ARTICLE
18 November 2012

Royalty rates review for minerals

The review seeks to apply a more consistent and transparent royalty regime to maintain international competitiveness.
New Zealand Energy and Natural Resources
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Submissions close on the royalty rates review for minerals on 7 December 2012.

We commented recently on the companion taxation proposals.

Broad approach

The discussion paper recommends a hybrid approach with an ad valorem (AVR) and an accounting profit (APR) component because this provides both a guaranteed minimum return to the Crown at the outset of production and upside where the mine is highly profitable.

The existing threshold for royalty payments ($200,000 in annual net sales revenues) will be retained.

The new rates will be applied to new permits only.

Scope of the review

The review covers all other Tier One minerals – commercial gold, silver, coal, ironsands, platinum group elements (PGE), phosphates and seafloor massive sulphides (SMS).

It seeks to apply a more consistent and transparent regime which:

  • provides the Crown with a "fair" financial return on the development of its mineral estate
  • catches up with movements in commodity prices for gold, silver and coal since royalties were last reviewed in 2008, and
  • maintains international competitiveness, particularly against Australia.

Petroleum royalties are not subject to review as the Government considers that they already provide a fair financial return and are internationally competitive.

Recommendations

  • Coal, gold, silver, PGE, ironsands, phosphates and SMS permits: the higher of a 2% AVR or a 10% APR.
  • Underground coal gasification: the higher of a 1% AVR or a 10% APR. This is a holding rate to be reviewed once the project economics for this mining activity are clearer.
  • A threshold for applying the APR of $5 million for coal and $2 million for gold, is intended to distinguish the few highly profitable and productive mines from the many smaller, more marginal fields. No threshold will apply to other minerals as the Ministry considers that any future such mine developments would have to be very large anyway.

Comparison with current rates

Mineral Current rate Proposed rate
Coal $1.40/tonne hard and semi-hard coking
80c/tonne thermal and semi-soft coking
30c/tonne lignite
Plus a energy resources levy of $1.50/tonne for South Island lignite and $2/tonne for opencast coal mines.
Higher of 2% AVR, 10% APR (applied to accounting profits over $5m).
Underground coal gasification Decided at the discretion of the Minister Higher of 1% AVT, 10% APR
Gold and silver 1% (for sales revenue < $1.5m) or 2%
AVR (for sales revenue > $1.5m)
Higher of 2% AVR, 10% APR (applied to accounting profits over $2m)
PGE 1% (for sales revenue < $1.5m) or 2%
AVR (for sales revenue > $1.5m)
Higher of 2% AVR, 10% APR
Ironsands,
phosphates, SMS
Decided at the discretion of the Minister Higher of 2% AVR, 10% APR

Fair financial return

The total Crown take from mining (taxes plus the new royalties) is expected to be around 35% of accounting profit which is thought to be internationally competitive and likely to have a negligible impact on future mine development.

However, the new regime, once in place, will be hard to change so the consultation phase on both the royalties and the taxation reviews are important. Chapman Tripp's commentary on the tax paper is available here.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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