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[NOTE: Royalty may or may not be provided for under Applicable Law. Any such Applicable Law should be considered in discussions between the State and Company, as variations may require legislative or ministerial approval or amendment. Where royalties may be negotiated by agreement, the State and Company should choose an appropriate Royalty Rate and type of Royalty clause for the Agreement and the type of Mineral deposit. Royalty payments should be viewed together with all other taxes and government payments, any State equity or ownership share in the Project required under Applicable Law, and social and community development payments and benefits, in order to evaluate the total sharing of benefits from mine development among the State, the Company and communities and Local Government. There is an extensive body of literature on mining royalties that the Parties can consult, including Otto et al, “Mining Royalties: A Global Study Of Their Impact On Investors, Government, And Civil Society” (IBRD/World Bank 2006).

The details of royalty calculation may not be provided in Applicable Law and the Agreement may be used to supply appropriate details of the royalty for the type of Mineral deposit, the likely economics of developing the deposit and other fact-specific circumstances. Different royalty types may be appropriate for different Minerals. Examples of different royalty types and variations are included below, and, as with all provisions in the MMDA, are intended to be illustrative rather than recommending a specific approach or alternative.]

4.1 Calculation of Royalty

(a) The Company shall pay to the State a royalty at the rate of [ _x%_ ] (the “Royalty Rate”) on all Minerals produced, saved and sold or otherwise disposed of from the Mining Area. Royalty shall be calculated as follows:

Alternative #1: Profit-based Royalty

[NOTE: The profits-based royalty is the most sensitive to changes in Mineral prices during the life of the Project and differences in the economics of ore bodies (for example, large vs. small deposits, high vs. low grade, access to existing infrastructure (power, transportation) vs. need to build infrastructure. It allows the Parties to share these risks and benefits. However, a profits-based royalty will be low or non-existent during the initial recovery of the investment in the mine and periods of capital expansion. It is also more difficult for the State to calculate and collect than value-based royalties.]

(i) The Royalty shall be the Royalty rate multiplied by the Net Profits derived from all Minerals produced, saved and sold or otherwise disposed of from the Mining Area.
(ii) “Net Profits” means the amount by which Revenues exceed Costs.
(iii) The amount by which Costs exceed Revenues for any prior calendar quarter or quarters shall be recovered in determining Net Profits for any succeeding period, until all such losses have been recovered.
(iv) “Revenues” will mean the total proceeds and other compensation received by the Company from the sale or other disposition of Minerals.
(v) “Costs” will mean all expenditures incurred by or on behalf of the Company on or in connection with the Mining Area, the Project Area or the Project, and related to the exploration, development, and placing of the Mining Area into Commercial Production, and all operating, mining, milling, smelting, refining, marketing and transportation costs, including, without limitation:

(A) costs and the expenses incurred by the Company in exploring for, mining, extracting, removing, and transporting Minerals;
(B) costs and expenses incurred by the Company in milling, processing and refining Minerals in its own facilities or the facilities of third parties;
(C) costs and expenses of exploration and discovery of the Minerals and costs and expenses of any additional exploration conducted in the Mining Area during the term of this Agreement;
(D) costs and expenses of developing the Mining Area for Commercial Production, including, without limitation, costs and expenses relating to geological, geochemical and geophysical studies, prefeasibility and feasibility studies, development drilling, sampling and assaying, mine design and development, rail, road and other transportation, port or water infrastructure development, and costs and expenses of any additional development, expansion or refurbishment of any such facilities or equipment conducted in the Mining Area, Project Area or for the benefit of the Project during the term of this Agreement;
(E) taxes and payments of any kind to the State under this Agreement or Applicable Law, taxes or royalties payable with respect to severance, removal, sale, or disposition of Minerals to any Local Government or community other than the State, private party royalties reasonably related to the exploration and development of the Property, and taxes and payments of any kind paid to any governmental authority in any foreign jurisdiction relating to any smelting, refining, or other processing of Minerals that occurs after export of such Minerals from the State;
(F) all direct and indirect costs and expenditures required for the purchase, installation or construction of buildings, machinery and equipment;
(G) interest on money borrowed by the Company for exploration, development, and placing of the Mining Area into Commercial Production;
(H) general and administrative costs and expenses properly allocable to the administration of this Agreement and the Mining Area and Project Area;
(I) an allowance for depreciation and amortization for mining, processing, and other capital equipment and machinery;
(J) an allowance for future costs and expenses anticipated to be incurred by the Company in environmental compliance, including reclamation, of the Mining Area and Project Area, and costs for social and community development in connection with the Project (whether incurred or expended within or outside of the Mining Area or Project Area), in accordance with this Agreement and Applicable Law; and
(K) other costs of implementing and complying with this Agreement and not enumerated above.

