Community Engaged Capital StrategyCommunity Engaged Capital Strategy

Dr. David E. Martin, Chairman

Prepared at the request of Chairman Lawrence DaveonaJune 19, 2013

First PrinciplesFirst PrinciplesResource 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, extra-sovereign agreements

Market conditions and BCL’s uncured payment breaches nullify any contractual right(s) they may have presumed

Unethical and Unlawful Behavior Now Being Unethical and Unlawful Behavior Now Being InvestigatedInvestigated

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 StoryThe 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 out-performed RioTinto by a considerable margin (see upper graph)Bougainville Copper under-performed the Australian Exchange by a large margin (see lower graph)

The Global Market ParadigmThe 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 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 NegotiationsPreparing 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 NegotiationsConducting 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 ModelsCorporate Models

Regional Operator/Investors form multiple corporations: 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 HoldersLicense 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 EntitiesContracting / 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 EntitiesFinancing EntitiesIn 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 EquityUnderstanding the Equity

If you do not own the SENIOR, LISTED stock, you DO NOT have: 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 equityOwnership of local subsidiaries give NO ability to control contracting, financing assessments, management, corporate governance, profit determination and distribution, dividends, or grievance resolution

The ExchangesThe Exchanges

Many early stage ventures list on junior exchanges to avoid disclosure rules and costs (examples): 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 exchangesNo 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 EntitiesAsset 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 FlowsCapital FlowsWhy 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 What PNG / AB Government and Landowners Have Been ToldLandowners 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 StructuresBusiness 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)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 SharingBenefit 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 ExpectationsTraining 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 K-12 education

Local workforce must be represented in ALL levels of operations

Economic EngagementEconomic Engagement

Local vs. FIFO employment must be calculated on total compensation, notnot number of employees

Local content contracting must be calculated as an absolute percentage of total operating, general and administrative costs , notnot “best efforts” (e.g. Petrobras in Brazil uses between 60-70%!)

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 StepsNext 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