Contents

1. HOW WE CAN MITIGATE RISKS IN MINING .......................................................................................... 2

2. DIFFERENT FORMS OF TAXES THAT MINING COMPANIES HAVE TO DEAL WITH IN UGANDA ............. 4
3. WHY THE UGANDAN SHILLING IS ALWAYS DECLINING AGAINST A DOLLAR ........................................ 6
3.1 Understanding Exchange Rate ............................................................................................................ 6
3.2 Depreciation/appreciation of a currency...................................................................................... 6
3.3 The Uganda Exchange rate situation ............................................................................................ 6
3.4 What explains the current exchange rate depreciation? ............................................................. 8
3.5 Recommendations ...................................................................................................................... 10
4. WHY UGANDA HAS FAILED TO ATTRACT INVESTORS FROM BIG COMPANIES ................................... 11
5. QUESTION FIVE ................................................................................................................................... 12
5.1 TYPES OF SHARES .............................................................................................................................. 12
5.2 EQUITY AND DEBT ....................................................................................................................... 14
5.2.1 EQUITY ....................................................................................................................................... 14
5.2.2 DEBT .................................................................................................................................... 14
5.3 INFLUENCING FACTORS CONSIDERED BEFORE AN INTEREST RATE IS ATTACHED TO A LOAN. . 17
6. REFERENCES ........................................................................................................................................ 20

LIST OF FIGURES
Figure 1 USD: UGX DEPRECIATION/APPRECIATION RATES- January 2004 to February 2015
...................................................................................................................................................................... 7
Figure 2 Period Average Exchange Rate from January 1990 to February 2015 .................................. 7
Figure 3 showing difference between debt and equity ........................................................................... 15

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 1

 1. HOW WE CAN MITIGATE RISKS IN MINING
Risk mitigation is defined as taking steps to reduce adverse effects. These are some of the
different ways on how to mitigate risks in mining.
Exploration and Resource Development

 Project management and drill program supervision: Here, the mining engineer has to
ensure accurate and effective drilling and obtain accurate results to confirm whether he is
to continue or not. There has to be enough supervision also.
 Geochemical testing for elements: Enough laboratory testing has to be done to confirm
all the elements that are contained within that particular orebody to avoid separation and
concentration problems
 Orebody modeling and resource calculations: The engineer must ensure accurate resource
estimation calculations and come up with an ore body model to guide the mining
operations.
 Environmental and geotechnical baseline studies: The geotechnical properties of the ore
body and the host rock have to be clearly identified and determined to avoid risks of
collapsing walls to state effectively the appropriate mining method.

Feasibility Studies
 Bankable pilot plant testing: This involves carrying out a relatively small initial
production to test for the quality of the product to be produced, as well as determining the
efficiency of the technology to be applied.
 Geometallurgy Framework to support economic evaluation of process and mine planning,
modeling and optimization
 Environmental Impact Assessment: Before mining, one has to first assess the impact of
the activity on the environment so as to cater for the related costs to environment and to
confirm whether the activity will be accepted by the authorities to continue.
 Mine closure and rehabilitation planning: This also has to be put in consideration prior to
the mining activity so as to cater for the costs involved after the mining operation.
 Production of market samples: This involves assessing the market for the mineral product
so as to confirm whether the final product will have a potential market.

Technical Due Diligence

 Laboratory due diligence reviews: Continuous laboratory testing has to be done
throughout the mining and processing activities to ensure accurate quality control and to
confirm whether the output is what the lab results say/ said.
 Plant design, efficiency and operation audits: Ensure appropriate plant design and
construction so as to avoid future complications of plant breakdown before the operations
are complete. This can help even to reduce on maintenance costs.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 2

  Review of business plan and financial models: The earlier drafted business plans have to
be followed up see whether what was expected is the one being obtained before more
capital is injected in the business.
 Review of construction and commercial agreements: In case of some agreements and
memorandum of understanding signed prior to the mining business, they should be
frequently examined and reviewed to confirm whether what was stated is being fulfilled.
 Permit and license reviews: One has to first attain a mining license before mining. After
that, in case it needs to be renewed, it should be renewed as soon as possible to avoid
complications from government.
 Environmental, sustainability, ethical & social audits