Alternative #2: Value-based Royalty (Gross value)

[NOTE: A value-based royalty based on gross value of the Minerals does not allow deduction of any costs and is payable regardless of the profitability of mining. It is the least sensitive type of royalty to changes in Mineral prices during the life of the Project and profitability of operations over high and low points in the economic cycle. It can result in suspension of operations when prices are low and non-recovery of marginal resources. It may, however provide a more regular revenue stream to the State. A gross value-based royalty is also more simple to administer.]

(a) The Royalty shall be the Royalty Rate multiplied by the Gross Market Value for all Minerals produced, saved and sold or otherwise disposed of from the Mining Area.
(b) “Arms-Length Transaction” means a contract or agreement that has been arrived at in the marketplace between independent, non-affiliated persons with opposing economic interests regarding that contract. For a transaction to remain arms-length for Royalty purposes, it must be arms-length during the entire period for which Royalty is determined under this Section.
(c) “Gross Market Value” has the following meaning:

(A) If the Company causes refined Minerals to be produced from the Mining Area meeting the applicable specifications for the relevant market described below, “Gross Market Value” shall mean, for the applicable Mineral, the Quarterly Average of

(I) the official cash settlement price for refined copper or nickel, as published daily by the London Metals Exchange,
(II) the applicable price for platinum, palladium or other platinum group metals, as published daily by the London Platinum and Palladium Market,
(III) the daily London Bullion Market Association P.M. Gold Fix, for refined gold, and
(IV) the daily London Bullion Market Association P.M. Silver Fix, for refined silver;

(B) If the Company sells raw ore or doré or concentrates produced from the Mining Area in an in an Arms-Length Transaction, the sales value receivable at the mine gate, without discounts, commissions or deductions of any kind; and
(C) If the Company sells raw ore or doré or concentrates produced from the Mining Area in an in a transaction that is not an Arms-Length Transaction, or uses, consumes or otherwise disposes of such intermediate Mineral products without sale, the fair market value of such raw ore, doré or concentrates at the mine gate.

(d) “Quarterly Average” means the average of the applicable price under Subsection (iiii)(A) above multiplied by the number of days in the applicable quarter.

Alternative #3: Value-based Royalty (Net value)

[NOTE: A value-based royalty based on net value of the Minerals permits deduction of certain costs incurred in producing and selling Minerals. One type of net value royalty used for metallic minerals is the “net smelter return” royalty, which permits deduction of certain processing costs such as smelting and refining, but does not permit deduction of mining costs and other costs that would be deductible under a net profits royalty.]

(i) The Royalty shall be the Royalty rate multiplied by the Net Smelter Returns for all Minerals and mineral products produced, saved and sold or otherwise disposed of from the Mining Area.

(A) “Net Smelter Returns” means the Gross Market Value less, but only to the extent actually incurred or paid by Company, the following (and only the following, without duplication):

(I) Smelter or refinery costs and charges, including assaying and sampling costs, umpire charges and penalty substance charges, if any, incurred upon smelting or refining Minerals and mineral products. If smelting or refining is carried out in facilities owned or controlled, in whole or in part by the Company, or by an affiliate of the Company, charges and penalties for such operations shall mean the amount the Company would have incurred in an Arms-Length Transaction; and
(II) Costs and charges, if any, for transportation (including related storage and insurance costs) from the mine, mill, processing or refining facility in the Mining Area to the place where the Minerals and mineral products are sold or disposed of; plus charges and costs, if any, for transportation (including related storage and insurance costs) of Minerals and mineral products to any mill, processing or refining facility outside the Mining Area and from there to the places where such minerals and mineral products are sold or disposed of; and
(III) taxes or royalties payable with respect to severance, removal, sale, or disposition of Minerals to any Local Government or community other than the State (but private party royalties shall not be deductible).

(B) “Gross Market Value” has the following meaning: [See definition in Gross Value royalty alternative]

Alternative #4: Unit-based Royalty

[NOTE: This type of Royalty may be appropriate for certain industrial minerals or minerals sold in bulk, but is generally not appropriate for most other minerals. Consideration should be given to indexing this type of royalty for inflation given the extended term of the Agreement.]

