, the price of copper hovered around 8,000 US dollars. During the economic crisis it dropped to as low as 2,500 US dollars. The current prices show that the industry has not only recovered but that the prices of metals keeps rising from year to year.

The Government of Armenia, with the Ministry of Energy and Natural Resources in the lead, is developing new legislation on the Republic’s natural resources. The draft legislation passed its first reading at the National Assembly swiftly. But this draft legislation not only fails to address existing problems related to the rational and systematic use of mineral resources (esp. metals), but in fact it adds additional ones.

This draft legislation entails numerous environmental, economic, and corruption risks. 

This draft legislation, that passed its first reading in the National Assembly without a hitch, is a prime example of how the mining sector is presented as having “no problems.” Of course, it would have no problems if we blind ourselves to its environmental degradation and if we make our national interest and welfare of the future generations secondary in importance.

The mining sector is clearly given a privilege position with respect to environmental protection and economically rational use of natural resources.

Let’s put aside the issues of water, air, and other environmental pollution and their inadequate compensation. Let’s for a moment focus on disposal of waste generated from mining and mineral processing.

According to the Armenia’s “Law on Rates of Environmental Charges,” there are seven categories of waste. Four of these are hazardous waste ranked level 1 to 4. The least hazardous waste, category 4, is levied at 1,500 AMD per ton where as category 1 waste, the most hazardous, is assessed 48,000 AMD per ton. Waste not deemed hazardous is levied at 600 AMD per ton. Waste generated from removal of land is levied at 60 AMD per ton. The seventh category, mineral waste, is identified by this law and assigned a fee of zero AMD.

To illustrate the economic loss this represents, in 2010 the Syunik Marz generated 99.7% of the industrial waste, primarily from mining. However, no fees were payable by mining enterprises for this mining waste. Even if we don’t take into account the hazard level of the waste generated, and we assume the lowest tariff for waste disposal (i.e., 60 AMD per ton), more than 10 billion AMD would have been added to the state coffers in 2010 alone. If, however, we categorize this waste as the lowest hazardous level waste (i.e., 1,500 AMD per ton), the amount payable to the state budget would have been 250 billion AMD!  

Even at the lowest rate of 60 AMD per ton, the generated revenues would be more than all the 2010 environmental and natural-use charges combined (including fees collected for air pollution by automobiles and industry, water pollution, waste disposal, environmentally harmful products, use of water, biological, and mineral resources.

As if recognizing that sooner or later this issue would be raised by the public or by experts, the new legislation sidesteps it by identifying waste not as waste but as “letsakuyt” (which roughly translates to  “assembled heaps” or “filled heaps”). The legislation does not identify the extra materials generated as waste. So, “no waste, no waste disposal charges.”

This is only the first component of what makes mining a privileged industry. Government of Armenia’s Decree No. 864N, “Rates of Natural Resource Charges” adopted on December 30, 1998, specifies fees for use of natural resources, esp. noble and nonferrous metals.

Given that in1998, mines and mining enterprises were primarily under state ownership, and making and collecting fees would be tantamount to moving funds between one’s own pockets, the tariffs set were among the lowest in the world, 1-1.5% of mined metals’ market value.

If we compare Armenia to other nations that are rich in metal deposits, it is evident that Armenia fundamentally undervalues its natural resources.  For example, in Russia that fee is set at 3.8-8.3% and in Canada 10-16%. Chile, which is among the prominent copper mining countries, sets the fee at 5-14%, Columbia 4-6%, South Africa 10%, and Australia up to 4.5%.

Instead of improving our system of fees for environmental and natural resource use, the proposed legislation on natural resources, being circulated at the National Assembly, completely eliminates the fees! The proposed legislation instead institutes a system of “royalties,” that is percentages to be paid from sales proceeds of the minerals.

International experience, however, shows that the system of royalties works most effectively when the companies operating the mines are in full or majority state owned. In all other cases, a system of natural resource use fees is preferable.

In a large number of countries natural resource use fees are collected in addition to royalties. The natural resource use fee is collected as payment for the use of resources exclusively belonging to the state whereas collecting royalties offers a mechanism for taxing super profits.

The draft natural resource legislation states that the basis for calculating royalties may either be the mineral ores, the concentrates, smelted minerals, or any manufactured goods obtained from them. The mining enterprise can decide for itself which of these stages of processing it wants to adopt as the basis for calculating the royalties it should pay. No doubt this system will induce miners to sell the minerals at the first stage, that is at the stage of ores, so that they can have the lowest tax basis. This contorts the incentives so that the country becomes a natural-resource extractor and not a processor and manufacturer. This is contrary to international experience where discounts are provided to additional stages of processing, thereby encouraging manufacturing.

The draft legislation also stipulates a profit level of 25%, after which additional royalties are to be collected. But to base royalties on company profits is misguided. According to the draft legislation two miners could extract the same amount of natural resource, but one of them either due to incompetence or wish to avoid taxation shows low profit whereas the other because of processing and effective management shows higher profit. Consequently the same amount of natural resource extraction would end up paying different royalties, a fact that will also negatively impact competitiveness in the country.

The draft legislation also has a conceptual problem. If one of the objectives of the natural resource use fee is to introduce economic incentives for managing the behavior of the mining sector so as it extracts metal resources most effectively to pay the least amount for the natural resource use, then according to the draft legislation the economic mechanisms of managing environmental resources is eliminated and only a accounting mechanism is left in place. Consequently, it’s not important how much natural resources are extracted, the important thing is the accounting mechanism.

With respect to possibilities of negotiations between tax authorities and mining companies, the draft legislation entails great number of corruption risks especially as the tax authority’s jurisdiction is defined by the agreements on the accounting basis of the royalties. This means that even if the international price of copper rises to 10,000 US dollars per ton, but the mining company, wishing to minimize its tax basis, sells the minerals at a lower price by several fold, the only basis of the tax accounting would be the purchase and sales agreements.

Several critical issues that need to be addressed:

1. Mining waste should be defined and become subject to taxation, securing additional financial mechanisms and becoming a tool for rational use of natural resources.
2. Royalties should not replace natural resource use fees, but instead they should be complementary to them. At least for the coming years these two mechanisms should be instituted together.
3. The rates of natural resource use fees should be based on the market values of the natural resources and if such values are not available, they should be based on environmental and economic impact valuations.
4. The Environmental fees should be based on real accounting of the damage to environmental and public health
5. Today mining exports are exempted from paying customs tariffs. This should be changed so that mineral goods should be exempted based on the level of processing. The more processed the good, the less the tariffs. In the event of the exports of the mineral ores, for instance, the export tariffs should be the highest. Concentrates should have a lower rate, smelted metals even lower, and manufactured goods may even be exempt altogether.
6. International market values of the minerals should be the basis of the royalties; there should be no opportunity for negotiation between the tax authorities and mining companies.

By Erik Grigoryan,

Co-President of the Association of Young Environmental Lawyers and Economists NGO