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Queensland gold miners kick off royalty battle

Australia's gold miners are preparing for a long, tough campaign to convince Queensland's government to lower its gold royalty, which industry says is among the highest in the world and threatens the very future of the state's gold production.

The campaign kicked off this month with a new discussion paper by advisory firm Grant Thornton, which makes the case for Queensland to move to an "ad valorem" or profit-based regime for gold on par with other Australian jurisdictions.

An ad valorem tax is the charge levied as a percentage of the project it's imposed on, not on the quantity of gold produced.

Grant Thornton argues that a hybrid of profits-based and ad valorem royalty may be a "better and fairer" approach to taxing projects rather than only ad valorem.

While Queensland's gold royalty rate theoretically floats between 2.5% and 5%, the maximum rate of 5% applies where the realized gold price is at or above A$890 per ounce, and Grant Thornton said that had been the effective realized rate in the state for most of the last decade.

S&P Global Market Intelligence data reveals that it was last below A$890/ounce on Nov. 16, 2007.

Grant Thornton said the 5% royalty rate for Queensland, which produces 6% of Australia's gold, topped other Australian jurisdictions and was "very high" compared to global rates.

The firm's report blamed the royalty, "more than anything else", for preventing Queensland's gold sector from reaching its maximum potential, with production largely flat over the past decade and minimal exploration.

Meanwhile, Australia's gold production — and particularly Western Australia, which accounts for 69% of the country's output and whose government recently failed to secure parliamentary support to lift its gold royalty from 2.5% to 3.5% — has surged over the past decade.

Grant Thornton said a royalty rate of 5% could erode net present value, or NPV, of a project by more than half; and where projects are less profitable, a royalty rate of 5% can entirely erode their NPV.

Miners expecting long-term dialogue

The Association of Mining and Exploration Companies CEO Warren Pearce told S&P Global Market Intelligence that convincing Queensland's government would be a "difficult outcome" to achieve given the state's tight economic environment.

While reducing the royalty rate would reduce the government's take immediately, Pearce believes a longer-term view would ensure investment would pick up and the royalties would again flow.

A landmark report from MinEx Consulting launched in December 2017 predicted that in 40 years almost all of Australia's future gold production will come from exploration successes, by which time production and revenues are likely to halve.

In 15 years, half of Australia's gold production will come from mines that are yet to be discovered.

"Of serious concern is the fact that the weighted average delay between discovery and development for a new discovery is 13 years. Consequently, government and industry need to support exploration today," MinEx warned.

"We only have the next couple of years to properly identify and address ways to improve our exploration performance — otherwise Australia runs the real risk of a significant supply disruption in the medium-term."

"For the gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance."

Perth-based independent analyst Peter Strachan said in an interview with S&P Global Market Intelligence that Queensland's government would be "stupid" to move towards a profits-based royalty regime, and believes the same sliding scale could be kept but updating the prices for inflation.

"The thing about a profits tax is you have to be cash flow positive before you pay it, but unlike the [federally imposed] Petroleum Resource Rent Tax you’re not allowed to offset your earnings before interest, tax, depreciation and amortization against your development capital, which [companies] can carry forward at the long bond rate plus 5% per annum," Strachan said.

"So until they've effectively or notionally repaid their capital, they pay no royalty at all."

"Given the experience they’ve had with coal seam gas, [Queensland's government would] be stupid to go that way because [companies] could still be making A$100 an ounce, but the people of Queensland would get nothing, and they’re the owners of the assets at the end of the day."