Construction Support
 Project management and reporting: As management is the key feature that affect the
performance of a project, effective management should be implemented so as to ensure
continuous operation and process flow of the operations.
 Procurement support: As a company, there may be need for some procurement to supply
some equipment, machinery or utilities to the company. This is a critical issue as fake/
less efficient supplies may render the project into risks of quality reduction, loss of
market and increased costs which can cause losses.
 Work supervision at site: There should be enough supervision at the site/ work place to
ensure controlled production, elimination of reluctant workers and avoiding hazards that
can cause stoppages or closure of the project or reduce on the quality and quantity of
production.
 Budget and schedule control, optimization: Costs should be controlled so that they fit in
the budget planned. This can help to do away with risks of losses due to too much
expenditure. Also, schedules, trips and shifts should be as stipulated by the management
plan to avoid queueing, stoppages and delays in the production.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 3

 2. DIFFERENT FORMS OF TAXES THAT MINING COMPANIES
HAVE TO DEAL WITH IN UGANDA
A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an
individual or other legal entity) by a governmental organization in order to fund various public
expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law.
Below are the different forms of taxes that mining companies have to deal with in Uganda.

 Value-added tax (VAT), known in some countries as a goods and services tax (GST),
is a type of general consumption tax that is collected incrementally, based on the increase
in value of a product or service at each stage of production or distribution. VAT is
usually implemented as a destination-based tax, where the tax rate is based on the
location of the customer.
 Corporate tax
It’s also called corporation tax or company tax, is a direct tax imposed by a jurisdiction
on the income or capital of corporations or analogous legal entities. Many countries
impose such taxes at the national level, and a similar tax may be imposed at state or local
levels. The taxes may also be referred to as income tax or capital tax. Partnerships are
generally not taxed at the entity level.

 The income tax

It is generally levied on a graduated scale, and because it applies only to profits, it is
neither a fixed nor a variable mining cost. It has less effect on cutoff grade than the other
two types of tax. It does, however, affect the annual cash flow from a mineral body. If the
tax rate is too high, it may reduce the present value of a potential orebody to an
unacceptable level.
The income tax is by far the most appropriate for conservation of mineral resources. The
other forms of taxation may cause lower-grade ore to be left in the ground and they may
delay capital improvements for mining and processing

Countries may tax corporations on its net profit and may also tax shareholders when the
corporation pays a dividend. Where dividends are taxed, a corporation may be required to
withhold tax before the dividend is distributed.

 Withholding tax: It is deducted from a payment (income) to a payer.

Withholding tax is a form of income tax deducted at source by one person upon effecting
a payment to another.
The withholding agent (person effecting the payment) is supposed to make the payment
of tax.
The payer must remit to the Commissioner General the tax withheld on or before the 15th
day of the month following the month in which the payment subject to withholding tax is

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 4

 made.
However, for promoters or non-resident or sports entertainers, tax withheld must be paid
within 5 days after the performance or not later than the departure date from Uganda of
the non-resident tax.

 Severance tax or royalty

It is levied against each unit of mineral that has been mined and shipped. It is a variable
cost rather than a fixed cost of operation. Like the ad valorem tax, it raises the cutoff
grade of a potential orebody, but unlike the ad valorem tax, it does not penalize the miner
for outlining future ore reserves and it does not apply unless the mine is operating. This
kind of tax is sometimes used to encourage local smelting and refining rather than the
shipping of ore and concentrates out of the state; the tax is simply reduced for material
that has undergone additional local processing.

Royalties are easier for a state to assess and collect than most other kinds of tax, so much
so that they are almost too easy to increment past the threshold of what mines can pay. A
steep rise in the royalties assessed on minerals by the province of British Columbia in
1975 is a good case in point; it encouraged exploration and new mine financing by
Vancouver-based companies almost immediately -- in Alaska, the Yukon Territory, and
almost everywhere else.

