Mineral and Petroleum Resources
Royalties Bill
September 2008
Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Background, MPRDA, Royalty Bill consultation process
Why mineral royalties – economic rationale
Refined and Unrefined minerals
Tax base: Gross Sales
Mineral royalty rates: Formulae
EBIT, with 100% capital expensing
Estimated mineral royalty rates
Rollover relief & Unincorporated bodies
Small business relief
Fiscal stability
Transitional measures
Administration
International examples
Mining Value Chain: Exploration, Mining, Mineral Processing,
Refining: First saleable point
2
Mineral and Petroleum Resources
Royalty Bill (B 59 – 2008)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Definitions
Imposition of royalty
Determination of royalty
Royalty formulae
Earnings before interest and taxes (EBIT)
Gross sales
Small business exemption
Exemption for sampling
Rollover relief for disposal involving going concerns
Transfer involving body of unincorporated persons
Arm’s length transactions
General anti-avoidance rule
Conclusion of fiscal stability agreements
Terms and conditions of fiscal stability agreements
Foreign currency
Transitional rules
Act binding on State and application of other laws
Short title and commencement
3
Ownership of Land and Minerals
•
•
•
•
•
Surface rights
Mineral rights
Land restitution and land reform
Indigenous communities
State
4
Background
•
•
•
•
•
•
•
•
•
•
•
•
Mineral and Petroleum Resources Royalty Bill (MPRRB) follows on the Mineral
and Petroleum Resources Development Act (MPRDA), (Act 28 of 2002)
1st draft Mineral and Petroleum Royalty Bill released for public comment on
20 March 2003
2nd draft of Royalty and Petroleum Resources Royalty Bill released for public
comment on 11 October 2006
May / June 2007 - Consultation, workshops
3rd draft of Royalty and Petroleum Resources Royalty Bill released for public
comment on 6 December 2007
4 March 2008 - Briefing by National Treasury to PCOF, 3rd draft
11 & 19 March 2008 - PCOF public hearings,
23 April 2008 – Consultation, workshop, preparation for 4th draft
13 May 2008 - PCOF briefing policy changes, basis for 4th draft
03 June 2008 - 4th draft published for technical comments only
17 June 2008 - PCOF briefing, 4th draft
24 June 2008 – Parliament, Minister of Finance - Introduction of Bill
5
Mineral and Petroleum Resources
Development Act (Act No. 28 of 2002)
(MPRDA)
The “MPRDA” provides for:
– All mineral rights to vest with the State
– Conversion of “old order” mineral rights into “new
order” rights by 1 May 2009
– Imposition of mineral royalties by the State:
Section 3 (2): As the custodian of the nation’s
mineral and petroleum resources, the State,
acting through the Minister may: (b) in
consultation with the Minister of Finance,
determine and levy, any fee or consideration
payable in terms of any relevant Act of
Parliament.
6
Mineral and Petroleum Resources
Development Act (Act No. 28 of 2002):
Community royalties
• The MPRDA Act reserves the right of communities to
receive a consideration or royalty.
• Item 11 of Schedule II of the Act states:
(1) Notwithstanding the provisions of item 7(7) and 7(8), any
existing consideration, contractual royalty, or future
consideration, including any compensation contemplated in
section 46(3) of the Minerals Act, which accrued to any
community immediately before this Act took effect, continues to
accrue to such community.”
(2) The community contemplated in (1) must annually, and at such
other time as required to do so by the Minister, furnish the
Minister with such particulars regarding the usage and
disbursement of the consideration or royalty as the Minister
may require.
7
Why mineral royalties (1)
“Although the structure and rates of mineral
royalties vary internationally, most are
collected for the same reason, that is
payment to the owner of the mineral resource
in return for the removal of the mineral from
the land. The royalty, as the instrument for
compensation, is payment in return for the
permission that, first, gives the mining
company access to the minerals and second,
gives the company the right to develop the
resource for its own benefit”. (James Otto, et al – The
World Bank, page 42)
8
Why mineral royalties (2)
“Another way in which a mine differs
from other businesses is that it exploits
a non-renewable resource that, in most
cases, the taxpayer does not own. In
the majority of nations, minerals are
owned by the state, by the people
generally, or by the crown or ruler”.
