WA Mineral Royalty Rate Analysis A Quick Guide Simon Panegyres, Partner Resources & Energy T: +61 8 9211 8157 E: firstname.lastname@example.org Kylie Panckhurst, Associate Resources & Energy Level 27, Allendale Square, 77 St Georges Tce Perth WA 6000 PO Box Z 5312, St Georges Tce Perth WA 6831 © HopgoodGanim May 2015 Page 2 WA Mineral Royalty Rate Analysis – A Quick Guide In 2012, the Western Australian State Government announced a Mineral Royalty Rate Analysis (Review) to review the State’s mineral royalty system. The Review was conducted jointly by the Departments of State Development and Mines and Petroleum, with the final report released to the public on 25 March 2015. The Review contains a detailed analysis of the current royalty system in Western Australia and sets out a number of recommendations intended to strengthen the system and remove anomalies. While the Mines and Petroleum Minister has confirmed that there will be no changes to royalty rates in the 2015-2016 Western Australian State Budget, he has also recognised the Review’s value for future discussions on the subject. In this Quick Guide, Partner Simon Panegyres and Associate Kylie Panckhurst provide an overview of the Review’s findings and recommendations as well as the current mineral royalty regime in Western Australia. Background The Review was announced in the 2012-13 Western Australian State Budget, with the Terms of Reference released by the State Government on 19 August 2013. The Review's main objectives were to evaluate whether the underlying settings of the royalty system in Western Australia (originally adopted in 1981) were delivering a fair and reasonable return to the community, and to identify any anomalies that might need to be addressed. The Terms of Reference to the Review did not anticipate major revisions to the State’s royalty structure and specified that the ad valorem basis of royalties used in Western Australia must be retained. The Review considered only mineral royalties and excluded petroleum royalties and magnetite iron ore. Overview of recommendations/implementation The Review found that the royalty system in place in Western Australia is sound and should be retained. It endorsed the ad valorem system and that the 10% benchmark of mine-head value was an appropriate gauge for royalty returns to the community. In addition to clarifying how the 10% benchmark should be calculated and used to ensure a consistent return to the community across commodities, the Review: recommended a new ad valorem tier of 3.75% be added to reflect the processing stages that typically exist within the mining industry today; and analysed each major Western Australian mineral commodity in detail, and in some instances recommended changes to rates (see table below). The Terms of Reference to the Review required that the Review consider economic conditions and international competitiveness in making its recommendations. The Review recognised that economic conditions are poor in some parts of Western Australia’s resources industry and, for those parts of the industry, the Review recommended no change until conditions improve. In releasing the results of the Review, the Mines and Petroleum Minister confirmed that there would be no changes to royalty rates in the 2015-16 Western Australian State Budget. Further, he indicated that should there be any future discussion of mineral royalties, the Liberal National Government would consult with industry and the community before making any changes. It is our understanding that royalty rates are unlikely to be revisited before the next Western Australian State election (scheduled to be held on 11 March 2017). © HopgoodGanim May 2015 Page 3 WA Mineral Royalty Rate Analysis – A Quick Guide Types of royalties in WA Mineral royalty rates, the subject of the Review, are established by the Mining Act 1978 (WA) (Mining Act) and Mining Regulations 1981 (WA) (Mining Regulations) and various State Agreements. They are either a specific rate per tonne of production, or ad valorem (a percentage of the resource’s value). Specific-rate royalties apply to basic raw materials such as clay, gypsum and sand, but also apply to some industrial minerals, such as salt and talc. These rates are indexed every five financial years. Ad valorem royalties apply to metallic minerals and generally higher value industrial minerals. The royalty is calculated as a percentage of sale value (or mineral value). There are currently three ad valorem rates, which reflect processing costs after the mineral is mined: 7.5%, which applies to bulk material; 5%, which applies to mineral concentrates; and 2.5%, which applies to minerals in metallic form or equivalent. In the case of nickel, rare earths and vanadium