Analysis of the Effect of Payment Mechanism on Exploitation of Polymetallic Nodules in the Area
2. Research Status of Payment Mechanism
2.1. The Basic Principles and Problems That Need to Be Solved in the Formulation of the Payment Mechanism for Exploitation Regulations
- The system of payments to the Authority shall be fair both to the contractor and to the Authority and shall provide adequate means of determining compliance by the contractor with such system;
- The rates of payments under the system shall be within the range of those prevailing in respect of land-based mining of the same or similar minerals in order to avoid giving deep seabed miners an artificial competitive advantage or imposing on them a competitive disadvantage;
- The system should not be complicated and should not impose major administrative costs on the Authority or on a contractor. Consideration should be given to the adoption of a royalty system or a combination of a royalty and profit-sharing system. If alternative systems are decided upon, the contractor has the right to choose the system applicable to its contract. Any subsequent change in choice between alternative systems, however, shall be made by agreement between the Authority and the contractor.
2.2. The Royalty Types of Land Mining
2.2.1. Unit-Based Royalty
2.2.2. Value-Based Royalty
2.2.3. Profit-Based Royalty
2.2.4. Combination of Value-Based and Profit-Based Royalty
2.2.5. Progressive Value-Based Royalty
2.3. The Payment Mechanism Discussed in the Current Draft Regulations on Exploitation of Mineral Resources in the Area
- Fixed ad valorem—one stage;
- Fixed ad valorem—two stage;
- Variable ad valorem—two stage (fixed first stage, variable second stage);
- Blended profit—two stage (fixed ad valorem first stage, blended profit and fixed ad valorem second stage)
3. Financial Evaluation Model and Parameters
3.1. Financial Evaluation Model
3.1.1. Net Present Value
3.1.2. Internal Rate of Return
3.1.3. Dynamic Investment Payback Period
3.2. Main Parameters in the Financial Model
3.2.1. Composition of a Typical Development System
3.2.2. Analysis Case
3.2.3. Model Parameters
4. Sensitivity Analysis
4.1. Sensitivity Analysis
4.2. Sensitivity Analysis Results
4.3. Risk Analysis Based on Monte Carlo Method
5. Analysis of the Advantages and Disadvantages of Different Payment Mechanisms
5.1. Analysis of the Fixed Ad Valorem—One Stage Payment Mechanism
5.2. Analysis of the Fixed Ad Valorem—Two Stage Payment Mechanism
5.3. Analysis of the Blended Profit—Two Stage Payment Mechanism
5.4. Analysis of the Advantages and Disadvantages of Different Payment Mechanisms
5.4.1. Risk Analysis of Three Payment Mechanisms
5.4.2. The Advantages and Disadvantages of Different Payment Mechanisms
- The ad valorem payment system is not conducive to the promotion of Area mineral resources development technology. Because of the uncertainty of mining technology and mining environment, the contractors have to pay more for the development of new resources. However, ad valorem does not have the function of ensuring the contractor to obtain the basic profit; thus, it will affect the investment of investors in development activities and technological innovation, and it is not conducive to the development and technological progress of Area mineral resources development.
- The blended profit and fixed ad valorem payment system will not greatly increase the complexity of the payment system. Van Nijen pointed out that sources for obtaining contractor mining costs might include ISA recommendations, wherein rules for allowable cost are set out, or through costs reported by contractors for income tax payments to their sponsoring states . In the draft regulation, the contractor is required to submit detailed reports on the mineral output, sales of ore, capital expenditure, and operating costs in mining activities in accordance with international accounting standards, and a strict inspection and audit system (rule 38) is stipulated. Therefore, it is feasible to obtain the production costs and income of the contractor through the above links and then calculate the profits. Moreover, the contractor not only needs to pay the royalty to the Authority, but also needs to pay the corporate income tax according to the profit to the country to which it belongs. In other words, the contractor’s profit is clear. Moreover, even for the Authority, the “owner of mineral resources”, the adoption of ad valorem has its own defects. For example, when the production cost decreases due to technological progress, the ad valorem payment system will not generate more benefits for the Authority; that is to say, other member states cannot share the benefits brought by technological progress.
