[miningmx.com] — AFTER the horror of its first draft, the second iteration of the National Treasury’s Royalty Bill has been given a positive reception.
This must partly be owing to the give-and-take attitude of the South African government which has once again proved itself open to negotiation, especially in one of its core industries. Although it did not yield to calls for a profit-based tax, preferring to stick to a revenue-based royalty structure, it nonetheless, reduced most of the levy rates.
Gold companies, for instance, will pay 1.5% of their revenues compared to 3% as formerly proposed. The diamond industry benefits from a 5% royalty compared to 8% previously. Significantly, however, iron ore producers will be hurt.
Instead of a 2% revenue levy, they will now pay 4% of revenue if they don’t beneficiate the material into steel or pig iron. Roger Baxter, senior economist at the Chamber of Mines of SA, believes this is unrealistic. The chances of major pig iron projects being developed are remote, he says.
But it’s a striking fact of the Royalty Bill that companies preferring to beneficiate will be favourably treated. So in addition to punitive measures on iron ore producers, platinum producers who export unrefined metal will also face higher revenue levies than those who don’t.
This is contentious applied to the platinum sector. Does it include platinum producers who send unrefined platinum to refiners within South Africa? If it is, surely the government is slaying South Africa’s junior platinum industry in the womb since most small platinum players simply don’t have the capacity to refine their concentrate.
Analysts believe one of the few, if only, exporters of significant amounts of unrefined platinum is Northam Platinum. It sends material to Heraeus, a European refiner. “This royalty favours the producers with their own refineries,’ said Mark Smith, an analyst for RBC Capital Markets. “Northam is worse of as it exports concentrate. No doubt it will force companies to use existing refineries,’ he says.
The Royalty Bill is also accompanied by the Diamond Export Bill which imposes 5% export duty on diamonds, much lower than the initial 15% tax that was proposed. Tax credits are provided to producers who import rough stones for polishing in South Africa, an outcome that makes De Beers one of the clear winners in the Royalty Bill stakes.
This is because it’s the value of the gems that is the determining factor. De Beers wins because it’s always likely to reimport more gems by value than it will export from its South African mines. Venetia, a driver in De Beers’ South African portfolio, tends to yield smaller stone for instance.
“I think this is truly in line with best practice,’ said Bernard Swanepoel, Harmony Gold CEO. But he worries whether proceeds from the levies will find their way to the local communities the legislation was initially intended to benefit. As matters stand, the levies are currently earmarked for the fiscus.
There are also questions about the “breaks’ given to marginal miners and whether there’s a hint of smoke and mirrors in the largesse. In terms of the Royalty Bill, a marginal miner pays only 25% of their levies, but in Government’s view, such companies have to be making an operating loss first. And on closer inspection, an operating loss is meant to mean a cash negative business; losses incurred before factoring in items such as company overheads, toll treating costs, and other capital values such as depreciation.
For most miners, this is not marginal mining, but plain, “out-of-sight’ lossmaking. “Where’s the incentive in that?,’ declares Mark Wellesley-Wood, CEO of DRDGOLD.
Warts and all, the Royalty Bill is good lawmaking. And since its first draft, other emerging markets have called for escalation of royalties to recompense for use of their national patrimony. Like South Africa, they perhaps recognise an opportunity to cash in on the strong commodity market.
Cadiz analyst, Peter Major, believes the revenue nature of the bill is necessary.
“I’ve gone sympathetic to the Royalty Bill. It hits mining companies at the start where they can’t manipulate the figures.’ This is Government’s fear: that a profit-based tax would be difficult to administer particularly in these days of new-fangled accounting methods. With IFRS, who’s to know when a profit is a profit?
There are also other, as yet, hidden benefits. One is that companies complying with the legislation will not be subject to royalty increases, and will gain the advantage of any future decreases in royalty rates. On balance, this is fair-handed legislation that now provides more certainty to South Africa’s mining sector.
One final caveat: One wonders what commodity markets will be doing on implementation of the Royalty Bill, in 2009. This is anyone’s guess. By the time royalties are payable, the legislation might wreak more damage than it does at present, and there might be more “marginal miners’ around in South Africa than initially thought.