(James Otto, et al – The World Bank, page 16)
9
Tax base - mineral royalties
“Across the globe, no type of tax on
mining causes as much controversy as
a royalty tax. It is a tax that is unique to
the natural resources sector and on that
has manifested itself in a wide variety of
forms, sometimes based on measures
of profitability but commonly based on
the quantity of material produced or its
value”. (James Otto, et al – The World Bank, page 1)
10
Tax base = Gross Sales less
transport costs (clause 6)
• Gross Sales =
– Proceeds of a transferred mineral
resource at its readily saleable condition
(i.e., refined or unrefined (“concentrate”)
state of mineral as specified)
– Disregard transportation costs of “final
product” (including insurance and handling
charges)
11
Refined and Unrefined minerals
(clause 1, and Schedules 1 and 2)
1.
Refined (Schedule 1):
•
•
•
•
•
•
2.
Gold; 99.5%
PGM – refined; 99.9%
Copper; 99.0%
Zinc; 98.5%,
Etc; &
Oil & Gas
Unrefined (Schedule 2):
•
•
•
•
•
•
•
•
•
•
•
•
Diamonds
PGM – concentrate
Iron ore; (between 61% to 64% Fe)
Coal – various grades
Manganese (between Mn37% to Mn48%)
Chrome (between 37% to 46% Cr2O3)
Mineral Sands
Zinc concentrate; 27% Zn
Uranium (80% concentrate)
Aggregates; Bulk
Etc.
Other; Concentrate or Bulk
12
Gross Sales - Refined: Schedule 1
(clause 6)
•
•
•
General Rule:
– Gross sales of refined minerals equal amounts received or
accrued (use spot rate if foreign currency is involved)
– However, an override exists to ensure that all transactions occur at
arm’s length
Different Condition:
– If a refined mineral is sold above the refined Schedule 1 condition,
(unlikely event) the gross sales price is reduced to a hypothetical
refined condition price
– If a refined mineral is sold below the refined Schedule 1 condition,
the gross sales price is increased to a hypothetical refined
condition price (or schedule 2 – unrefined formula)
Stolen, Destroyed or Lost:
– A deemed sales price applies at the proper condition so a royalty
is always charged even if no proceeds are obtained
– Rationale: Prevents evasion plus Government should not incur the
risk of a permanent loss (e.g. stolen) of a non-renewable resource
13
Gross Sales – Unrefined: Schedule 2
(clause 6)
•
•
•
General Rule:
– Gross sales of unrefined minerals equal amounts received or
accrued (use spot rate if foreign currency is involved)
– However, an override exists to ensure that all transactions occur at
arm’s length
Different Condition:
– If an unrefined mineral is sold above the unrefined Schedule 2
condition, the gross sales price is reduced to a hypothetical refined
condition price
– If an unrefined mineral is sold below the unrefined Schedule 2
condition, the gross sales price is increased to a hypothetical
refined condition price
Stolen, Destroyed or Lost:
– A deemed sales price applies at the proper condition so a royalty
is always charged even if no proceeds are obtained
– Rationale: Prevents evasion plus Government should not incur the
risk of a permanent loss of a non-renewable resource
14
Dual Schedule Minerals
• Some minerals fall under both
schedules (e.g. platinum)
• In these circumstances, the mineral will
be viewed as refined if developed to or
above the refined condition; otherwise,
view as unrefined
• Example:
– Platinum 99,9% or above view as refined
– All other conditions view as unrefined
15
Tax rates – formula (clause 4)
(X = EBIT/Gross Sales *100)
1. Y (r) = 0.5 + X/12.5 (Max = 5.0)
Refined metal (e.g. refined Gold,
refined PGM, etc.), and Oil and Gas
2. Y (c) = 0.5 + X/9.0 (Max = 7.0)
Unrefined; Concentrate
Coal, Rough Diamonds, Iron Ore, etc.
16
EBIT: Basic Calculation (clause 5)
• EBIT = “taxable income” before interest and
taxes
• EBIT: Additions
– Gross sales (slides 13 and 14)
– Recoupment / recapture of depreciable mining
equipment
• EBIT: Subtractions
– All operating expenses
– All depreciation/CAPEX for machinery employed
to extract/upgrade/refine the mineral
• If EBIT < zero, assumed to be zero.
