6.If a contractor chooses to make his financial contribution to the
•Authority by paying a combination of a production charge and a share of net
•proceeds, such payments shall be determined as follows:
(a)The production charge shall be fixed at a percentage of the
•market value, determined in accordance with subpara-graph (b),
•of the processed metals produced from the polymetallic nodules
•recovered from the area covered by the contract. This
•percentage shall be fixed as follows:
(i)first period of commercial production 2 per cent
•(ii) second period of commercial production 4 per cent
•If, in the second period of commercial production, as defined in
•subparagraph (d), the return on investment in any accounting
•year as defined in subparagraph (m) falls below 15 per cent as
•a result of the payment of the production charge at 4 per cent,
•the production charge shall be 2 per cent instead of 4 per cent
•in that accounting year.
(b)The said market value shall be the product of the quantity of the
•processed metals produced from the polymetallic nodules
•recovered from the area covered by the contract and the average
•price for those metals during the relevant accounting year as
•defined in paragraphs 7 and 8.
(c)(i) The Authority's share of net proceeds shall be taken out
•of that portion of the contractor's net proceeds which is
•attributable to the mining of the resources of the area
•covered by the contract, referred to hereinafter as
•attributable net proceeds.
•(ii) The Authority's share of attributable net proceeds shall be
•determined in accordance with the following incremental
•schedule:
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•Portion of attributable
•net proceeds
•Share of the Authority
•That portion representing a
•return on investment which
•is greater than 0 per cent,
•but less than 10 per cent
•That portion representing a
•return on investment which
•is 10 per cent or greater, but
•less than 20 per cent
•That portion representing a
•return on investment which
•is 20 per cent or greater
•First period of
•commercial
•production
•35 per cent
42.5 per cent
•50 per cent
•Second period of
•commercial
•production
•40 per cent
•50 per cent
•70 per cent
(d)(i) The first period of commercial production referred to in
•subparagraphs (a) and (c) shall commence in the first
•accounting year of commercial production and terminate
•in the accounting year in which the contractor's
•development costs with interest on the unrecovered
•portion thereof are fully recovered by his cash surplus, as
•follows:
•In the first accounting year during which development
•costs are incurred, unrecovered development costs shall
•equal the development costs less cash surplus in that year.
•In each subsequent accounting year, unrecovered
•development costs shall equal the unrecovered
•development costs at the end of the preceding accounting
•year, plus interest thereon at the rate of 10 per cent per
•annum, plus development costs incurred in the current
•accounting year and less contractor's cash surplus in the
•current accounting year. The accounting year in which
•unrecovered development costs become zero for the first
•time shall be the accounting year in which the contractor's
•development costs with interest on the unrecovered
•portion thereof are fully recovered by his cash surplus.
•The contractor's cash surplus in any accounting year shall
•be his gross proceeds less his operating costs and less his
•payments to the Authority under subparagraph (c).
•(ii) The second period of commercial production shall
•commence in the accounting year following the
•termination of the first period of commercial production
•and shall continue until the end of the contract.
(e)"Attributable net proceeds" means the product of the
•contractor's net proceeds and the ratio of the development costs
•in the mining sector to the contractor's development costs. If
•the contractor engages in mining, transporting polymetallic
•nodules and production primarily of three processed metals,
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•namely, cobalt, copper and nickel, the am ount of attributable
•net proceeds shall not be less than 25 per cent of the
•contractor's net proceeds. Subject to subparagraph (n), in all
•other cases, including those where the contractor engages in
•mining, transporting polymetallic nodules, and production
•primarily of four processed metals, namely, cobalt, copper,
•manganese and nickel, the Authority may, in its rules,
•regulations and procedures, prescribe appropriate floors which
•shall bear the same relationship to each case as the 25 per cent
•floor does to the three-metal case.
(f)"Contractor's net proceeds" means the contractor's gross
•proceeds less his operating costs and less the recovery of his
•development costs as set out in subparagraph (j).
(g)(i) If the contractor engages in mining, transporting
•polymetallic nodules and production of processed metals,
•"contractor's gross proceeds" means the gross revenues
•from the sale of the processed metals and any other
•monies deemed reasonably attributable to operations
•under the contract in accordance with the financial rules,
•regulations and procedures of the Authority.
•(ii) In all cases other than those specified in
•subparagraphs (g)(i) and (n)(iii), "contractor's gross
•proceeds" means the gross revenues from the sale of the
•semi-processed metals from the polymetallic nodules
•recovered from the area covered by the contract, and any
•other monies deemed reasonably attributable to operations
•under the contract in accordance with the financial rules,
•regulations and procedures of the Authority.