MINERAL	ROYALTY RATE[*] per ton
.	.
.	.
.	.
.	.

[Note: Example optional provision to adjust unit-based Royalty for inflation:
The Royalty rate for each Mineral shall be adjusted annually every ____ years after the Date of Commencement of Commercial Production at the commencement of such year. The Royalty rate shall be adjusted up or down based upon the variation in the [choose appropriate index, for example: Producers Price Index, Industrial Commodities, of the United States Department of Labor, Bureau of Statistics.] (the “Adjustment Index”). For the purposes of such adjustment, the “Base Index” shall be calculated by ascertaining the arithmetic average of the Adjustment Index for each quarter during the calendar year preceding the Date of Commencement of Commercial Production. The first adjustment for the variation in said index shall be made effective [specify date], using the arithmetic average of the Adjustment Index for each quarter during the calendar year preceding such date of adjustment, and the variation in such index from the Base Index shall thereafter be calculated annually in the same manner (the “Variation Index”). To determine the Royalty rate for any calendar year beginning [specify date], the Variation Index for such year shall be divided by the Base Index and the resulting quotient multiplied by the Royalty Rate for each Mineral.]

Additional Variation: Sliding Scale Royalty Rate based on Profitability of Operations

[NOTE: If the Parties desire to increase the State’s share of royalty during times of high commodity prices when the Company is recognizing higher profits from the Project, the Royalty Rate can be increased and decreased automatically (without changing the royalty calculation) based on increases price of the Mineral, or based on the company’s profitability.

The following example of a sliding scale Royalty Rate (which would be inserted as Section 4.1(b) of the Agreement) is based on the approach recently used in Ghana. It uses a floor royalty rate and a capped royalty rate, with a sliding royalty rate between the floor and the cap depending on the ratio of the Company’s costs to its revenues. The royalty rate and the operating ratio percentages will vary depending on the type of Mineral deposit and the type of royalty (profits-based, value-based, etc.), and the “value” of Minerals would be defined consistently with the type of royalty for which the sliding scale is used.]

(b) Variation of Royalty Rate

(i) The Royalty Rate payable under this Agreement shall be based on the profitability of Mining Operations, adjusted annually after the end of the Company’s financial year and effective as of the commencement of the Company’s next financial year.
(ii) Such profitability shall be determined by the application of the “Operating Ratio,” being the ratio as expressed in terms of percentage which the Operating Margin bears to the [value of Minerals produced, saved and sold from the Mining Area.] during such financial year.
(iii) The following Royalty Rates shall apply in accordance with the applicable Operating Ratios:

OPERATING RATIO	ROYALTY RATE
.(i) where the Operating Ratio is [x]% or less	.[A]%
.(ii) where the Operating Ratio is more than [x]% but less than [y]%	.[A]% plus 0.225 of every 1% by which the operating ratio exceeds [x]%
.(iii) where the Operating Ratio is [y]% or more	.[B]%

(iv) The “Operating Margin” of Mining Operations shall be determined by deducting the Operational Cost from the [value of Minerals produced, saved and sold from the Mining Area.]
(v) “Operational Cost” in relation to any financial year of the Company means:

(A) the current expenditure wholly and exclusively incurred by the Company during that financial year for the purpose of mining, transporting, processing and sale of minerals from the Mining Area; provided that such current expenditure shall not include –

(I) any royalty payable under this Agreement;
(II) any income tax or other tax on the Company’s profit, whether imposed in the State or elsewhere;
(III) any expenditure incurred in respect of the management and control of the Company which is not directly related to the operations of mining, transportation, processing, sale or other disposal of Minerals from the Mining Area; and

(B) capital allowances for that financial year deductible under this Agreement and applicable Tax Law.

