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Royalties make mining suffer: expert

05 December, 2012

The minerals royalty system is economically inefficient and leads to sub-optimal exploitation of mineral resources in WA, according to a leading industry commentator.

Professor Pietro Guj of The University of Western Australia's Centre for Exploration Targeting said there was clear evidence that the state's current royalty system did not fulfill the intent of 1981 Mining Regulations policy.

Low-grade mines and those further away from markets pay proportionally higher royalties relative to the ex-mine value of their resources than high-grade mines closer to markets, Professor Guj said.

"The current system violates equity principles and is a disincentive to developing marginal projects," he said.

In May this year the WA Government announced a surprise review of the State's mineral royalties as part of the 2012-2013 State Budget.  Professor Guj was invited by the Department of Mines and Petroleum to make a presentation on key policy and administration parameters to be considered. This analysis has now also been captured in an article published in the December 2012 issue of the CET Quarterly.

To be conducted over three years, the review will assess to what degree current royalty revenues differ from those that would have been generated by strict adherence to the 1981 policy. The 1981 policy specified that royalties to be applied to any mineral production were to be levied at a rate equivalent to 10 per cent of their ex-mine value, essentially of the value of the broken ore at the point of extraction.

The review will also consult with industry to suggest possible amendments to re-align future practice with the 1981 policy.

Professor Guj concluded there was clear evidence to suggest that the current royalty system, based on three standardised royalty rates applied to mineral products based on their levels of downstream processing, made it administratively impossible to levy exactly 10 per cent of the ex-mine value of the resource.

The paper advised the best way to address these weaknesses was to bring the royalty system back into line with the 1981 policy of 10 per cent of the ex-mine value, but on an individual mine basis. The ex-mine value should be derived by deducting all costs incurred upstream of the point of sale - excluding exploration and mining costs - from the price realised on the arm's-length sale of the first mineral product sold. This should be the value on which a 10 per cent royalty rate is applied for all minerals.

The conclusion reached was that it is difficult to estimate whether and by how much total revenue collected under the present system differs from the desired 10 per cent of ex-mine value. The WA Treasury has indicated a potentially significant gap may exist, and establishing the magnitude of any potential gap will be one of the review's aims.

Professor Guj said should this prove to be the case, then any attempt to implement the 1981 royalty policy in one go would result in potentially significant increases in royalty collections. For this reason Treasury has placed a $180 million cap to possible revenue increases when the results of the review are implemented starting in the 2015-16 year.

Irrespective of the magnitude of the gap in terms of total revenue collected, any amendments to re-align the royalty policy will generate winners and losers both among mineral categories and individual mines. Therefore Professor Guj recommended current inequities should be re-dressed gradually in a phased-in manner to soften their impact.

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