pentoxide, the royalty is calculated as 2.5% of the contained mineral value. The royalty system was designed to return to the community about 10% of the mine-head value of the ore, regardless of the commodity or the level of processing. Proposed additional ad valorem rate The Review determined that a gap exists between the current ad valorem rates of 5% for concentrates and 2.5% for finished products and therefore proposed that a new rate of 3.75% be introduced for minerals subject to more intensive processing than is typically used to produce concentrates. The four broad categories of processing and the corresponding royalty rates recommended by the Review are listed below. Tier 1, primary treatment (7.5%). Tier 2, secondary treatment (concentration) (5%). Tier 3, secondary treatment (metallurgical) (3.75%). Tier 4, final treatment (2.5%). The rate applied to a new product would be guided by the level of processing a product undergoes, rather than the nature of the final product. Significantly, the Review recommended that the ad valorem rate for gold should be changed from 2.5% to the new rate of 3.75%. © HopgoodGanim May 2015 Page 4 WA Mineral Royalty Rate Analysis – A Quick Guide State Agreements State Agreements have been a feature of the Western Australian resources landscape for decades and across a range of commodities. Significantly, royalty rates vary between State Agreements and in some instances do not match the rates in the Mining Act. The Review recommended that the more recent practice of not specifying royalty rates in new State Agreements should continue and that the royalty concessions in existing State Agreements (see the table below) should continue to be progressively removed, with royalty rates set according to the Mining Act. As such an adjustment would require the agreement of the counterparties to the relevant State Agreements, the implementation of the royalty changes will be gradual. Recommendations for specific minerals The commodities assessed by the Review were iron ore (excluding magnetite), gold, alumina, nickel, heavy mineral sands, diamond, coal, base metals (copper, lead, zinc), salt, basic raw materials and industrial minerals, silica and silicon, uranium, vanadium pentoxide, rare earth elements and lithium. The following table summarises the recommendations of the Review in relation to certain of the more significant of these commodities to the Western Australian economy. Commodity Current position Recommendation Iron Ore Royalties for iron ore are currently administered in one of three ways, through: the Mining Act and the Mining Regulations; State Agreements referring to the Mining Act; and royalty rates prescribed in State Agreements. Under the Mining Regulations and iron ore State Agreements, an ad valorem rate of 7.5% applies to lump and fine ore, and an ad valorem rate of 5% applies to beneficiated ore (including magnetite concentrate). Concessions There are two State Agreements which contain iron ore royalty concessions. These are the Iron Ore (Yandicoogina) Agreement Act 1996 (Yandicoogina State Agreement) and the Iron Ore Processing (Mineralogy Pty Ltd) Agreement Act 2002 (Mineralogy State Agreement). The Agreements contain discounted royalty rates for iron ore used to produce pellets, iron and steel. There are also two royalty rebate schemes in place for the iron ore industry in Western Australia. These are: A temporary ‘iron ore relief package’, allowing a 50% royalty rebate on eligible hematite ore royalties for junior iron ore miners for up to 12 months, repayable over two years after the rebate period ends. The relief is subject to the iron ore price remaining below an average of A$90 a tonne over the 12 month period. A temporary Magnetite Royalty Rebate scheme which began in April 2013, under which magnetite The Review recommended that the Yandicoogina State Agreement and the Mineralogy State Agreement should be amended to remove discounted royalty rates for iron ore that is used as a feedstock for pellets, iron and steel processing. The Review recommended that this amendment should be made as and when the opportunity arises under the relevant State Agreements. Aside from removing this concession, an ad valorem rate of 7.5% should continue to apply to lump and fine ore, and an ad valorem rate of 5% should continue to apply to beneficiated ore (including magnetite concentrate). © HopgoodGanim May 2015 Page 5 WA Mineral Royalty Rate Analysis – A Quick Guide producers may receive a rebate of up to 50% of royalties paid for the first 12 months of magnetite production, before returning to the full royalty rate. The rebate is not repayable. Gold Royalties for gold are currently administered through the Mining Act and Mining