 The ad valorem tax

It is based on the assessed value of the plant and the ore reserves. The tax payment is a
fixed cost of operation, applied to the entire mine without regard for the level of
production. As a cost of operation, the anticipated payment of a high ad valorem tax
affects an exploration target by raising the acceptable cutoff grade -- the grade of the
weakest mineralization that can be mined at a profit.
This encourages 'high-grading' and reduces the effective tonnage in an orebody, and if the
entire deposit is marginal in grade, it may be completely invalidated as an economic
target. Because an ad valorem tax is levied whether the mine is operating or not, it has an
advantage to the state in providing a steady, predictable source of revenue. But the
advantage has limits. If the tax becomes unrealistically high, the source of revenue goes
elsewhere. Minnesota's experience has been mentioned.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 5

 3. WHY THE UGANDAN SHILLING IS ALWAYS DECLINING
AGAINST A DOLLAR
3.1 Understanding Exchange Rate
Exchange rate is the price of a nation’s currency in terms of another currency. It is the rate at
which one currency will be exchanged for another. It is also regarded as the value of one
country’s currency in terms of another currency. An exchange rate thus has two components, the
domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a
direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic
currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms
of the foreign currency.

3.2 Depreciation/appreciation of a currency

A currency is said to be getting stronger or appreciating if that currency is going up in value
against another. So, $1: UGX 2500 moving to $1: UGX 2800 means the dollar is getting
stronger.
A currency that is becoming weaker or depreciating is a currency that is going down in value
against another. So, $1: UGX 2000 moving to $1: UGX 2700 means the shilling is getting
weaker.
Currencies change in value because there is a change in demand for holding that currency.
Households, governments and businesses need other countries’ currencies to buy their goods and
services such as petroleum products, machinery, travel abroad etc.
A change in exchange rates might affect a business in the following ways:
Exchange rates changes can increase or lower the price of a product sold abroad. When the
shilling depreciates against the dollar, it means that we mean that one needs more shillings to
buy a unit of a dollar. Therefore, for imports whose purchasing cost was in USD, one needs more
shillings to buy them. i.e. goods and services procured form abroad in USD become more
expensive.

3.3 The Uganda Exchange rate situation

In line with a liberalized current and capital account of the balance of payments, Bank of Uganda
pursues a flexible exchange rate policy regime. In this regime, the price of the shilling visa-vi the
US dollar and other foreign currencies is determined by the market forces of demand and supply.
BOUs involvement in the foreign exchange market is limited to occasional interventions
(purchase or sale of foreign currency) only to dampen excessive volatility in the exchange rate.
Stable exchange rate movements in either direction (appreciation or depreciation), enables the
proper planning by all market players

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 6

Figure 1 USD: UGX DEPRECIATION/APPRECIATION RATES- January 2004 to February 2015

The figure above shows a line graph of the monthly Shilling: Dollar depreciation or appreciation
trends from the last 10 years. All data points below Zero show that the shilling appreciated
against the dollar while the data points in the positive show a depreciation shilling. Over the past
ten years, the worst depreciation rate was recorded in October 2008 where the shilling
depreciated against the dollar from UGX 1,645 in September 2008 to UGX 1,838.73 in October
2008 and the rate of depreciation was noted to be 11.8%. This trend can be linked to the
seasonality of the demand for the USD towards Christmas and Easter holidays as traders’ and
other players in the market stock goods and services. Importers and those who wish to travel
abroad buy the USD just before the festive seasons so that they do not face the high rate. This
development in its self is self-correcting since the shilling appreciates after this period.

Figure 2 Period Average Exchange Rate from January 1990 to February 2015

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 7

The figure above shows a slow but sure depreciation of the shilling. The Polynomial trend line fit
on the data suggests that the exchange rate will be within the UGX 2000 to the UGX 2500 band
over the next six months, until August 2015. This outlook of hope unfortunately does not
consider the economic fundamentals as it is purely a statistical exercise. To realize the projected
exchange rates in the near future, we ought to understand what explains the current depreciation
situation and work towards correcting glitches highlighted below.