17
EBIT: Adjustments
(clause 5)
• No deductions for financial instruments (other than
hedges against mineral sales)
• No deduction for the royalty itself (to avoid circularity)
• Transport between buyer/seller (and beyond the
refined/unrefined condition)
• No carryover of excess operating expenses (but
unredeemed mineral CAPEX can be carried over)
• Oil and gas also 100% write-off: deny additional
allowances in terms of the Tenth Schedule
18
Composite Minerals (clause 5)
• When an ore body contains a
combination of minerals
• General Rule: Allocate EBIT
deductions (refined versus unrefined)
according to a reasonable method
consistently applied
• De minimis: Less than 10% portions
can be viewed as the dominant portion
if desired (and if consistently applied)
19
Estimated Mineral Royalty Rates
Y = 0.5 + X/12.5 (Refined)
Y = 0.5 + X=/9 (Unrefined)
Profitability
EBIT/ Gross
Sales (%)
Refined
Min = 0.5
B = 12.5
Unrefined /
Concentrate
Min = 0.5
B=
9.0
0
0.5
0.5
10
1.3
1.6
15
1.7
2.2
20
2.1
2.7
25
2.5
3.3
30
2.9
3.8
40
3.7
4.9
50
4.5
6.1
56
5.0
6.7
58.5
5.2
7.0
70
6.1
8.3
20
Mining: R million: StatsSA,
P0044: 28 March 2008
1
Turnover received
2
2006
2007
203,467
291,737
Interest paid
5,398
6,794
3
Depreciation
15,358
19,667
4
Net profit before taxation
42,271
82,161
5
Total capital expenditure
36,090
33,777
6
Book value of assets
192,607
216,116
% Gross revenue:
7
Net profit before taxation
20.8%
28.2%
8
EBIT ( Depreciation )
23.4%
30.5%
9
EBIT ( Capital expensing )
13.2%
25.7%
EBITDA
31.0%
37.2%
10
21
Mining: R million: StatsSA,
P0044
Financial
ratios
Est. Royalty
Rates
2006
2006
Estimated Royalty Rates
Financial
ratios
2007
Rate
Est. Royalty
Rates
2007
Rate
Refined: Y = 0.5 +X/12.5
11
EBIT ( Depreciation )
23.43
2.37
30.5
2.94
12
EBIT ( Capital expensing )
13.24
1.56
25.7
2.55
Unrefined: Y = 0.5 = X/9.0
13
EBIT ( Depreciation )
23.43
3.10
30.5
3.9
14
EBIT ( Capital expensing )
13.24
1.97
25.7
3.4
22
Rollover relief and
Unincorporated Bodies (clauses 9 &10)
• Rollover Relief:
– If minerals are sold pursuant to the sale of a going concern
(e.g. the whole mining business or a severable part),
rollover relief applies
– If rollover relief applies, the transfer is ignored and the
transferee assumes the royalty liability upon subsequent
sale
• Unincorporated Bodies (e.g. Partnerships):
– An election can be made to tax the body (and not the
members on their proportionate share)
– The body is effectively viewed as a separate “extractor” with
the members being jointly and severally liable
23
Miscellaneous (clauses 7,8,12,13, &14)
• Small Business Relief:
– Relief applies if the royalty otherwise imposed does not
exceed R100 000 (and if gross sales do not exceed
R10.0 million)
– Rules against dividing-up big companies into small
businesses
• Sampling Relief:
– Exemption for sampling/testing (linked to section 20 of the
MPRDA)
– Up to R100 000 of gross sales
• General Anti-Avoidance Rule:
– Standard for most tax acts
• Fiscal Stability:
– Fixed parameters of formulae guaranteed
24
Transitional Rules
(clause 16)
• Effective Date:
– Transfers occurring on or after 1 May 2009
– Applies even if parties only lodge for conversion as of 1 May 2009
(i.e. the royalty cannot be delayed further)
• Transitional Credits:
– Previous consideration paid to the State for old order rights (State
Lease Payments) to be offset (i.e. a credit) against the royalty
– Might be of importance in the case of minerals won/recovered
before 1 May 2009 (and State lease paid) and transferred
afterwards
– Also important for parties that only have lodgings but not yet
converted on 1 May 2008 (and hence both State Lease Payments
and new Royalties are due)
– No credit for certain profit sharing arrangements (i.e. Diamonds)
and considerations to communities
25
Mineral and Petroleum Resources
Royalty (Administration) Bill
(B 60 – 2008)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
Definitions
Registration
Cancellation of registration