Regulations. The Mining Regulations prescribe an ad valorem royalty rate of 2.5%. Concessions Under the Mining Regulations, a gold miner that produces gold from one or more tenements using a common facility (or facilities) is defined as a gold royalty project. The first 2,500 ounces per financial year produced from a gold royalty project is exempt from royalties. The Review recommended that the royalty rate for gold should change from the Tier 4 ad valorem rate of 2.5% to the proposed new Tier 3 rate of 3.75%, with the Mining Regulations amended to effect the rate change before 1 July 2015. The Review also recommended that the exemption from royalties applying to the first 2,500 ounces per financial year produced from a gold royalty project be removed for projects that produce more than 2,500 ounces per financial year. Alumina Royalties for alumina are currently administered by State Agreements. The alumina royalty under these Agreements is an ad valorem rate of 1.65%. The Mining Act does not include a royalty rate for alumina but does include a rate of 7.5% for bauxite. The rate of 1.65% for alumina in the State Agreements was set in order to be equivalent to a bauxite royalty of 7.5%. The Review recommended that the proposed royalty Tier 3 rate of 3.75% should apply to alumina, as it is subject to secondary (metallurgical) processing. The Review, however, recommended that changes to the alumina rate in State Agreements be delayed until the economic conditions in the industry improve, and an opportunity arises to negotiate amendments to the relevant State Agreements. Nickel Royalties for nickel are administered under the Mining Act and the Mining Regulations and are paid on the nickel contained in the product sold and references the London Metal Exchange’s nickel price at an ad valorem rate of 2.5% of contained nickel value. The Review recommended that the ad valorem rate of 2.5% of contained nickel value should be maintained. Nickel metal is subject to final processing, indicating royalty Tier 4 (2.5%) should apply. The Review concluded that evidence does not suggest laterite and sulphide nickel should pay different royalty rates. Heavy Mineral Sands Royalties for heavy mineral sands are administered under the Mining Act and Mining Regulations. While there are three mineral sands State Agreements, these Agreements refer to the Mining Act for royalties payable. The Mining Regulations apply an ad valorem rate of 5% to all mineral sands concentrates. The exception is ilmenite feedstock not deemed to be of marketable quality, which attracts a specific rate. However this has not been used since 2005, as the quality of the ilmenite has been marketable. The Review recommended that an ad valorem rate of 5% should continue to apply to separated mineral sand products. Product separation processes are secondary (concentration) in nature, indicating royalty Tier 2 is appropriate. Diamond Although the Mining Regulations specify an ad valorem rate of 7.5% for diamond, this rate does not currently apply to any diamond mines in the State. Royalties for the Argyle diamond mine are administered under the Diamond (Argyle Diamond Mines Joint Venture) Agreement 1981 (Argyle State Agreement), while royalties for the Ellendale diamond mine are administered under the Mining (Ellendale Diamond Royalties) Regulations 2002 (Ellendale Regulations). Both the Argyle State Agreement and the Ellendale Regulations set an ad valorem rate of 5%. The Review recommended that an ad valorem rate of 5% is appropriate for diamond. Diamonds are subject to secondary (concentration) processing, indicating royalty Tier 2 is appropriate. The Review recommended that the diamond royalty of 7.5% in the Mining Regulations should be amended to 5%. This would then be consistent with the rate in the Argyle State Agreement and the Ellendale Regulations. © HopgoodGanim May 2015 Page 6 WA Mineral Royalty Rate Analysis – A Quick Guide Coal There are currently two coal producers in Western Australia, both of which operate under State Agreements that refer to the royalty provisions in the Mining Act. The Mining Regulations specify two rates for coal: Exported coal attracts an ad valorem rate of 7.5%. Domestically consumed coal attracts a base rate of $1.00 a tonne adjusted each year in accordance ‘with the percentage increase in the average exmine value of Collie coal for the year ending on [30 June] when compared with the corresponding value of Collie coal for the year ending on 30 June 1981’. In 2013-14, the indexed rate was roughly equivalent to an ad valorem rate of 5.5%. The Review recommended that an ad valorem rate of 7.5% should apply to all coal produced in Western Australia, whether for export or domestic consumption. Coal