3.4 What explains the current exchange rate depreciation?

 The ambitious infrastructure programmes by the GoU.

The Karuma Hydro Power Dam Project (600 MW) which cost UGX 1,096 billion in the
FY 2014/15, the Isimba Hydro power dam projects (183 MW) which cost UGX 0.9
billion5 in the FY 2014/15, the standard gauge rail way project and the Oil sub sector
investments are having a major impact on the forex market in Uganda. The huge forex
requirements by these under takings in reality or in speculation cannot be sustained by the
Uganda’s forex market. Whereas actual expenditure on the dam projects is getting
stronger as they kicked off in the FY 2014/15, the economy does not have enough dollar
to implement them without shocks like we are witnessing. The equipment required to
implement the projects is procured in forex (USD) and so are the payments to the
expatriates employed with these projects. The standard gauge rail way project has also
had major speculative impacts that have too wiped dollars from the economy.

 Strengthening of the US Economy.

The other major reason for the depreciation of the shilling is the reduction of supply of
the USD on the world market. The combination of higher oil production and lower oil
consumption in the United States has already reduced net imports as a share of U.S.
liquid fuels use from 60% in 2005 to 40% in 2012. Net import volumes of crude oil and
liquid fuels on a volume basis are projected to decline by 55% between 2012 and 2020.
What this means for the Ugandan Economy is that there is going to be a continued strain
on the supply of USD on the world market. The shilling will potentially continue to
depreciate since we heavily rely on the USD for our imports.

 Poor performance of Uganda’s Exports.

In order to increase the dollars inflows in the country, we need to produce for export.
Uganda has for a long time now struggled with the question of increasing value from her
exports. In the FY 2013/14, the earnings from total exports declined by 6.97%. From the
FY 2011/12 in July to the FY 2014/15 in January, the average value of Uganda’s exports
is USD 227.83 million.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 8

 Inadequate regulation of the forex market.
In Uganda, there is poor regulation of the flow of forex in and out of Uganda. Uganda is
one of the few countries in the world that does not care or have a limit on the amount of
forex that can be repatriated, exchanged or held as cash at any one time. Whether this is
staged as an incentive for investors or otherwise, it hurts the stock of forex in the country.
One can argue that the floating exchange system we are exercising in Uganda will
continue to make it hard for the shilling to be stable against the dollar. In South Africa for
example, foreign exchange control is applicable to all transactions no matter the size, no
resident may effect a transfer without prior approval, no company or legal entity may
effect a transfer without prior approval, only authorized dealers are allowed to effect a
currency transfer, outward payments may only be made for permissible reasons and
under conditions that are approved by the authorized dealers on behalf of the Reserve
Bank, all payments made to foreign parties must be reported to the Reserve Bank, there
are set amounts for personal transfers in the form of allowances that must be adhered to.
In Ethiopia Non-residents traveling to Ethiopia must declare any/all foreign currency in
excess of 3000 USD (or its equivalent in other currency) upon arrival in Ethiopia.11
These interventions help to keep the integrity of the local currency and make it possible
for serious investors to invest in the country.

 Locally registered firms charging for services rendered in foreign currency.

The act of charging for services provided in Uganda in USD is worsening the already bad
forex situation in Uganda. For as long as the investors, local or international do not value
the shilling enough to have it as the medium of exchange in our economy, the forex
situation will continue to be bad. This is common in the tourism and service sector to the
extent that even local building owners in Uganda ask for rent in USD.

 Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. Those
countries with higher inflation typically see depreciation in their currency in relation to
the currencies of their trading partners.
 Differentials in Interest Rates
By manipulating interest rates, central banks exert influence over both inflation and
exchange rates and changing interest rates impact inflation and currency values. Higher
interest rates offer lenders in an economy a higher return relative to other countries.
Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.
The opposite relationship exists for decreasing interest rates that is lower interest rates
tend to decrease exchange rates.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 9

  Current-Account Deficits
The balance of current account reflects all payments between countries for goods,
services, interest and dividends. A deficit in the current account shows the country is
spending more on foreign trade than it is earning, and that it is borrowing capital from
foreign sources to make up the deficit. The excess demand for foreign currency lowers
the country's exchange rate.
 Public Debt
A large debt may prove worrisome to foreigners if they believe the country risks
defaulting on its obligations. Foreigners will be less willing to own securities
denominated in that currency if the risk of default is great. For this reason, the country's
debt rating as determined by Moody's or Standard & Poor's, for example is a crucial
determinant of its exchange rate.
 Political Stability and Economic Performance
Foreign investors inevitably seek out stable countries with strong economic performance
in which to invest their capital. A country with such positive attributes will draw
investment funds away from other countries perceived to have more political and
economic risk. Political turmoil, for example, can cause a loss of confidence in a
currency and a movement of capital to the currencies of more stable countries.

3.5 Recommendations
Sequence the infrastructure developments in such a manner that will have limited impact on the
real economy.
Make value addition a major component of GoU projects especially in the agriculture sector.
Where the private sector has no capital or know how to add value to the various agriculture
sector enterprises that are exported, GoU should intervene directly or indirectly by offering
incentivized credit and capacity building sessions as this will increase the value fetched by the
same volume of exports. As a result, the supply of foreign currency, particularly the USD will be
improved.
The Bank of Uganda should increase regulation in the Uganda’s forex market. Specifically, they
should set limits beyond which banks cannot send foreign currency without authorization, among
other things.
But also, the bank should reign on local/international entrepreneurs who unnecessarily strain the
shilling against the dollar by charging in dollars with no economic justification apart from profit
maximization.
Government should prioritize the implementation of the enterprise zoning that was done for
Uganda so as to maximize the productivity of different regions in the country. This will increase
production for exports and should work towards improving our earnings from exports.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 10

 4. WHY UGANDA HAS FAILED TO ATTRACT INVESTORS FROM
BIG COMPANIES
An investor is an individual who commits money to investment products with the expectation of
financial return. Generally, the primary concern of an investor is to minimize risk while
maximizing return, as opposed to a speculator, who is willing to accept a higher level of risk in
the hopes of collecting higher-than-average profits. Uganda has not been able to attract different
investors from big companies due to some reasons, among which include;
 Political instability: The political state of Uganda over the last 20years have not been all
that attractive, which blocks some of the large capital investors to come and invest their
money in Uganda’s mining sector.
 High tax rates: The tax charges attached to Uganda’s mining sector is a bit high
compared to some other potential-deposit bearing countries like DRC and Zambia. This
leaves investors with no option other than shifting to those countries where they can
spend a little and save much.
 Remoteness of different mining projects: Once a mineral deposit is located in a place
where transport costs can be high to almost offsetting the income to be earned from it, it
may leave the deposit as just interesting. This has been a case of some of Uganda’s
deposits.
 Corruption and bribery: The corruption and bribery scandals being heard of in Uganda’s
government tends to scare away some investors. For example, the cases that arose on oil
contracts.
 Poor infrastructure: The Uganda has tried much to improve its infrastructure, still there
are difficulties in accessing some of the places where the deposits are located.
 Government policies: Uganda still have some policies that are not favorable to big
investors for example government ownership of mineral resources
 Hostile tribes: There are still some tribes in Uganda that are not yet friendly to strangers
for example the Batwa around iron ore deposits in western Uganda and Karamojong in
north eastern.
 Lack of data on estimates of mineral deposits. Uganda’s mineral sector is still low in
identifying and quantifying its mineral deposits. This leaves some companies with a lot of
work to do on exploration which increases the costs, hence end up ignoring some
deposits.
 Limited local institutions training relevant professionals and technicians to work in the
mining industry: Over the last 10 years, Uganda has been having no institution that trains
mining engineers to help investors in Uganda.
 High export transport costs from the mining areas to the market. Uganda being a land
locked country, is disadvantaged with high exportation costs of mineral products, and
even importing of machines and technology to apply in the sector. This leaves the
industry undeveloped, which in turn chases away potential investors.
 High energy for energy, water, fuel and other utilities to use in mining that increases the
costs of mining that minimizes value addition to the mineral and quarry resources.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 11

