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).
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%.
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.
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