This document summarizes discussions held within the International Seabed Authority (ISA) regarding the development of a financial model and payment regime for deep seabed mining regulations. It outlines the objectives of the payment regime, the process used to develop the regulations, issues considered in financial modeling, and a comparison of four economic models. The objectives are to optimize ISA revenues, attract investment while ensuring fairness to contractors and the ISA. Stakeholder discussions helped inform draft exploitation regulations covering royalty terms, fees, and periodic review. Financial modeling aims to provide insights on balancing these objectives. Key issues examined include revenue types, environmental considerations, and transitional payment schemes.

1. Overview of the discussions on the
future financial model held within
ISA in the context of the
development of the draft exploitation
regulations
PACIFIC SMALL ISLAND DEVELOPING STATES REGIONAL TRAINING AND
CAPACITY BUILDING WORKSHOP ON DEEP-SEABED MINING
NUKU’ALOFA, KINGDOM OF TONGA
12-14 February 2019
Presentation by Siosiua Utoikamanu

2. Structure of presentation
I Draft Exploitation Regulations: Part VII Financial terms of
an exploitation contract & Part VIII Annual, administrative and
other applicable fees
II The objectives of the payment regime and mechanism
III Purpose of financial modelling
IV Process for designing the draft regulation
V Discounted cash flow framework
VI Payment system modeling issues
VII Financial Regimes for Polymetallic Nodule Mining: A
Comparison of Four Economic Models
VIII Concluding remarks

3. I Draft Exploitation Regulations: Part VII
Financial terms of an exploitation contract
• Section 1: General
Draft regulation 60 Equality of treatment
Draft regulation 61 Incentives
• Section 2 Liability for and determination of royalty
Draft regulation 62 Contractor shall pay royalty
Draft regulation 63 Secretary-General may issue Guidelines
• Section 3 Royalty returns and payment of royalty
Draft regulation 64 Form of royalty returns
Draft regulation 65 Royalty return period
Draft regulation 66 Lodging of royalty returns
Draft regulation 67 Error or mistake in royalty return
Draft regulation 68 Payment of royalty shown by royalty return

4. Draft Exploitation Regulations: Part VII
Financial terms of an exploitation contract
Draft regulation 69 Information to be submitted
Draft regulation 70 Authority may request additional information
Draft regulation 71 Overpayment of royalty
• Section 4 Records, inspection and audit
Draft regulation 72 Proper books and records to be kept
Draft regulation 73 Audit and inspection by the Authority
Draft regulation 74 Assessment by the Authority
• Section 5 Anti-avoidance measures
Draft regulation 75 General anti-avoidance rule
Draft regulation 76 Arm’s-length adjustments
• Section 6 Interest and penalties
Draft regulation 77 Interest on unpaid royalty

5. Draft Exploitation Regulations: Part VII
Financial terms of an exploitation contract
Draft regulation 78 Monetary penalties
• Section 7 Review of payment mechanism
Draft regulation 79 Review of system of payments
Draft regulation 80 Review of rates of payments
• Section 8 Payments to the Authority
Draft regulation 81 Recording in Seabed Mining Register

6. Part VIII Annual, administrative and other
applicable fees
• Section 1 Annual fees
Draft regulation 82 Annual reporting fee
Draft regulation 83 Annual fixed fee
• Section 2 Fees other than annual fees
Draft regulation 84 Application fee for approval of a Plan of Work
Draft regulation 85 Other applicable fees
• Section 3 Miscellaneous
Draft regulation 86 Review and payment

7. Draft Exploitation Regulations
• Appendix II Schedule of annual, administrative and other
applicable fees
• Appendix III Monetary penalties
• Appendix IV Determination of a royalty liability

8. II The objectives of the payment regime
and mechanism
• To ensure optimum revenues for the Authority from the
proceeds of commercial production
• To attract investments and technology to the exploration
and exploitation of the Area
• That contractors receive equal treatment and have
comparable financial obligations
• That the system of payments to the Authority shall be
fair both to a contractor and to the Authority