 5. QUESTION FIVE
5.1 TYPES OF SHARES

In financial markets, a share is a unit of account for various investments. It often means the stock
of a corporation, but is also used for collective investments such as mutual funds, limited
partnerships, and real estate investment trusts.

Corporations issue shares which are offered for sale to raise share capital. The owner of shares in
the corporation is a shareholder (or stockholder) of the corporation. A share is an indivisible unit
of capital, expressing the ownership relationship between the company and the shareholder. The
denominated value of a share is its face value, and the total of the face value of issued shares
represent the capital of a company, which may not reflect the market value of those shares.

The income received from the ownership of shares is a dividend. The process of purchasing and
selling shares often involves going through a stockbroker as a middle man.

Different types, or ‘classes’ include:

 Preference share
These carry the preferential right of certain owners to receive a fixed percentage of
profits before others. In some cases, they also offer the preferential right to capital
distribution before other classes. As a result, however, they often carry no voting rights.
 Non-voting shares
Typically issued to family members of the main shareholders, or to employees as part of
a share scheme. This class enables existing members to maintain full control of the
company whilst distributing a portion of profits to other people in a tax-efficient way.

An employee scheme is an effective way to align the interests of staff with a company’s
values and objectives. The potential reward from their vested interest can motivate staff
to work harder. Dividends from non-voting ordinary shares can be used as a tax-efficient
way to pay part of an employee’s salary. Voting rights on ordinary shares may be
restricted in some way – e.g. they only carry voting rights if certain conditions are met.
Alternatively, they may carry no voting rights at all. They may also preclude the
shareholder even attending a General Meeting. In all other respects they will have the
same rights as ordinary shares.

 Redeemable shares
This class enables a company to buy back its issued shares after a fixed period of time.
Often, they are created for employees and issued with the provision of being taken back if
an employee leaves the company. They are often non-voting.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 12

 Alphabet shares
These are usually ordinary shares that are divided into different sub classes, such as ‘A’,
‘B’ and ‘C’. This allows a company to vary the percentage of each prescribed particular
share. Example:
 A company has two owners. They each hold one share but contribute different amounts
of capital to the business. One owner is given 50% voting rights, 50% dividend rights and
70 % capital rights. The other owner is given 50% voting rights, 50% dividend rights, and
only 30% capital rights to reflect his or her smaller capital contribution upon company
formation.
 Management shares
These carry a smaller nominal value than other classes and/or provide multiple voting
rights. They are often held by the original members as a way to retain more control of the
business than newer members.
 Ordinary shares
These carry no special rights or restrictions. They rank after preference shares as regards
dividends and return of capital but carry voting rights (usually one vote per share) not normally
given to holders of preference shares (unless their preferential dividend is in arrears).
 Deferred ordinary shares
A company can issue shares which will not pay a dividend until all other classes of shares
have received a minimum dividend. Thereafter they will usually be fully
participating. On a winding up, they will only receive something once every other
entitlement has been met.
 Cumulative preference shares
If the dividend is missed or not paid in full then the shortfall will be made good when the
company next has sufficient distributable reserves. It follows that ordinary shareholders
will not receive any dividends until all the arrears on cumulative preference shares have
been paid.
By default, preference shares are cumulative but many companies also issue non-
cumulative preference shares.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 13

 5.2 EQUITY AND DEBT
5.2.1 EQUITY

In accounting, equity (or owner's equity) is the difference between the value of the assets and
the value of the liabilities of something owned. It is governed by the following equation

𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

For example, if someone owns a car worth $15,000 (an asset) but owes $5,000 on a loan against
that car (a liability), the car represents $10,000 of equity. Equity can be negative if liabilities
exceed assets. Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders'
capital or similar terms) represents the equity of a company as divided among shareholders of
common or preferred stock. Negative shareholders' equity is often referred to as a shareholders'
deficit.

