Pellerano & Herrera The Pellerano & Herrera Foundation

Mining - Getting the Deal Through 2008

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Mining industry
1.What is the nature and importance of the mining industry?

Mining is an important activity in the Dominican Republic. The main minerals found in the country are gold, silver, nickel, marble, limestone and granite. The significance of the mineral resources of the country makes this one of the most attractive sectors for investment, and the government is currently promoting the attractiveness of the sector by carrying out several foreign investment programmes.

In this regard, the government created the Corporative Mining Unit, with the aim of working with the government in the operational procedure of all mining projects in which the government is a participant. Another important purpose of the Corporative Mining Unit is to ensure that private investments in the mining sector are clear, credible and guaranteed, thereby providing a solid foundation for the reactivation of commercial mining activity.

Efforts performed by the Corporative Mining Unit have led to substantial growth in the mining sector: by the end of 2004, the mining sector had contributed 3.7 per cent to national GDP. At present, there are around 35 mining companies in the country, which are mainly working on the extraction of marble and limestone. A Canadian capital company, Falconbridge Dominicana, operates a mine and a melting plant and exploits nickel.

Gold and silver exploitation had been largely concentrated in the hands of the state, but in 1998 it granted to Placer Dome (now Barrick Gold) a lease agreement for the exploitation of the Pueblo Viejo gold and silver reserves. This mine’s reserves are considered to be first class, with an estimated capacity of

403,000 ounces of gold, 2.2 million ounces of silver and 90 million pounds of zinc per year for at least 30 years. Placer Dome plans to invest approximately US$1.2 trillion for the exploitation of these reserves.

Additionally, Globestar Mining is developing a project for copper, zinc, gold and silver in the provincial town of Monseñor Nouel and plans to invest about US$50 million.

Legal and regulatory structure
2 Is the legal system civil or common law-based?

The entire legal system of the Dominican Republic is based on civil law.

3 How is the mining industry regulated?

The mining industry in the Dominican Republic is regulated by laws and regulations issued by the Dominican state.

4 What are the principal laws that regulate the mining industry? What are the principal regulatory bodies that administer those laws?

The principal laws that regulate mining activities in the Dominican Republic are the following:

• the Mining Law No. 146-71 and its Regulation, which apply to mineral substances in general with a few exceptions including sand, gravel, chippings, and some type of rocks, petroleum and its derivate;

• Law No. 123-71, related to the extraction of sand, gravel and chippings; and

• The Environmental Law No. 64-00.

The governmental bodies in charge of administrating mining activities in general are the executive branch, the Ministry of Industry and Commerce and the Ministry of Environment and Natural Resources.

5 What classification system does the mining industry use for reporting mineral resources and mineral reserves?

The Dominican Republic does not have a binding classification system for reporting mineral resources and reserves.

Mining rights and title
6
Who has title to metallic minerals in the ground?

The Dominican state has title to mineral deposits of every natureexisting in its national territory, including metallic minerals. These minerals may be granted in usufruct by the state.

7 What information and data is publicly available to private parties that wish to engage in mining activities?

The Ministry of Industry and Commerce, through the General Mining Directorate, provides to interested parties geological, technical and statistical information.

8 What mining rights may private parties acquire? How are these acquired? What obligations does the rights holder have?

Parties acquire mineral rights under Law No. 146-71 through: exploration concessions that grant the exclusive right to explore mineral deposits for up to three years; and exploitation concessions that grant its holder the right to extract, exploit, melt and use the mineral substances found during a period of up to 75 years. Parties may also acquire a reconnaissance permit that is mainly granted for preliminary prospecting of minerals, and an authorization to install processing plants for mineral rights.

In general, mining rights are granted on a first-come, first served basis. As an exception, the granting of a concession over a fiscal reserve requires a public bidding. In order to obtain a mining right, the interested party is required to file an authorization request before the relevant governmental authority by carrying out an application process. Concessions are finally granted by a resolution issued by the Ministry of Industry and Commerce. For the granting of an exploitation concession, the previous authorization of the executive branch is required.

The Dominican state may also execute special agreements for the granting of exploitation and exploration rights within an area determined as a fiscal reserve. Among the obligations of the holder of a concession are the following: protection of the life and health of workers; submission of semi-annual and annual operation reports; compliance with environmental standards; payment of annual patents, royalty fees and income taxes; the keeping of legal accounting books in accordance to GAAP rules; execution of works in accordance to methods and techniques, avoiding damages to the landowner and to the adjoining concessionaires; and starting the works within six months after the date of the granting of the concession, under sanction of forfeiture which is the time limit established in the Law depending on the type of concession.