Comment on “Windfall Profits” or Resources Rent Taxes

Some countries have proposed or adopted an additional tax, sometimes described as a “windfall profits” tax, that applies whenever a certain threshold of profitability is reached. Others impose a “resource rent” tax intended to compensate the State for the value of mineral resources in the ground, which applies after recovery of all costs and a specified rate of return on the project. Some of the arguments made in favor of such taxes include the non-renewable nature of mineral deposits, the differences in quality of mineral deposits (size of deposit, grade, access to existing infrastructure, etc.) and the corresponding “right” of the State to recover a greater share from higher quality (more profitable) deposits where a primary determinant of profitability is the quality of the deposit “provided” by the State. Arguments against “windfall profits” and “resource rent” taxes include the difficulty of calculation and the negative impact such taxes have on exploration and development of mineral deposits, since the opportunity to obtain a “windfall” (discovery of a high quality mineral deposit) provides considerable incentive to explore for and develop mineral deposits, including more marginal deposits, for the benefit of the State. Such taxes have generated considerable controversy in a number of countries.

“Windfall profits” and “resource rent” taxes and are too detailed and varied in their approach to include as an alternative, but examples are available. Australia has recently proposed a “mineral resource rent tax” on significant producers of certain minerals, which applies when profits exceed a certain specified rate. An additional profits tax formerly imposed in the Philippines (described as the “Additional Government Share”) is contained in the Department of Natural Resources of the Philippines Department Administrative Order (DAO) 99-56, “Guidelines Establishing the Fiscal Regime of FTAAs” (Dec. 27, 1999), which can be accessed online at http://www.denr.gov.ph/policy/1999/minesdao99-56.pdf.

4.2 Royalty on other mineral materials

(a) If mineral materials other than those defined as “Minerals” in Section 1.1 are produced from the Mining Area, the Company shall pay a royalty on all such mineral materials produced, saved and sold or otherwise disposed of from the Mining Area. The royalty rate, amount of product and value for such royalty shall be as provided by Applicable Law, or in the absence of Applicable law shall be agreed between the State and the Company. The value of such mineral materials shall be based on the international fair market value of such mineral materials, determined, in the absence of published international market prices for such mineral materials, in such manner as agreed by the Parties.
(b) Royalties shall not be payable or paid on stone, sand, gravel or other construction materials produced in the Mining Area and used internally by the Company in construction of any of its facilities or infrastructure for the Project.

4.3 Production Statement

(a) The Company must submit to the State a production statement in accordance with Applicable Law, and if not so provided then not later than [30] days after the end of the calendar quarter in which the Date of Commencement of Commercial Production occurs and thereafter not later than thirty [30] Days after the end of each subsequent calendar quarter during the term of this Agreement. The production statement must be prepared in accordance with Applicable Law, if any, and Good Industry Practice, containing the following particulars:

(a) The quantity and quality of Minerals produced and sold;
(b) The size of Minerals stocks held at the beginning of the calendar quarter;
(c) The size of Minerals stocks held at the end of the calendar quarter;
(d) The calculation of the royalty due on such Minerals produced and sold, in accordance with Section 4.1 and, if applicable, Section 4.2.

(b) The State may give Notice specifying other particulars relating to Project operations necessary for calculation of the royalty be included in the production statement and the Company must comply with any such reasonable request.

4.4 Payment of Royalty

The final Royalty payable under this Agreement must be paid no later than [45] Days after the last day of the month in which final settlement is made by the purchaser of the Minerals produced and sold or otherwise disposed of by the Company.

A provisional royalty payment based on provisional settlements shall be paid [45] days after the last day of the month in which the Minerals are produced and sold.

4.5 Disputes regarding Royalty Payments

(a) The Parties agree to submit any dispute arising out of or in connection with calculation of the royalty under this Agreement to an Independent Sole Expert under Section 32.1(b). Any additional amount payable to the State or any overpayment refundable to the Company, as determined by the Independent Sole Expert, shall be paid no later than [30] Days after the written decision of the Independent Sole Expert is delivered. All royalty payments will be considered final and in full satisfaction of all obligations of the Company, unless the State gives the Company written notice describing and setting forth a specific objection to the determination thereof within [12] months after of receipt by the Royalty Holder of a production statement under Section 4.3.

Example 1
The Company shall pay to Government Mineral Royalty tax (the “Royalty”) on the net back value of minerals produced in the Mining Area at a rate of two per cent (2%).

For purposes of the foregoing, “net back value” shall mean: the market value of Mine Products free-on-board at the point of export from County, or in the case of consumption within Country, at the point of delivery within County, less:

a) the cost of transport, including insurance and handling charges, from the Contract Area to the point of export or delivery; and
b) the cost of smelting and refining (where applicable) or other processing costs except that such other processing costs are relate to processing normally carried out in County in the Contract Area.
The term “market value” means realized price for a sale free-on-board at the point of export from Country or at point of delivery within Country.