Alternatively, equity can also refer to the capital stock of a corporation. The value of the stock
depends on the corporation's future economic prospects. For a company in liquidation
proceedings, the equity is that which remains after all liabilities have been paid.

5.2.2 DEBT
This is money owed by one party, the borrower or debtor, to a second party, the lender or
creditor. The borrower may be a sovereign state or country, local government, company, or an
individual. The lender may be a bank, credit card company, payday loan provider, business, or an
individual. Debt is generally subject to contractual terms regarding the amount and timing of
repayments of principal and interest.[1] A simple way to understand interest is to see it as the
"rent" a person owes on money that they have borrowed, to the bank from which they borrowed
the money. Loans, bonds, notes, and mortgages are all types of debt. The term can also be used
metaphorically to cover moral obligations and other interactions not based on economic value.[2]
For example, in Western cultures, a person who has been helped by a second person is
sometimes said to owe a "debt of gratitude" to the second person.

Capital is the basic requirement of every business organization, to fulfill the long term and short
term financial needs. To raise capital, an enterprise either used owned sources or borrowed ones.
Owned capital can be in the form of equity, whereas borrowed capital refers to the company’s
owed funds or say debt.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 14

Equity refers to the stock, indicating the ownership interest in the company. On the contrary,
debt is the sum of money borrowed by the company from bank or external parties, that required
to be repaid after certain years, along with interest.

Almost all the beginners suffer from this confusion that whether the debt financing would be
better or equity financing is suitable. So here, we will discuss the difference between debt and
equity financing, to help you understand which one is appropriate for your business type.

Figure 3 showing difference between debt and equity

Advantages of Debt Compared to Equity

 Because the lender does not have a claim to equity in the business, debt does not dilute
the owner's ownership interest in the company.
 A lender is entitled only to repayment of the agreed-upon principal of the loan plus
interest, and has no direct claim on future profits of the business. If the company is
successful, the owners reap a larger portion of the rewards than they would if they had
sold stock in the company to investors in order to finance the growth.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 15

  Except in the case of variable rate loans, principal and interest obligations are known
amounts which can be forecasted and planned for.
 Interest on the debt can be deducted on the company's tax return, lowering the actual cost
of the loan to the company.
 Raising debt capital is less complicated because the company is not required to comply
with state and federal securities laws and regulations.
 The company is not required to send periodic mailings to large numbers of investors,
hold periodic meetings of shareholders, and seek the vote of shareholders before taking
certain actions.

Disadvantages of Debt Compared to Equity

 Unlike equity, debt must at some point be repaid.

 Interest is a fixed cost which raises the company's break-even point. High interest costs
during difficult financial periods can increase the risk of insolvency. Companies that are
too highly leveraged (that have large amounts of debt as compared to equity) often find it
difficult to grow because of the high cost of servicing the debt.
 Cash flow is required for both principal and interest payments and must be budgeted for.
Most loans are not repayable in varying amounts over time based on the business cycles
of the company.
 Debt instruments often contain restrictions on the company's activities, preventing
management from pursuing alternative financing options and non-core business
opportunities.
 The larger a company's debt-equity ratio, the riskier the company is considered by
lenders and investors. Accordingly, a business is limited as to the amount of debt it can
carry.
 The company is usually required to pledge assets of the company to the lender as
collateral, and owners of the company are in some cases required to personally guarantee
repayment of the loan.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 16

 5.3 INFLUENCING FACTORS CONSIDERED BEFORE AN INTEREST
RATE IS ATTACHED TO A LOAN.

An interest rate is the amount of interest due per period, as a proportion of the amount lent,
deposited or borrowed (called the principal sum). The total interest on an amount lent or
borrowed depends on the principal sum, the interest rate, the compounding frequency, and the
length of time over which it is lent, deposited or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as interest to the
borrower, normally expressed as an annual percentage. It is the rate a bank or other lender
charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.