Election for unincorporated body of persons
Payments in respect of estimated royalty
Submission of return and final payment
Form, manner and place determined by Commissioner
Maintenance of records
Notice of assessment
Reduced assessments
Withdrawal notice of assessment
Time limit for notice of assessment
Refunds
Penalty for underestimation of royalty payable
Adjustment if estimated royalty
Interest
Administration of Act
Applicability of Income tax Act
Reporting
Regulations
Short title and commencement
26
Administration (Administration Bill, clauses 1 to 20)
• SARS the collecting agent
• Two 6-monthly estimated payments
• Final payment (6 months after the close of
the financial year)
• A potential 10% penalty exists if both
estimates fall short by 20% of the final
amount
• Treasury has the power to request individual
taxpayer information
27
Thank you
Mining and Mineral processing
THE FOUR STAGE BENEFICIATION PROCESS
(Chamber of Mines)
Stage
1
2
3
4
Mineral beneficiation
process category
The action of mining and
producing an ore or
concentrate (primary
product)
The action of converting a
concentrate into a bulk
tonnage intermediate
product (such as a metal
or alloy)
The action of converting the
intermediate goods into a
refined product suitable for
purchase by both small &
sophisticated industries (semis)
The action of
manufacturing a final
product for sale
Process flow-chart
Run-of-mine
ores
Washed &
sized
concentrates
Labour Capital
intensity intensity
High
High
Industry
Clu ster
Mining
Mining
Mattes/slags/
bulk
chemicals
Ferro alloys/
pure metals
Low
High
Mining
Steel/ alloys
Worked
shapes &
forms
Low
High
Refining /
Manufacturing
Worked
shapes &
forms
Worked
shapes &
forms
Manufacturing
Medium to Medium to
high
high
Manufacturing
30
Mineral Beneficiation Value Chain
(Mintek / DME)
Capital requirements & Services
•
Exploration
–
–
–
•
•
–
–
–
–
•
Crushing
Hdyro-met. Plant
Material handling
Furnaces
•
Smelter
Furnaces
Electro-winning
cells, Casters
Value addition
–
–
–
Rolling & moulding
Machining
Assembling
Comminution
Grinding, media
Chem / reagents
Refining
–
–
–
•
Mine planning
Consumables
Sub-contracting
Mineral processing
–
–
–
•
GIS
Analytical
Data processing
Mining
–
–
–
Refining
–
–
–
•
•
Drilling
Cutting
Hauling
Mineral processing
Exploration
–
–
–
Geophysics
Drilling
Survey
Mining
–
–
–
•
Reductants
Chemicals
Assaving
Value addition
–
–
–
Design
Marketing
Distribution
31
Estimated royalty rates –
Refined / Metal
EBIT (“accounting”
depreciation)
/Gross revenue = X
Y = 0.5 + X/12.5 (Max = 5.0)
2002
2003
2004
2005
2006
Average
PGM - metal (refined)
3.4
2.2
2.1
2.2
3.6
2.7
GOLD - metal (refined)
3.7
2.7
1.5
0.5
2.2
2.0
32
Unrefined
EBIT (“accounting”
depreciation)
/Gross revenue = X
Y = 0.5 + X/9.0 (Max = 7.0)
2002
2003
2004
2005
2006
Average
DIAMONDS
5.3
3.1
3.3
4.8
5.7
4.4
MANGANESE
5.3
4.8
3.3
5.4
4.5
4.7
IRON ORE
4.2
3.0
2.5
5.1
6.0
4.1
MINERAL SANDS
5.1
3.6
2.2
2.3
3.3
3.3
PGM - Concentrate
4.6
2.8
2.8
2.8
4.8
3.6
COAL
3.0
2.0
2.0
2.4
2.0
2.3
CHROME
1.0
2.1
2.2
1.6
1.2
1.6
BASE METALS
0.7
0.5
0.5
0.5
2.6
0.7
33
Mineral
Range
Unit
Sold at
Ratio
Chrome Ore
37%
46%
Cr2O3
48%
95.8%
Manganese
37%
48%
Mn
50%
96.0%
61
64
Fe
66
97.0%
Iron Ore
Mineral
Range
Unit
Sold at
Ratio
Chrome Ore
37%
46%
Cr2O3
34%
108.8%
Manganese
37%
48%
Mn
35%
105.7%
61
64
Fe
59
103.4%
Iron Ore
34
Mineral Royalties
International comparison
Australia – New South Wales
• An ad valorem royalty of 4% the “ex-mine”
value (value less allowable deductions) of
minerals (except coal) is applied to highvalue minerals.
• The rate of coals is as follows:
• 7% of the value of coal recovered by open cut mining
• 6% of the value of coal recovered by underground
mining
• 5% of the value of coal recovered by deep underground
mining
36
Australia – Western Australia (1)
• Under the Mining Act, royalties are payable on all
“minerals”. A mineral is defined as a naturally
occurring substance including evaporites, limestone,
rock, gravel, sand and clay.
