5. Controlling and discouraging speculative practices
In the mining sector, the term "speculation" is most often used negatively. It refers to titleholders who apply for licenses with the intention of selling them later and, in the meantime, retain the licences without development of significant activity on site. In countries where this practice is very common, it may impede development of the mining sector, and cadastral management may be needed to decrease the negative effects of speculation, mainly by setting conditions for the validity of mineral licences.
Before taking steps to limit speculation, however, it is important to understand the practice and consider its negative and positive effects. Not all speculative practices are completely negative. In some cases, speculation may be “active,” where reconnaissance or exploration activities are developed in order to promote the property and increase its selling value. This type of active speculation (typically done by junior companies) plays an essential role in the development of the mining sector. Consequently, any measures taken to decrease speculative practices should be focused on passive rather than active speculation. Furthermore, any measures introduced to decrease speculative practices should respect the essential principles guaranteeing the security of tenure, otherwise the effects derived from discouraging speculation may be opposite to the expected ones. The different corrective measures that have been implemented to decrease speculation in many countries are analysed below.
Escalating annual rental fees
This requires the holder of a licence to make regular yearly payments of a fee per unit of area (square kilometre or hectare) to retain the concession. These fees have the following advantages:
- Implementation is easy, direct, and guarantees transparency without discretion since no interpretative or subjective evaluations are required.
- Potential opportunities for corruption are reduced.
- Revenue is generated that may guarantee economic sustainability for the administration of the entire mining sector.
- Fees can be easily adapted to the evolution of the metals market and the mining sector in general, as well as to the local conditions and characteristics of each country.
- Voluntary relinquishment of title is stimulated as there is an incentive for companies to reduce the surface area of a licence, without the introduction of risks for the titleholder.
In the recent past, countries established rental fees as fixed amounts (the same every year), but the inefficiency of this method soon became apparent, as it did not encourage voluntary relinquishment of unwanted parts of the licence areas. The method was improved by introducing the escalating fee, which was promptly adopted by many countries. Fees are generally either increased year by year, or every two or three years. Practical experience has shown that systems using annual fee escalations are more efficient.
Ideally, the level of fees must be high enough to avoid speculation, but low enough to attract investors and to allow for the participation of national and small-scale miners. This balance should be adapted to the context in each country: low fees can be seen as adequate to attract investment in little-explored mining countries, which cannot establish levels as high as those in very well-known and attractive countries. At the same time, the design of an escalating fee system must be well adapted to the most frequent strategy for exploration; in other words, low-cost during the first period when companies are obliged to apply for large areas, and, progressively, more expensive during subsequent periods when companies normally reduce the area of interest to focus on detected targets (and when, in other cases, the real passive speculation starts).
Thus, the adequate implementation of these principles requires fine-tuning the level of the fees to the situation and characteristics of each country, as well as to market prices. For this reason, rental fees should be managed in a dynamic and flexible way, ready to be adapted to any changes in the parameters controlling the mining sector and it is recommended that these values be established in regulations or in a specific decree (where they can be modified) and not in the text of the law, where amendment is always more difficult. Table below shows examples of rental annual rental fees (expressed in US$/hectare per year) applied in different countries.
It is important to note that similar discussions also occur regarding exploration fees. Mining licences should also be subject to rental fees, but the problems related to speculation and investment level are different because passive speculation is predominantly focused on the exploration phase.
Mandatory relinquishment requirements
An alternative to the escalating surface rental fees methodology is a mandatory relinquishment requirement that involves periodic obligation to reduce the surface area of the exploration licences. This reduction is normally required at the time of renewal of the licence and the percentage of required surface reduction varies from one country to another, sometimes reaching as high as 50 percent.
As in the case of escalating rental fees, the application of this methodology is easily implemented; it is transparent, objective, and involves no discretion. This methodology can also be efficient because it guarantees that no large surfaces (after successive and mandatory relinquishments) will be controlled by a single titleholder. In practical terms, however, this is not always the case because it would imply additional provisions such as a prohibition against reapplying for areas relinquished, which are not clearly stipulated in the legal framework or may otherwise be difficult to verify (for example, if a lease is reapplied for by intermediaries).
Another disadvantage of the mandatory relinquishment method is the lack of flexibility; it is impossible to adapt it to the evolution of the metals market or the mining sector. In addition, it also risks decreasing the security of tenure, particularly in the case of successful prospecting projects, because the holder may have difficulties maintaining the property over the discovered resources and discouraging other prospecting investments. Some countries have already seen these practical difficulties in the application of the mandatory relinquishment requirement.
Minimum investment requirements and minimum work obligations
Another option to encourage exploration and decrease passive speculation is the use of annual minimum investment requirements or minimum work obligations. Conceptually, this is an excellent idea because it guarantees that the titleholder is really developing exploration activities and the license is not dormant. But experience shows that there are practical difficulties that may arise in the implementation of this option. One challenge is how to set the value of the minimum requirement for work or investment that must take place to ensure that an adequate exploration level is carried out. The requirement must be substantial enough to efficiently discourage speculation and in line with the standard exploration costs of any type of deposits in any geological environment. Taking into consideration the variety of metallogenic contexts, there is no simple technical solution for this question. The more practical option would be to adopt a single calculation linked to the applied surface and to the rental fee (for instance, 100 times the rental fee per surface unit). The requirement can then be easily adapted to the evolution of the metals market and mining sector in general, as well as to country-specific characteristics (as in the case of the surface rental fees) by just updating the values of the required amounts.
However, the main difficulty lies in the practical verification of the amount of resources, in terms of investment, time, or effort spent by the titleholder. One condition for proper control relates to the availability in the Mines Administration of qualified staff and resources to facilitate a well-functioning mining inspectorate able to asses on the ground the reports submitted to demonstrate the works developed and the investments realised. In addition, there are also cases when such evaluations imply a certain degree of subjectivity, with the consequent potential for bureaucratic bottlenecks or risks of discretion or corruption.
Other measures to restrict speculation have included limitations on the maximum size (surface area) per licence in the legislation. This measure is logical for rationalising cadastral management by avoiding excessively large and unmanageable licences but is not effective against speculation because it is not linked to the renewal fees or the activity to be developed. Furthermore, in many countries there is no limitation on the number of licences to be held by a single titleholder, and, consequently, no limitation on the maximum surface area to be held by a single titleholder.
Some countries have introduced restrictions which prevent a single holder from having more than a limited number of licences, determined by law. This rule may not be efficient because, in practical terms, holders may control many licences through intermediate holders, exceeding the authorised number; generally, the Mineral Rights Cadastre does not have the capacity to detect these irregularities.
Another option, also applied in many countries, is to “filter” the entry of potential speculators by requiring a minimum level of economic and financial capacity as a precondition for granting a licence (i.e., "eligibility"). It is assumed that many speculators do not have the economic resources to properly develop exploration activities and, with an obligation to prove the availability of certain economic resources, this rule would prevent the entry of passive speculators. Technically, the application of this rule is very similar to that of the minimum investment requirement or minimum work obligations explained above, and the required capacity may be established by a simple calculation linked to the applied surface and the rental fee.
As in the previous case, the implementation of this rule appears direct, objective, and can be easily adapted to the evolution of the metals market. The availability of the required amount may be demonstrated by a bank certificate showing the applicant’s own or borrowed funds. The main limitation of this method is that certificates prove the availability of resources just for that particular date, and resources may be mobilised and transferred for other purposes a few days later. Practical experience demonstrates that many of the titleholders who exhibit the availability of the required capacity do not use the funds for developing exploration activities after being granted a licence.