Example 2
Royalties.

a. Except as may be provided by amendment to the Revenue Code subsequent to the Effective Date, the Concessionaire shall no later than 30 days following the date of (i) shipment (in the case of exports by the Concessionaire); or (ii) of sale or other disposition (whichever is earlier), in the case of transactions in which the Concessionaire transfers title to Product(s) before the Product(s) leave Country, pay to the general revenue account of the Government a royalty for Product(s) in that shipment (or subject to such sale or other disposition) at the percentage rate stated in subsection (b) times the Reference Price for each unit of Product, FOB Country (such payment collectively, the “Royalty”). Each payment shall be accompanied by a statement from the Concessionaire showing in such reasonable detail as the Ministry of Finance may require the basis of computation of Royalties due.
b. The royalty rate for shipments or sales of Iron Ore in any month during the Term shall be as follows: (i) when the Index Price is US$100 per metric ton or less the royalty will be [w]%, (ii) when the Index price is greater than US$100 per metric ton and less than US$125 per metric ton, the royalty will be 3[x]%, (iii) when the Index Price is greater than US$125 per metric ton and less than US$150 per metric ton, the royalty will be [y]%, and (iv) when the Index Price is US$150 per metric ton or more the royalty will be [z]%. The “Index Price” shall be the CVRD spot price FOB Brazil for shipment to China for the same product of equivalent grade and quality produced at Mine.

Example 3
(a) (i) The NSR payments shall be [x]% of (A) Company’s Net Receipts from the sale of Royalty Minerals to purchasers other than Affiliates, and (B) Company’s Deemed Receipts from the special cases described in Section 8.2(b). “Net Receipts” from the sale of Royalty Minerals shall be the Dollar value of the gross selling price to the purchaser minus costs incurred by Company of the nature described in Section 8.2(c) that are actually borne by Company after mining, extraction or removal of the Royalty Minerals from the ground of the Leased Properties.

(ii) The CENTRAL BANK may request, at any time and from time to time, upon at least two (2) Months’ Notice to Company, payment of a portion of the NSR in physical refined gold using values as described in Section 8.2(b)(ii)(B)(I) as of the date of payment. Such portion shall not exceed so much of the NSR as is attributable to gold. The CENTRAL BANK shall bear all storage, transportation, insurance and security costs regarding such refined gold after the transfer of ownership. Company shall in its discretion determine the place of transfer of ownership and delivery of such refined gold.

Example 4
ROYALTY

a) Licensee shall pay an ad valorem royalty, as that term is used in the Mining Proclamation, at the production site and at the rate of [ ] percent ( %). For purposes of this provision, ad valorem means: (i) for gold and precious minerals, the value of the Mineral at the moment it is extracted at the mine site, and (ii) for base minerals, the value of the Mineral at the moment it is extracted at the mine site, which value shall be the amount Licensee estimates that it will receive from the smelter, refinery, or other purchaser of the Product. The amount of royalty so paid by Licensee when the Mineral is extracted at the mine site shall be adjusted within thirty (30) days following the end of each calendar quarter based on the quantity of Product sold and the sales proceeds actually received by Licensee for such Product for the prior quarter. In the event there arise problems in implementing this provision, the Parties agree to negotiate in good faith a reasonable resolution to the problems, failure of which a Party may elect to submit the matter to arbitration pursuant to Article 21 (SETTLEMENT OF DISPUTES). The Licensee may raise the issue of a lower royalty in the future by requesting the Licensing Authority to enter into a good faith negotiation on the matter. Such request shall be supported by a detailed explanation of the nature of the deposit and the corresponding Feasibility Study.
b) Such royalty shall be paid quarterly, within thirty (30) days of the end of the quarter in which the Mineral is extracted. Any required adjustments, based upon actual sales proceeds, shall be made as provided in Section 12.4(a).
c) The Licensing Authority may elect to take all or any part of the royalty in kind. Unless the Licensing Authority elects to take royalty in kind as provide herein, the royalty shall be paid in cash.
d) Title to the royalty production Minerals not taken in kind shall pass to Licensee upon extraction of such Minerals and a production royalty shall be paid to the Licensing Authority as provided in Section 12.4(a).

REFER TO MMDA DISCLAIMERS AND MMDA USER’S GUIDE
PRIOR TO ANY USE OF THIS DOCUMENT.

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