6. Analysis of the Impact of Polymetallic Nodule Resources Development on Metal Market
6.1. Manganese Market
6.2. Cobalt Market
- This paper introduced the research status of payment systems in deep-sea mineral resources development regulations. At present, there are four payment systems being discussed. In essence, the first three are value-based payment modes, and the last one is a blended profit and fixed ad valorem payment mode.
- According to the background of Chinese deep-sea mineral resources development project in the Area, by using the discounted cash flow method, this paper constructed a financial model, named the CSU2019 model, determined the main parameters of the model, and compared it with several foreign financial models such as the MIT model.
- According to the sensitivity analysis, the top sensitive factors are annual mining output, manganese grade and price, smelting operation, and investment cost. It can be seen that increasing the output of ore and the value of manganese products and reducing the smelting cost are very important to improve the economic benefits of deep-sea polymetallic nodule development.
- On the basis of the COMRA project, the CSU2019 model was applied to calculate and analyze the impact of different payment systems and payment rates on the economic indicators of the project and the cumulative ISA revenue. Under the same internal rate of return (IRR), when adopting the fixed ad valorem—two stage payment system or blended profit—two stage payment system, the cumulative ISA revenue is always higher than that of the fixed ad valorem—one stage payment system.
- The fixed ad valorem—two stage payment system and blended profit—two stage payment system have their own advantages and disadvantages. If we only choose the value-based payment model, it is relatively less conducive to the promotion of Area mineral resources development technology, and it is relatively less conducive to sharing the benefits brought by the progress of mining technology. The blended profit and fixed ad valorem payment mode will not increase the complexity of the payment system.
- The determination of the key factors of metal prices in the above economic evaluation and analysis was based on the prediction of metal price under the current land mining production conditions. In fact, some metals in deep-sea mineral resources have huge production capacity relative to the current market demand or land mining output, which may have a huge impact on the corresponding metal market price, especially manganese and cobalt. Considering the limited demand and huge energy consumption of EMM, it is obviously inappropriate to regard EMM as the only product of manganese in various financial models. It is necessary to consider silicon–manganese alloy and manganese-rich slag as products or adopt various forms of manganese products.
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
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|Unit-based royalty||The administration is simple and efficient.|
Income stability and transparency are high.
|Income maximization is low.|
|Value-based royalty||Market is highly sensitive.|
The administration is simple and efficient.
Income stability and transparency are moderate.
|The level of income maximization is average.|
It is easy to ignore the potential value of minerals.
|Profit-based payment mechanism||Income maximization is high.||The administration is complex and inefficient.|
Income stability and transparency are low.
|Combination of value-based and profit-based royalty||Income maximization is high.|
Income stability and transparency are moderate.
|The administration is complex and inefficient.|
|Progressive value-based royalty||Market is sensitive.|
Income stability and transparency are moderate.
|It is easy to ignore the potential value of minerals.|
|Production Plan||Construction period (years)||3|
|Commercial mining period (years)||25|
|Annual production capacity (10,000 dry tons)||300|
|Pre-feasibility and feasibility study||310||8.8%|
|Manganese Grade||Recovery Rate||Nickel Grade||Recovery Rate||Copper Grade||Recovery Rate||Cobalt Grade||Recovery Rate|
|Administrative Expenses or Taxes||Amount or Tax Rate||Illustration|
|Application fee for exploitation contract||1,000,000 USD||Reference to exploration regulations|
|Annual management fee||100,000 USD/year||Reference to exploration regulations|
|Annual fixed fee||1,000,000 USD/year||Reference to the Convention|
