Community Engaged Capital Strategy
Dr. David E. Martin, Chairman
Prepared at the request of Chairman Lawrence Daveona
June 19, 2013
First Principles
Resource owners are the Citizens of Papua New Guinea (PNG Constitution Section 53 (5) (a), (c) and (d).)
Bougainville Copper Agreement Act of 1967 and the Exploration sum of
$4,514,851 do not constitute a Constitutionally-binding obligation as no
unencumbered consideration was paid to PNG or its citizens
The BCA has been in persistent breach by Bougainville Copper Ltd (BCL) for failure
to declare or pay royalty on “copper, other minerals, and gold” (BCA 1967 §5(h))
Renewals or extensions “subsequently granted” need to be considered under
“prevailing facts and circumstances” and must be “fair and reasonable” (BCA 1967 §5
(j)(iii)(A))
Colonial Administration Powers neither authorize, nor render enforceable, extrasovereign agreements
Market conditions and BCL’s uncured payment breaches nullify any contractual
right(s) they may have presumed
Unethical and Unlawful Behavior Now Being
Investigated
Britain and the European Union are pushing for new laws that require mandatory
disclosure by petroleum and mining companies of all payments including taxes
and licensing fees to governments and officials, and for developing countries to
report all resource revenues in a standardized way.
The goal is to “lift the veil of secrecy that too often lets corrupt corporations and
officials in some countries run rings around the law,” British Prime Minister David
Cameron wrote last month.
http://www.bloomberg.com/news/2013-06-16/mining-firms-face-new-scrutiny-from-regulators-amid-deal-probes.html
The Market Story
RioTinto lost $2.576 billion
on revenue of $50.967
billion but maintained a
total market value over $80
billion!
Copper (commodity) and
the industrial exchange outperformed RioTinto by a
considerable margin (see
upper graph)
Bougainville Copper underperformed the Australian
Exchange by a large margin
(see lower graph)
The Global Market Paradigm
“Development” does not involve “Indebtedness”
 Panguna can be “developed” as a premier metal producing asset using
commodity off-take financing
Economic participation can begin Day 1 …,
 Sale of development rights
 Participation in financing revenues
 Participation in infrastructure development through compulsory trade-offset
transactions (local content, technology transfer, training, etc.)
…and continue for the life of the mine
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Metals sales (including commodity hedging)
Liquid (public) equity trading on the global markets
Metal “reserve banking” for long-term economic value
Follow-on project financing
Preparing for Negotiations
Local community training
 Legal, capital markets, transparency (including global observers/media), and
professional competency
 Establishment of an Asset Management Entity
“Best-practices” Audit
 Site visits to premier projects by each bidding developer funded by the
developer prospect
 Review of “best practices” financing agreements
 Review of legal, environmental, and financial fitness
Organization of Transparency Governance
 Bid, financing, and procurement transparency
 Demand local compliance with Banking, Tax, Securities, Serious Fraud Office,
and Foreign Corrupt Practices regulations
Conducting Negotiations
“Light of Day” standard
 Insure that observer status is afforded to all community and
government bodies
Establish and publish meetings and public hearings (including
media participation)
Publish all visitation records including all names of all
members of delegations (including press releases for
newswires)
Corporate Models
Regional Operator/Investors form multiple corporations:
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License holding entities
Contracting and sub-contracting entities
Financing (public and private) financing entities
Asset holding entities
Mineral / energy sales entities
Governments do not understand, or participate with most of
these structures
License Holders
Foreign corporations (like BCL) are typically foreign owned
and are not the same legal entities that negotiate and sign
MOAs
These corporations are used by the global financing entities
to supply press releases and news to inflate stock price
These corporations may or may not have the same ownership
as the global financing entities
Contracting / Sub-contracting Entities
Most regional Operator/Investors actually contract
management, equipment and financing services to companies
that they own outside of PNG / AB
 These contracts are not competitively bid and effectively provide a
dividend to internal interests with costs charged against profit
 PNG / AB has no established mechanism to regulate or restrict these
self-dealing transactions
With no cost-controls or competitive bids, PNG / AB have no
mechanism to participate in global standards for contracting
and trade credit offsets
Financing Entities
In the period from 2008 – 2011, Operator/Investors have
received 1,100% of PNG’s total GDP to the exclusion of all
PNG / AB benefit
 During the period, of the over US$9 billion raised to
Operator/Investors, no PNG / AB interest received any consideration
for financing based exclusively on PNG / AB resources
 Of the over US$101 billion in market value of traded securities, not
only did no PNG / AB interest participate in any of this value but, in
the case of Newcrest (Lihir) and Nautilus (Solwara 1), the government
was indebted and defrauded by buying shares in an illiquid holding
company
Financing companies make money through Private
Placements, Debt Placements, Initial Public Offerings,
Secondary Public Offerings, and stock trading on the
Australian Stock Exchange, the London Stock Exchange, the
Toronto Stock Exchange and the New York Stock Exchange
Understanding the Equity
If you do not own the SENIOR, LISTED stock, you DO NOT
have:
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Liquidity;
Shareholder equivalent rights;
Grievance remedies
Ability to control and oversee cashflows and distribution
At present, NO PNG/AB interest has appropriate, unleveraged
equity in ANY SENIOR LISTED equity
Ownership of local subsidiaries give NO ability to control
contracting, financing assessments, management, corporate
governance, profit determination and distribution, dividends,
or grievance resolution
The Exchanges
Many early stage ventures list on junior exchanges to avoid
disclosure rules and costs (examples):
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TSX-V – the Toronto junior exchange
TSX – the London senior exchange
ASX – the Sydney exchange
London AIM – the London junior exchange
London FTSE – the London senior exchange
Landowners and governments should demand ‘Senior
Exchange’ disclosures even when operators seek to evade
rules by raising funds on junior exchanges
No landowner group should sign ANY MOA that does not
include direct and debt-free participation in publicly traded
equity so that ALL value can be participated – not just
royalties and payments
Asset Holding Entities
No foreign Operator/Investor allows cash-flows from
financing and production sales to first pass through PNG / AB
 This practice provides opportunity for tax evasion, royalty evasion,
operating cost deduction manipulation, etc.