is subject to primary processing indicating that royalty Tier 1 is appropriate. The Review recommended that implementation of the rate change should not occur until conditions in the coal industry improve. Base metals (copper, lead and zinc) The Mining Regulations set an ad valorem rate of 2.5% for base metals sold as a metal, and an ad valorem rate of 5% for base metals sold in concentrate form. The only base metals project operating under a State Agreement is the Nifty copper mine and the relevant Agreement for that project refers to the Mining Act for the royalty rate. he Review recommended a continuation of the ad valorem rate of 5% for base metal concentrates, and the ad valorem rate of 2.5% for base metals. Base metal concentrates are subject to secondary (concentration) processing indicating royalty Tier 2 is appropriate. Metallic base metals are considered to have undergone final treatment and royalty Tier 4 is appropriate. Uranium The Mining Regulations apply an ad valorem rate of 5% to uranium sold as a uranium oxide concentrate. The Uranium (Yeelirrie) Agreement Act 1978 (Yeelirrie State Agreement) sets an ad valorem rate of 3.5% for uranium oxide sold in the first seven years after the treatment plant comes into operation, with a royalty review mechanism at the end of that period and every five years thereafter. The Review considered the royalty of 3.5% in the Yeelirrie State Agreement to be a variation in the royalty system as it is inconsistent with the rate applied to other materials with a comparable level of processing. The Review recommended an ad valorem rate of 3.75% should apply to uranium. The level of processing for uranium is considered to be secondary (metallurgical) indicating royalty Tier 3 should apply. The Review recommended that the Mining Regulations should be amended to revise the royalty rate for uranium from 5% to 3.75% in recognition of the level of processing. It was noted that this rate would not take effect for the Yeelirrie mine until seven years after the treatment plant comes into operation due to the royalty concession in the Yeelirrie State Agreement. Vanadium pentoxide The Mining Regulations, apply the following ad valorem rates to vanadium products: if sold as a vanadium oxide concentrate, 5% of the vanadium pentoxide price; if sold in metallic form (ferrovanadium), 2.5% of the ferrovanadium price; and for vanadium not realised on contained vanadium from a product (such as magnetite) where the average grades of vanadium are over 0.275%, and a vanadium circuit is not installed, 5% of the vanadium pentoxide price. The Review recommended that: the ad valorem rate of 5% for vanadium contained within ore concentrates and for oxides of vanadium should be changed to 3.75% of the vanadium pentoxide price; and the rate of 2.5% for ferrovanadium be maintained. The Review indicated that there were no timing sensitivities with implementing this change. © HopgoodGanim May 2015 Page 7 WA Mineral Royalty Rate Analysis – A Quick Guide Rare Earth Elements Royalties for rare earths are currently administered through the Mining Regulations using the contained mineral system. An ad valorem rate of 2.5% applies to the rare earth oxide price multiplied by the proportion of the rare earth oxide contained within the product. The review considered that the existing ad valorem rate of 2.5% was appropriate for individual rare earth oxides and that the contained mineral system remains appropriate. Lithium Royalties for lithium are administered through the Mining Regulations, with an ad valorem rate of 5% applying to lithium concentrate. If the concentrate is processed to lithium carbonate or lithium cathode, the royalty applies on the lithium feedstock. The Review determined that the lithium royalty is a variation in the system, as the royalty rate is applied to the value of the concentrate feedstock, even if it is further processed into lithium carbonate. The Review recommended that an ad valorem rate of 5% should continue to apply to lithium concentrate, but that the Mining Regulations be amended so that an ad valorem rate of 3.75% applies to lithium carbonate. Lithium concentrates are subject to secondary (concentration) processing indicating royalty Tier 2 is appropriate. Lithium carbonate is subject to secondary (metallurgical) processing, indicating royalty Tier 3 is appropriate. The Review did not specify a particular timing for this recommended change. If you require further information in relation to Western Australia’s mineral royalty system or have other questions about the regulation of mining and resources in Western Australia, please contact HopgoodGanim's Resources and Energy team. 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