9. The objectives of the payment regime and
mechanism (cont.)
• The system is also to provide adequate means of
determining compliance by the contractor
• That any payment mechanism should not be
complicated to administer for both the contractor and
the Authority
• That a periodic review be applied to the system of
payments
• The rates of any payments under the system shall be
within the range of those prevailing in respect of land-
based mining of the same or similar minerals

10. III Purpose of financial modelling
• To assist the ISA in developing a payment regime which
achieves the objectives of the payment regime and mechanism
by providing insights into:
optimizing revenues for the Authority from the proceeds of
commercial production
attracting investments and technology to the exploration and
exploitation of the Area
system of payments to the Authority which is fair both to a
contractor and to the Authority
system which provides adequate means of determining
compliance by the contractor
payment mechanism which is not complicated to administer for
both the contractor and the Authority
system that allows for a periodic review

11. IV Process for designing regulations
• ISA adopted a building block process for designing the
regulations
• Initial zero draft issued in 2016
• Key deliverables were discussed with stakeholders 2015-
2017
Financial modelling for proposed Financial terms and payment mechanism
Data management strategy and plan
Environmental assessment and management
Adaptive management approach
“Serious harm”
Responsibility and liability
• Revised Draft discussed by ISA Council in July 2018

12. Timeline of key stakeholder discussions
• June 2015: ISA/CIL Workshop, Singapore
• May 2016: Payment Regime Workshop #1, La Jolla,
California
• December 2016: Payment Regime Workshop #2, London
• April 2017: Payment Regime Workshop #3, Singapore
• March 2018: MIT presentation
• July 2018: MIT Update

13. V Discounted cash flow framework

14. VI Payment system modeling issues (1)
• Payment system and unintended disturbances
• Potential trade-off between incentives and risk allocation
• Transparency, transfer pricing, valuation
• Transitional scheme due to uncertainty
• Early vs later investors face different risks
• Price volatility and the option of precautionary saving of
revenues
• Sustainable development framework
• Aligning stakeholder goals
• Sponsoring State fiscal impact

15. Payment system modeling issues (2)
• Revenue
Unit–based royalty – fixed amount paid for each unit of mineral
Ad valorem royalty – fixed rate of amount of mineral sold
Profit-based royalty
Economic (resource) rent
Hybrid combination
Explore environmental aspects as they relate to the
payment mechanism and other obligations having a
financial impact under future contracts for exploitation
CHM Intergenerational equity with exhaustible resource -
capturing preferences of society: current v. future
consumption

16. Payment system modeling issues (3)
• Environmental fees & the use of bonds and funds as
incentive based mechanisms in addressing the
environmental responsibilities of contractors and the
application of a mitigation hierarchy framework
• Liability fund
• A transitional payment mechanism that provides for: an
economic incentive to attract investment and new
technology to the Area; low cost administration by both
the ISA and contractors and is stable in the initial years
of DSM activity to provide certainty and predictability
to investment decision making

17. VII Financial Regimes for Polymetallic
Nodule Mining: A Comparison of Four
Economic Models
• (1) the African Group Model (AG),
• (2) the China Southern University Model (CSU),
• (3) the German Federal Ministry for Economic Affairs and
Energy Model (BMWi), and
• (4) Massachusetts Institute of Technology model (MIT).

18. Financial Regimes for Polymetallic Nodule
Mining: A Comparison of Four Economic
Models
• Models:
African Group
CSU
BMW
MIT
• Comparison
Analytical framing
Production characteristics
Magnitude of estimated future prices
Magnitude of estimated operations related cost cash flows
Magnitude of estimated financial regime related cash flows

20. VIII Concluding remarks
• Financial modelling plays a key role in the development of
the payment system
• PSIDS may wish to consider scaling up its proactive
engagement with the ISA
• PSIDS may wish to consider scaling up capacity building at
all levels: technical; middle management; senior executive
and policy making levels

21. THANK YOU