 No MOA should be signed with any organization that doesn’t have
direct, independently audited, cash-flow control and oversight
Currently, debt is assigned to domestic shell subsidiary
corporations while asset pledges are made by Asset Holding
Entities
 This means that the local ‘partner’ company has ALL the liabilities and
NO coverage for satisfying obligations
Capital Flows
Why do investors invest?
 For equity returns
 More than 1,000 % more value is created by public equity trading
than from profits derived from production
 Note: in their 2012 Annual Report, RioTinto lost $2.576 billion on
revenue of $50.967 billion but maintained a total market value
over $80 billion!
 For dividend and profit sharing
 Gross profits to operator/investors during a three year period
were over 400% the GDP of the country of PNG – no benefit for
this was received by the country
 For asset leverage
 By owning leases, many companies use sovereign rights and debt
to lower their borrowing costs using leases and mines as collateral
for UNRELATED activities – something PNG / AB have NO LAWS
AGAINST
What PNG / AB Government and
Landowners Have Been Told
The value is in the minerals and energy
The truth is that the equity value of EVERY operation in PNG /
AB exceeds the production value at present.
PNG / AB must realize that it is in financing AND developing
that benefit is realized
Business Structures
PNG / AB Assets should require:
 Participation from Day 1 in the SENIOR, FINANCED corporate entity
including debt-free equity participation from Day 1
 NO AGREEMENTS OF ANY KIND signed with a subsidiary that does not
have FULL control over cash-flows from financing, development,
indebtedness, and asset sales
 Direct participation on the public equity valuation increase recognized
by ALL landowner and government announcements made by
operators including IMMEDIATE payment of a fraction of the share
increase
Business Structures (continued)
No related party (self-dealing) contracts should be authorized
without local review, competitive bid, and trade credit offset
performance guarantees
Independent audits must be required for all related party
(self-dealing) agreements to insure that they are market rate
Related party (self-dealing) expenses must be REMOVED from
cost calculations when determining profit sharing, dividends
or other distributions
Benefit Sharing
PNG / AB should require that ALL Operator/Investors provide
terms equivalent to, or better than their most recent
transaction in a G-20 country
 If operator/investors are not trying to take advantage of the country
and its people, this should present no impediment
All environmental studies and plans should require bonding
(insuring through an internationally recognized property &
casualty insurer) where the exclusive beneficiary is the
landowner group of record
 If operations are as safe as promoted, operator/investors should
prove it by obtaining reasonable and customary insurance with the
named beneficiary the local community
Training Expectations
Financier, Developer, Operator must provide local content
professional training (each, respectively if not the same
entity)
Education should include asset and finance management in K12 education
Local workforce must be represented in ALL levels of
operations
Economic Engagement
Local vs. FIFO employment must be calculated on total
compensation, not number of employees
Local content contracting must be calculated as an absolute
percentage of total operating, general and administrative
costs , not “best efforts” (e.g. Petrobras in Brazil uses between 6070%!)
Dividends should be declared based on adjusted gross sales
(rather than arbitrary operator-manipulated net profit)
resulting in a lower percentage on a significantly larger
number
Next Steps
Schedule Community Briefings
Insure representatives from Youth and Women’s groups
Define BCL Resolution Board to accept breach cure in the
event BCL / RioTinto wishes to enter negotiations as a
candidate developer / operator
Prepare pro forma financial model and secure funding for
negotiations phase