In the decision of Wright Prospecting Pty Ltd v Hamersley Iron Pty Ltd [2013] NSWSC 536 made on 10 May 2013, the Supreme Court of New South Wales found that Mount Bruce Mining Pty Ltd (MBM), and Hamersley Iron Pty Ltd (Hamersley) (collectively the Rio Tinto Group) were obliged to pay 2.5% royalty to Wright Prospecting Pty Ltd (Wright) and to Hancock Prospecting Pty Ltd (Hancock) in accordance with the terms of an agreement  between Hancock and Wright, Hamersley Iron Pty Ltd  and MBM  (1970 Agreement), in relation to ore mined from mines known as Eastern Range and Channar, in the Pilbara region of Western Australia.

Background

In 1968 Hancock and Wright (collectively Hanwright) held temporary reserves in respect of areas described as blocks 4937H to 4967H (inclusive) (Mount Bruce Temporary Reserves) in the Pilbara Region.

Hanwright entered into an agreement with Hamersley (1968 Agreement) under which Hamersley was granted certain rights, including the right to require Hanwright to transfer designated temporary reserves to MBM (1968 Option). The temporary reserves the subject of the 1968 Agreement included the projects later known as Eastern Range and Channar.

Under the 1970 Agreement:

  1. Hamersley relinquished the 1968 Option;
  2. Hanwright agreed that the Mount Bruce Temporary Reserves should be divided between Hanwright and MBM so that in respect of temporary reserves 4947H to 4962H inclusive (Hanwright Area) the entire rights were restored to Hanwright and in respect to temporary reserves 4937H to 4946H inclusive and 4963H to 4967H inclusive (MBM Area), MBM would acquire the entire rights thereto; and
  3. it was agreed that iron ore won by MBM from the MBM Area would be subject to the payment to Hanwright of a base royalty of 2.5% of the amount received on sale or other disposal of that iron ore.

After acquiring the rights to the MBM Area from Hanwright, MBM entered into the Iron Ore (Mount Bruce) State Agreement 1972 [No37] (Mount Bruce State Agreement) with the State, under which it was granted the rights to the temporary reserves included in the MBM Area.

The Mount Bruce State Agreement provided that MBM could apply at any time for a mining lease over any part or parts of the MBM Area not exceeding 300 square miles but that, upon the grant of such a mining lease, the temporary reserves in the MBM Area would expire.

In 1974, MBM applied for, and was granted a mining lease over a portion of the MBM Area (ML 252SA) and the temporary reserves expired.

Therefore from October 1974 to August 1977 there were no temporary reserves or mining leases over what had been temporary reserve 4967H (i.e. Eastern Range) and over parts of what had been temporary reserves 4965H and 4966H (i.e. Channar). It was unoccupied land.

In 1977 MBM applied for, and was granted a temporary reserve over a large part of former temporary reserve 4967H (Eastern Range) and in 1978 Hamersley applied for, and was granted a temporary reserve over the former portion of temporary reserve 4966H which had not been included in ML252SA (Channar).

The Rio Tinto Group has paid, and  continues to pay, royalties to Hanwright under the 1970 Agreement in respect of iron ore obtained from  ML 252SA, but has not paid royalties in relation to ore won from the remainder of the MBM Area over which it later acquired new temporary reserves.

Hanwright Claims

Hanwright was claiming that it was entitled to receive a royalty in respect of ore won from Eastern Range and Channar, as these mines were located in what had been the former MBM Area to which the 1970 Agreement applied. There were two separate components to the Hanwright claim:

  1. The MBM Area claim

The 1970 Agreement provided that all references to temporary reserves included all present and future rights in relation to the temporary reserves, including any extension of the ore bodies located therein.

The key question before the Court was whether the MBM Area as defined in the 1970 Agreement was the physical area (or part of it) over which former temporary reserves 4937H to 4967H had been granted or the lesser area over which ML252SA had subsequently been granted. Eastern Range and Channar were outside the area of ML252SA but within the larger original MBM Area.

Rio Tinto argued that the references to temporary reserves in the 1970 Agreement were not references to the physical areas covered by the temporary reserves, but meant Hanwright’s rights in respect of the land, being rights of occupancy and prospecting, and the right to obtain a mining lease.

Rio Tinto further argued that neither Eastern Range nor Channar fell within the MBM Area because, upon the grant of ML 252SA, all rights outside the area covered by ML 252SA expired by force of  the Mount Bruce State Agreement and that as a result both Eastern Range and Channar fell outside of the MBM Area.

Justice Hammerschlag held that the “division lines were drawn by reference to physical areas shown on a map, not with respect to an intellectual construct based on the continuity (or lack of continuity) of incorporeal rights”.

His Honour therefore decided that the royalty claimed by Hanwright was payable by the Rio Tinto Group in respect of ore won from Eastern Range and Channar.

  1. The iron ore body extension claim

Hanwright argued that, because the 1970 Agreement applied to “...any extension of the ore bodies located [in the temporary reserves]” a royalty was therefore payable in respect of ore won from Eastern Ridge and Channar as both these areas were within the original MBM Area and were extensions of the ore body within ML252SA. After hearing evidence from expert witnesses, Justice Hammerschlag held that, because of the proximity of the relevant deposits to ML 252SA, Hanwright would have still succeeded on the iron ore claim if they had not succeeded on the MBM Area claim.

Significance of the decision

This decision highlights the importance of how an area to which a future royalty applies is defined. It is particularly significant when the area to which the royalty applies is the subject of various successive titles which differ in shape and size to the original titles at the time the agreement was first entered into. This is not unusual in iron ore projects, many of which are the subject of State Agreements and were originally the subject of temporary reserves. It can also involve significant sums of money where the projects have a long mine life.