Mineral rights under Law No. 123-71, for the extraction of sand, gravel, chippings, rocks and similar minerals, are obtained by means of permits and concessions. In order to obtain a permit or a concession, interested parties are required to file a request before the Ministry of Environment and Natural Resources. Permits are finally granted by resolution issued by the executive branch, with the previous recommendation of the Ministry.

9 Is there any distinction between the mining rights that may be acquired by domestic parties and those that may be acquired by foreign parties?

Under Dominican law, mining rights may be acquired both by domestic and foreign parties. However, under Law No. 146-71 foreigners are required to incorporate a Dominican subsidiary prior to holding exploitation concessions over mineral rights. As an exemption to the above, foreign governments or states are banned from acquiring the mineral rights stipulated by Law No. 146-71. In cases duly justified and approved beforehand by the National Congress, the executive branch may grant special rights to partially or wholly state-owned foreign mining enterprises.

10 How are mining rights protected?

Overall, mining rights are protected by the Dominican Constitution, which establishes the due process of law. Also, the Dominican Republic has an independent and effective judiciary. Administrative decisions of the state bodies may be subject to administrative remedies. Any disputes between private parties are decided by the Civil and Commercial Courts.

11 How do the rights of aboriginal, indigenous or currently or previously disadvantaged peoples affect the acquisition or exercise of mining rights?

There are no specific provisions in the applicable laws in connection with aboriginal, indigenous, currently or previously disadvantaged peoples affecting the acquisition or exercise of mining rights. However, Law No. 146-71 provides that the holder of a mining right has an obligation to compensate the owner or occupant for the occupation of the land as well as for damage caused.

12 What surface rights may private parties acquire? How are these rights acquired?

Mining rights do not grant surface rights to their holders. The right of the holder varies depending on the specific law applicable to the mining permit or concession.

Rights under Law No. 146-71
The holder of a mining right is authorised to use and access the land necessary for its activities, including any state-owned land. The extension of such use and access rights varies depending on the type of concession or authorisation obtained. In general, the holder of a mining right has an obligation to compensate the owner or occupant for the occupation of the land as well as for damage caused.

Additionally, exploitation concessionaires and parties authorised to install processing plants have the right to request from the state the expropriation of indispensable land. The prior payment of a ‘just compensation’ as defined by the law and compliance with the procedure established by the law is required before the exercise of expropriation rights.

In addition to the above, the holder of a mining right may acquire any kind of surface rights through direct negotiation with the landowner (purchase, lease, etc).

Rights under Law No. 123-71
No special right is granted by the law to right holders over the surface areas. In practice, right holders execute agreements through direct negotiation with the landowners.

Duties, royalties and taxes
13
What duties, royalties and taxes are payable by private parties carrying on mining activities? Are these duties, royalties and taxes revenue-based or profit-based?

The beneficiaries of mining rights under Law No. 146-71 are required to pay taxes. An annual mining patent calculated on a per hectare basis as follows:

The current exchange rate is approximately 33 Dominican Republic pesos per US dollar.

In addition, a royalty on the exportation of 5 per cent of the sales price free on board at a Dominican port is applicable to exploitation and processing plant operations. This royalty constitutes a credit against the income tax.

An annual income tax of 25 per cent of the yearly net profits must be paid by all companies. Companies are also subject to pay an annual assets tax of 1 per cent to be levied on all assets which are included in the tax payer’s general ledger, not adjusted by inflation, after applying all deductions by depreciation, amortization, provision for non recoverable accounts, investments in shares in other companies, land located in rural areas, properties affixed to rural production plants and the advanced taxes. The liquidated amount in connection with this tax, when applicable, shall be considered as a tax credit against the annual income tax related to the same fiscal year.

In the case of non-renewable natural resources, parties are required to pay a 5 per cent contribution of their generated net profits produced from the exploitation activity to the municipality.

Right holders of concessions or permits under Law No. 123-71 are required to pay the above-mentioned income and municipal taxes. In addition, such right holders shall pay a contribution equal to 4.10 Dominican Republic pesos per m3 of mineral extracted, removed or excavated. The above tariff may be increased from time to time.

Other taxes may also apply to mining operations such as VAT, payments remitted abroad, import duties, etc.

14 What tax advantages and incentives are available to private parties carrying on mining activities?

At present, no tax incentives are granted to mining activities. However, the Dominican congress has granted tax incentives to some mining companies in the past.

15 Is there any distinction between the duties, royalties and taxes payable by domestic parties and those payable by foreign parties?

The Dominican Republic’s mining laws do not establish any distinction between domestic and foreign parties in this regard.

Business structures
16
What are the principal business structures used by private parties carrying on mining activities?