Annual interest rate is the rate over a period of one year. Other interest rates apply over
different periods, such as a month or a day, but they are usually annualized.

Influencing factors

Interest rates vary according to:

 The government's directives to the central bank to accomplish the government's

goals.
The government may be intending to collect a certain amount of money in a financial year, so the
interest rates are raised to get the sum

 The currency of the principal sum lent or borrowed

For example, the Ugandan shillings depreciates over time. So, the rates are increased to recover
the principal sum plus some profits

 The term to maturity of the investment.

For example, an investment that is already in operation or known can get a high loan with low
interest rates than a just starting or newly established investment.

 Debt-to-income
Borrowers with an elevated debt-to-income ratio carry a higher risk of default when it comes to
loan repayment. That’s because debt-to-income is an indicator of cash flow. It is the percentage
of income that is already dedicated to paying the borrower’s fixed expenses, like monthly bills,
insurance, taxes and other financial obligations. With limited cash, one extra expense can easily
derail a mortgage payment. The preferred DTI can vary from lender to lender, but the general
consensus is around 36%.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 17

  Higher credit scores can mean lower rates

Credit scores, which generally range from 300 to 850, play a vital role in shaping interest rates.
The higher your score, the lower your rates will typically be, since you’ll be considered more
financially reliable and more likely to make loan payments on time.

Lower rates mean you’ll pay less interest on your loan. Over the course of a 30-year mortgage,
you can save thousands of dollars if you manage to get a low rate instead of one that’s a few
points higher.

That means it’s a good idea to strengthen your credit score — if you can — before taking out a
loan. Aim for a score of 740 or higher, which may be accomplished by eliminating as much debt
as possible, paying credit card bills in full and on time, and using no more than 30% of your
credit limit.

 Larger down payments can reduce rates

When taking out a mortgage, most lenders will require you to pay a percentage of the total cost
of the home upfront. That’s your down payment. Generally speaking, the more money you can
put down right away, the lower your interest rates will be.

 Shorter terms can have lower rates

Every loan has a term, which is simply the time you’ll have to repay what you’ve borrowed.
Although home loans can have terms as long as 30 years, auto loans range from about two to
seven years. The shorter the term, the higher your monthly payments will be. However, interest
rates tend to be lower with a shorter term.

 Interest rate type

Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don’t change
over time. Adjustable rates may have an initial fixed period, after which they go up or down each
period based on the market.

Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan,
but that rate might increase significantly later on.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 18

  Loan type

Lenders decide which products to offer, and loan types have different eligibility requirements.
Rates can be significantly different depending on what loan type you choose. Talking to multiple
lenders can help you better understand all of the options available to you.

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 19

6. REFERENCES
 mine and mineral economics by SUBHASH C. RAY
 Selected readings in mineral economics edited by F.J ANDERSON
 Mineral Economics” by N L Sharma and Sinha
 An Introduction to Mineral Economics” by K K Chatterjee
 https://www.informdirect.co.uk/shares/types-of-share-a-company-can-have
 https://www.sgs.com/en/mining/project-risk-assessment-and-mitigation
 https://www.scribd.com/document/257778760/Factors-That-Influence-Exchange-
Rates-1

 http://www.investopedia.com/articles/basics/04/050704.asp#axzz2E97L v!"
 www.icmm.com/website/publications/pdfs/social-and.../minerals-taxation-regimes
 https://www.accountingcoach.com/blog/equity-financing-debt-financing
 https://www.consumerfinance.gov/.../7-factors-determine-your-mortgage-interest-
rate/
 www.businessinsider.com/factors-affecting-bank-interest-rates-2012-11\

GROUP 2 MINERAL ECONOMICS ASSIGNMENT 20