(h)"Contractor's development costs" means:
(i)all expenditures incurred prior to the commencement of
•commercial production which are directly related to the
•development of the productive capacity of the area
•covered by the contract and the activities related thereto
•for operations under the contract in all cases other than
•that specified in subparagraph (n), in conformity with
•generally recognized accounting principles, including,
•inter alia , costs of machinery, equipment, ships,
•processing plant, construction, buildings, land, roads,
•prospecting and exploration of the area covered by the
•contract, research and development, interest, required
•leases, licences and fees; and
•(ii) expenditures similar to those set forth in (i) above
•incurred subsequent to the commencement of commercial
•production and necessary to carry out the plan of work,
•except those chargeable to operating costs.
(i)The proceeds from the disposal of capital assets and the market
•value of those capital assets which are no longer required for
•operations under the contract and which are not sold shall be
•deducted from the contractor's development costs during the
•relevant accounting year. When these deductions ex ceed the
•contractor's development costs the excess shall be added to the
•contractor's gross proceeds.
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(j)The contractor's development costs incurred prior to the
•commencement of commercial production referred to in
•subparagraphs (h)(i) and (n)(iv) shall be recovered in 10 equal
•annual instalments from the date of commencement of
•commercial production. The contractor's development costs
•incurred subsequent to the commencement of commercial
•production referred to in subparagraphs (h)(ii) and (n)(iv) shall
•be recovered in 10 or fewer equal annual instalments so as to
•ensure their complete recovery by the end of the contract.
(k)"Contractor's operating costs" means all expenditures incurred
•after the commencement of commercial production in the
•operation of the productive capacity of the area covered by the
•contract and the activities related thereto for operations under
•the contract, in conformity with generally recognized
•accounting principles, including, inter alia, the annual fixed fee
•or the production charge, whichever is greater, expenditures for
•wages, salaries, employee benefits, materials, services,
•transporting, processing and marketing costs, interest, utilities,
•preservation of the marine environment, overhead and
•administrative costs specifically related to operations under the
•contract, and any net operating losses carried forward or
•backward as specified herein. Net operating losses may be
•carried forward for two consecutive years except in the last two
•years of the contract in which case they may be carried
•backward to the two preceding years.
(l)If the contractor engages in mining, transporting of polymetallic
•nodules, and production of processed and semi-processed
•metals, "development costs of the mining sector" means the
•portion of the contractor's development costs which is directly
•related to the mining of the resources of the area covered by the
•contract, in conformity with generally recognized accounting
•principles, and the financial rules, regulations and procedures
•of the Authority, including, inter alia, application fee, annual
•fixed fee and, where applicable, costs of prospecting and
•exploration of the area covered by the contract, and a portion of
•research and development costs.
(m)"Return on investment" in any accounting year means the ratio
•of attributable net proceeds in that year to the development
•costs of the mining sector. For the purpose of computing this
•ratio the development costs of the mining sector shall include
•expenditures on new or replacement equipment in the mining
•sector less the original cost of the equipment replaced.
(n)If the contractor engages in mining only:
(i)"attributable net proceeds" means the whole of the
•contractor's net proceeds;
•(ii) "contractor's net proceeds" shall be as defined in
•subparagraph (f);
•(iii) "contractor's gross proceeds" means the gross revenues
•from the sale of the polymetallic nodules, and any other
•monies deemed reasonably attributable to operations
•under the contract in accordance with the financial rules,
•regulations and procedures of the Authority;
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•(iv) "contractor's development costs" means all expenditures
•incurred prior to the commencement of commercial
•production as set forth in subparagraph (h)(i), and all
•expenditures incurred subsequent to the commencement
•of commercial production as set forth in
•subparagraph (h)(ii), which are directly related to the
•mining of the resources of the area covered by the
•contract, in conformity with generally recognized
•accounting principles;
(v)"contractor's operating costs" means the contractor's
•operating costs as in subparagraph (k) which are directly
•related to the mining of the resources of the area covered
•by the contract in conformity with generally recognized
•accounting principles;
•(vi) "return on investment" in any accounting year means the
•ratio of the contractor's net proceeds in that year to the
•contractor's development costs. For the purpose of
•computing this ratio, the contractor's development costs
•shall include expenditures on new or replacement
•equipment less the original cost of the equipment
replaced.
(o)The costs referred to in subparagraphs (h), (k), (l) and (n) in
•respect of interest paid by the contractor shall be allowed to the
•extent that, in all the circumstances, the Authority approves,
•pursuant to article 4, paragraph 1, of this Annex, the debt-equity
•ratio and the rates of interest as reasonable, having regard to
•existing commercial practice.
(p)The costs referred to in this paragraph shall not be interpreted
•as including payments of corporate income taxes or similar
•charges levied by States in respect of the operations of the
contractor.