• Rates:
• Bulk material (subject to limited treatment) (Including
Diamonds):
7.5% of the royalty value
• Concentrate material: 5.0% of the royalty value
• Metal:
2.5% of the royalty value
• “concentrate” means the product of a process of
extraction of metal or a metallic mineral from mineral
ore that result in substantial enrichment of the metal
or metallic mineral concerned”
37
Australia – Western Australia (2)
• “royalty value”, in relation to a mineral other
than gold, means the gross value of the
mineral less any allowable deductions for the
mineral”
• “gross invoice value”, in relation to a
mineral, means the amount, in Australian
currency, obtained by multiplying the quantity
of the mineral, in the form in which it is first
sold, for which payment is to be made (as set
out in invoices relating to the sale) by the
price for the mineral in that form (as set out in
those invoices).
38
Australia – Western Australia (3)
• “allowable deductions”, in relation to a mineral means –
(a) the amount, in Australian currency, of any reasonable costs
incurred in transporting the mineral, in the form in which it is
first sold, where those costs –
* are included after the shipment date by the person liable
to pay the royalty for the mineral; and
* relate to transport of the mineral by a person other than
the person liable to pay the royalty for the mineral, and
(b) the price, in Australian currency, paid or to be paid by the
person liable to pay the royalty for the mineral, for packaging
materials used in transporting the mineral, in the form in which
it is first sold;
39
Australia – Western Australia (4)
• The royalty rate for gold metal produced after
30 June 2000 is 2.5% of the royalty value of
the gold metal produced.
• The royalty value of gold metal produced
shall be calculated for each month in the
relevant quarter by multiplying the total gold
metal produced during that month by the
average of the gold sport prices for that
month.
• “gold metal” means gold that is at least
99.5% pure.
40
Tanzania
•
•
Mineral royalties are payable on gross revenue, less transport and sales costs
(called the netback value)
The rates are:
–
–
•
–
•
•
5%
3%
“net back value” means the market value of minerals FOB at the point of
export from Tanzania, less –
–
•
Diamonds
All other
The cost of transport, including insurance and handling charges, from the mining area
to the point of export or delivery; and
The cost of smelting and refining or other processing costs unless other processing
costs relate to processing normally carried out in Tanzania in the mining area.
“market value” means the realized price adjusted if necessary for a sale FOB
at point of export from Tanzania or point of delivery within Tanzania
There are provisions for adjustment of this value when, in the opinion of the
Minister, such value does not meet the arm’s- length standard.
The Act also makes provision for reduction, remission or deferment of mineral
royalties when the cash operating margin (gross sales minis operating costs)
falls below zero.
41
Ghana
•
•
The Mineral (Royalties) Regulations of 1986 provide for a sliding-scale
type royalty that starts at three per cent for low grade ore with a
maximum of twelve per cent for high grade ore.
These percentages are based on the gross value of the minerals.
The final royalty is determined by a mining company’s Operating Ratio
(OR). This ratio is based on the quotient obtained by dividing the
operating margin (i.e. working profit) by the value of minerals extracted
during the relevant fiscal period:
•
Operating ratio (%)
• 0 to 30
• 31 to 70
• 71 to 100
•
3% (minimum)
3 + 0.225 * (OR), maximum 12% (B = 4.45)
12% (maximum)
It is important to note that the statutory royalty rate is not influenced
by either mineral type or mine size, but rather determined by mine
profitability. This method typically results in a 3 per cent royalty
rate for gold.
42
Ghana
• Where in any yearly period the operational ratio is less than
thirty per centum then the difference between the actual
operational cost and the operational cost that would make the
operating ratio exactly equal to thirty per centum shall be added
to the operational cost of the following yearly period for the
purpose of calculating that periods’ operating ratio; provided
that the difference to be carried forward shall not exceed the
permissible capital allowance for the year of account.
• A Minerals Development Fund was created to return part of
government income from mining to the communities who are
affected by such activities.
• Twenty per cent of collected mineral royalties are paid into the
fund that is shared between the local government authority, the
land-owning authority and other communities which are
affected adversely by the miming activity.
43
USA - Nevada
• The gross yield must include the value of any
mineral extracted which was:
• Sold;
• Exchanged for any thing or service;
• Removed from the State in a form ready for use or sale;
or
• Used in a manufacturing process or in providing a
service,
during that period.
• Net proceeds are ascertained and
determined by subtracting from gross yield
the following deductions for costs incurred
during that periods, and none other:
44
USA - Nevada
Net proceeds / Gross
Proceeds (%)
• Less than 10
• 10 to < 18
• 18 to < 26
• 26 to < 34
• 34 to < 42
• 42 to < 50
• 50 or more
Rate
•
•
•
•
•
•
•
2.0
2.5
3.0
3.5
4.0
4.5
5.0
45