|Royalty||-||Research object of financial model|
|Corporate income tax||25%||Refer to Chinese standards|
|Value-added tax||8%||Considering the deduction in practice|
|Insurance||1,500,000 USD/year||Considering environment protection|
|Modeling Method and Evaluation Metrics|
|Price and Taxes|
|Price determination method||Prediction algorithm and expert conjecture||Prediction method and expert conjecture||Current market price||Average price in recent years|
|Corporate income tax||25%||25%||25%||X|
|Production Situation and Project Cycle|
|Analysis period (years)||28||37||35||16|
|Development cycle (years)||28 (3)||30 (3)||28 (3)||16 (4)|
|Annual capacity (million dry tons)||3||3||3||3|
|Types of metal extraction||Cu/Ni/Co/Mn||Cu/Ni/Co/Mn||Cu/Ni/Co/Mn||Cu/Ni/Co|
|Manganese product plan||Electrolytic manganese||Electrolytic manganese||Electrolytic manganese||X|
|Capital Expenditure (Million USD)|
|Mining and transportation system||1210||1643||1276||789|
|Operating Expense (Million USD/year)|
|Mining and transportation||412||413||450||91.5|
|Metal Price (USD/ton)|
|Sensitivity Ranking||Sensitive Factors||Absolute Value of After-Tax NPV Sensitivity Coefficient||Absolute Value of After-Tax IRR Sensitivity Coefficient|
|2||Manganese grade and price||7.78||0.92|
|3||Smelting operating expense||4.01||0.48|
|4||Smelting capital expenditure||3.43||0.47|
|5||Nickel grade and price||2.65||0.32|
|6||Cobalt grade and price||2.27||0.27|
|7||Mining operating expense||2.03||0.24|
|8||Mining capital expenditure||1.31||0.18|
|9||Copper grade and price||1.12||0.13|
|10||Transportation operating expense||0.74||0.094|
|11||Transportation capital expenditure||0.68||0.088|
|Risk Variables||Distribution Type||Expected Value||Distribution Interval||Range of Variation|
|Annual ore output (10,000 tons)||Trigonometric distribution||300||250–315||−17% to +5%|
|Annual operating cost (million USD)||Trigonometric distribution||1012||759–1265||±25%|
|Fixed investment (million USD)||Trigonometric distribution||3210||2407.5–4012.5||±25%|
|Metal grade||Mn||Trigonometric distribution||27.15%||25.79–28.51%||±5%|
|Metal prices (USD/ton)||Mn||Trigonometric distribution||1685||1263.75–2106.25||±25%|
|Types of Metals||2015–2019 5 Year |
|2020.1–2020.12 Present |
|Expert Estimated Price|
|Payment Systems||IRR||ISA Annual Revenue|
|ISA Cumulative Revenue|
|AV1%5y + AV8%20y||16%||22.03/176.24||3634.97|
|AV3%5y + AV7%20y||16%||66.09/154.21||3414.67|
|AV1%5y + AV5.5%20y||16.5%||22.03/121.17||2533.47|
|AV2%5y + AV5%20y||16.5%||44.06/110.15||2423.32|
|AV1%5y + AV3%20y||17%||22.03/66.09||1431.96|
|Payment Systems||IRR||After-tax NPV|
|ISA Annual Revenue|
|ISA Cumulative Revenue|
|AV3% + PB17%||16%||217.76||88.12/---||3449.89|
|AV2% + PB13%||16.5%||323.32||44.06/---||2519.12|
|AV1% + PB8.5%||17%||436.15||22.03/---||1505.75|
|Payment Scheme||Maximum IRR||Minimum IRR|
|AV1%5y + AV5.5%20y||24.67%||4.81%|
|AV2% + PB13%||24.94%||6.08%|
|Payment System||Influence on the Authority||Influence on Contractors||Main Advantages and Disadvantages|
|Ad valorem royalty||The difficulty of tax collection and the administrative cost are medium.||Does not reflect production costs and profits.||The contractors bear all the risks; it is not conducive to the development and technological progress.|
|Blended profit and fixed ad valorem||The requirements of accounting and auditing are high, and the management cost is high.||Reflects profitability and reduces risk.||ISA bears certain risks with the contractors; it encourages investment and technology development at early stage.|
|Annual production of four metals for a single development contract (10,000 tons)||2.7||3.3||0.55||73|
|Global supply of four metals in 2018 (10,000 tons)||2300||190||15||1890|
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Li, Y.; Liu, C.; Su, S.; Li, M.; Liu, S. Analysis of the Effect of Payment Mechanism on Exploitation of Polymetallic Nodules in the Area. Minerals 2021, 11, 221. https://doi.org/10.3390/min11020221
Li Y, Liu C, Su S, Li M, Liu S. Analysis of the Effect of Payment Mechanism on Exploitation of Polymetallic Nodules in the Area. Minerals. 2021; 11(2):221. https://doi.org/10.3390/min11020221Chicago/Turabian Style
Li, Yan, Chang Liu, Sihan Su, Mengdan Li, and Shaojun Liu. 2021. "Analysis of the Effect of Payment Mechanism on Exploitation of Polymetallic Nodules in the Area" Minerals 11, no. 2: 221. https://doi.org/10.3390/min11020221