Would Okvao Gold Mining Project Bring Fair Benefits To The State?

(The below analytical statements and opinions are merely an attempt of the author to show challenges and a way of addressing policy decision choices with regard to this studied case. All figures, data and information given in this article are mostly based on author assumption and knowledge of the case and they should not be used to reflect actual reality of the project).

As it was claimed by proponent of the project, the Okvao Gold Mining proposal could be the first one of international standard gold mining industry in Cambodia when it is running. If that is so, the overall socio-economic benefits to the country is significant. It would help broadening fiscal (eventually economic too) base and industrial diversification in the country as well as building national capacity in such specialized industry. Combining with other mineral resources development projects such as Block A oil field, the mining, oil and gas sector seems to bear significant new source of fiscal revenues to the state and could be another leverage for the government to create means for dealing with impacts from EBA sanction proposed by the EU.

However, these above benefits would not come to the country for free. The main and most significant cost the country would be paying is the fact that the project site is located right within a wild life protected area, Phnom Prich Wild Life Sanctuary – an important natural habitat for most highly value wildlife species and ecosystem of the country. Thought the impacts were claimed to be manageable by project proponent and approved by the ministry of environment, the cost to offset the risks and/or loses of natural ecosystem services values due to the project were not evaluated and offsetting measures were not provided.

Maybe at current context, the government is more concerned about the size of fiscal collection, in form of total effective tax that the country could benefit from the project, than the risk and the above cost. Even if that is so, we still need to be very cautious about our expectation of future economic and fiscal benefits from this project and its exaggeration suggested by the project proponent. A close look into economic model of the project should be used as guide to study such potential fiscal benefits. That is what we are going to discuss briefly in this article.

With data given by the project feasibility study and current term of fiscal regime suggested for the project we were able to craft an economic model of the project and study its behavior in response to sensitivity of few key assumptions. There are many variables that factor how big size is the state fiscal collection could be. Those variables are such as gold price, variation of ore grade and or ore reserve, gold recovery factor, variation of cost of capital and mining costs, etc. However, for the simplicity of this study, we choose only two most important assumptions to consider in our following analysis, market gold price and mining costs. The two assumptions (or variables) have the most significant impact on profitability of the project thus the fiscal collection.

Current Gold Price and sensitivity

At current market, gold price is in average around 1330 USD per ounce. Gold price is generally flat throughout the places with variation only because of currency exchange. Although gold price follows supply-demand market principle, historically its variation in real value is small compared other commodity and most of significant variations are due to currency inflation-deflation. For the case of our study, It is assuming that the future average gold price during the Okvao project life could be around 1250 USD per ounce and with a variation of around +/- 20% from this base price. This price of 1250 USD per ounce is used as base case price for this study.

Mining Costs and sensitivity

Mining costs were thoroughly studied in a full feasibility study by project proponent and costs were suggested by experienced operators in the field. An average cost per ounce produced was also derived to compare with world average one. The average cost per ounce used in this study is around 870 USD per ounce with a variation of +/-20% too to be consistent with the price sensitivity. This would mean the average cost ranging from 696 USD to 1044 USD per ounce produced.

Fiscal Instruments

The fiscal instruments used to estimate collection size of state’s total revenues that constitute a total effective tax rate or AETR of this project are as below:

  • Royalty at rate of 3.0% of gross sale
  • Export tax and duties – 0%
  • Profit Tax at rate 30%
  • Excess Profit Tax using R-Factor formula currently adopted in the amendment on tax law
  • Dividend withholding tax – 0% for the first 5 years of profit and 14% onward
  • Withholding tax on interest and services – 14%
  • Other misc. public service fees and surface rental – according to current inter-ministerial prakas.

Result for base case scenario

Shown in figure 1 below. The Average Total Effective Tax Rate (AETR) is about 42% in constant price or 41% in nominal price. With a discount factor of 5%, the ETR is around 44.46%.

Base Case Result

Estimated government’s dis-aggregated fiscal revenue flow by year is shown in figure 2 below. The flow indicates a late (end front) collection which provide cash-flow advantage to the project proponent as it can be collecting cash much more early than the government thus improving its cash-flow NPV value and breakeven time.

Government Revenues By Year and By Type

To grasp the likely behavior of the proposed fiscal regime, a sensitivity analysis was done for both selected variables: gold price and mining costs. The result of this analysis is presented in figure 3 below.

Result of Sensitivity Analysis

Depending on what are the gold price and mining costs situations, the resulted AETR and project proponent share percentage of benefits are varying. In the figure the axis value is a percentage change in studied variables. Few remarks can be made from this figure. The base case is where gold price is at 0% change and mining cost is 0% change. As figure suggested, the most favorable condition for the project proponent is a scenario where gold price is increased in the future from the base case. In this case, no matter mining costs increase or decrease, the government’s AETR is within range between 39%-44% (bleu area of the chart in the figure), thus, project proponent gets around 56%-61% of the total economic surplus. The situation changes drastically when the gold price drops below base case. If the gold price drops and the mining costs drop as well, the project proponent still can have the major share of the benefits (green area of the chart in the figure). But if the mining costs increase while gold price drops, the government’s AETR is increasing to a range between 49%-54% (grey area of the chart), thus project proponent gets around 46%-51% of the total economic surplus. In extreme case, where the gold price drops more than 10% of the base case and the mining costs increase by more than 10%, the project proponent will be in bad situation and clearly the fiscal regime becomes acutely regressive. This situation may make the project un-economical or not financially viable.

Sensitivity Analysis Of AETR with variation of Price and Costs from base case


While in most developed countries state share is in general more than 55% of the economic surplus, compared to other developing countries with similar condition as Cambodia, the scenario of such fiscal regime is merely a moderate one. With the externality cost as pointed out at the beginning of the article, the government should consider more to find a good balance between such costs and benefits. A better fairly scenario should be an AETR around 49%-54% for the state in such project context. However with current studied regime, this scenario could only happen when the price of gold and mining costs behave as shown in grey area of the figure above. This pattern also indicates that the current fiscal regime is not robust enough to cope with market condition to ensure progressivity of the regime. Due to this pattern, the government would make better fair share of benefits only when the project is in low profitability situation. In contrast, the government should instead consider to introduce special incentive instruments to cope with high regressive regime to help enhancing project’s commercial viability in the scenario of low profitability case due to price dropping with mining costs increasing as in case of red area shown in the figure.

2 thoughts on “Would Okvao Gold Mining Project Bring Fair Benefits To The State?

  1. Really good article with a few talking points to follow for me; the gain that Cambodia has is significant beyond the money from Okvau. To start the industry with that Australian training and management at Emerald would be a “Watershed Moment” for Cambodian mining to develop further. The higher the tax on the first few operations, the higher the risk they will fail and the less incentive to start. Emerald are taking on a big task to get the mine started as it is, so i think the taxation is fair, and does it compare to levels in Australia I wonder.

    The natural cost associated with the destruction of habitat for the mine footprint pales in comparison to the footprint of a farm – think about a beef farm, or a plantation acreage which may involve several leases and generates significantly lesser income compared to a mine which only actually takes up a much smaller place and generates much much more income.


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