The principal mining structure used is the limited liability company (compañía por acciones). In fact, the vast majority of the corporations in the Dominican Republic are limited liability companies.

All types of Dominican corporations are treated equally for tax purposes and only the compañía por acciones allows all of its shareholders to enjoy limited liability.

Financing
17 What are the principal sources of financing available to private parties carrying on mining activities? What role does the domestic public securities market play in financing the mining industry?

Large-scale mining projects are regularly financed by project finance from international banks.

Presently, the local securities market does not play any role in the financing of the mining industry. The Dominican securities market is currently under development.

Restrictions and limitations
18 What restrictions and limitations are imposed on the importation of machinery and equipment or services required in connection with mining activities?

There are no restrictions and limitations on the import of machinery and equipment or services required in connection with mining activities.

19 What restrictions and limitations are imposed on the use of domestic and foreign employees in connection with mining activities?

At least 80 per cent of the workers of a company should be Dominican citizens. Supervising officers should preferably be Dominicans, but there are no restrictions at a manager level.

When a Dominican citizen substitutes a foreigner in an employment position, the Dominican employee shall be entitled to the same salary, rights and conditions as the foreign employee.

20 What restrictions or limitations are imposed on the processing, export or sale of metallic minerals?

Under Law No. 146-71, concessionaires may only export their production after meeting the demands of the local market.

21 What restrictions or limitations are imposed on the import of funds for mining activities or the use of the proceeds from the export or sale of metallic minerals?

There are no restrictions or limitations imposed in connection with the import of funds for mining activities or the use of the proceeds from the export or sale of minerals.

Environment, health and safety
22 What are the principal environmental, health and safety laws applicable to the mining industry? What are the principal regulatory bodies that administer those laws?

The main laws regulating the environmental, health and safety standards of the mining industry in the Dominican Republic are the following:

• Law No. 64-00 of 24 August 2000 and complementary laws, which regulate general policies for environmental and natural resources. General standards to which the mining industry shall be subject in accordance with the Law 64-00 are related to the implementation of national policies for environmental

and natural resources including but not limited to guarding and securing the preservation, protection and sustainable development of the environment, local natural resources and species and assuring that exploration and exploitation of mineral resources are carried out without jeopardising the environment and it surrounding species; and

• Law No. 146 of 12 May 1971, which regulates, together with Law No. 64-00, the protection of the environment and the use of water by concessionaires holding mining concessions.

The Ministry of Environment and Natural Resources is the principal regulatory body in charge of administering and enforcing any aspects regarding the environment or natural resources of the

Dominican Republic.

23 What is the environmental review and permitting process for a mining project? How long does it normally take to obtain the necessary permits?

Before the initiation of the works, mining projects are required to obtain from the Ministry of Environment and Natural Resources an environmental permit or license. In order to obtain the corresponding authorization, an environmental impact study (EIS) shall be carried out and consequently filed by the petitioner. The terms of reference with the norms and procedures to be followed for the preparation of the EIS shall be previously determined by the Ministry of Environment and Natural Resources. Projects

that required EIS must carry out at least one public hearing.

Once the EIS has been approved, the corresponding permit or licence is issued, and the project may begin its operations. The law establishes that subsequent reports must be presented from time to time, and inspections shall be performed by the Ministry of Environment and Natural Resources in order to demonstrate compliance with the law and for the purposes of maintaining the permit.

The issuance of a permit or environmental licence may take approximate 10 months following the deposit of the EIS.

24 What is the closure and remediation process for a mining project? What performance bonds, guarantees and other financial assurances are required?

Under Law No. 146-71, concessionaires are required to have a closing plan including measures that guarantee the stability of the terrain, reforestation of the area and the prevention of contamination of waters. Deposited materials must be stabilized in order to prevent the leakage of water from the atmosphere inside drags dispersing contaminants that could degrade surface or underground water.

The closure of mines and remediation procedure is also regulated by the Environmental Law and complementary regulation which determine that concessionaires must recondition the nearby areas and ecosystems that may have been damaged. Right holders are also bound to perform several activities aimed at the protection of the environment in general, including those determined by the Ministry of Environment and Natural Resources.

A compliance bond in the amount of 10 per cent of the total cost of the works or investments is required.

International treaties
25
What international treaties apply to the mining industry or an investment in the mining industry?

The Dominican Republic has signed and ratified the Constitutive Convention of Multilateral Entities for Securities of Investment which encourages foreign investment and protects the investment made in the country.

The Dominican Republic has also signed and ratified numerous international environmental treaties such as the Vienna Convention for the Protection of the Ozone Layer, the Rio Convention on the Biological Diversity, the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their disposal, the Rio Declaration on Environment and Development, and the Kyoto Protocol to the United Nations on Climate Change.