080904 treasury mineral resources

Contents 8 Rollover relief & Unincorporated bodies 10 Fiscal stability 14 Mining Value Chain: Exploration, Mining, Mineral Processing, Refining: First saleable point... Tax base - minera

Mineral and Petroleum Resources

Royalties Bill

September 2008

Contents

8 Rollover relief & Unincorporated bodies

10 Fiscal stability

14 Mining Value Chain: Exploration, Mining, Mineral Processing,

Refining: First saleable point

Mineral and Petroleum Resources

7 Small business exemption

8 Exemption for sampling

9 Rollover relief for disposal involving going concerns

10 Transfer involving body of unincorporated persons

11 Arm’s length transactions

12 General anti-avoidance rule

13 Conclusion of fiscal stability agreements

14 Terms and conditions of fiscal stability agreements

15 Foreign currency

16 Transitional rules

17 Act binding on State and application of other laws

18 Short title and commencement

Ownership of Land and Minerals

• May / June 2007 - Consultation, workshops

• 3 rd 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, 3 rd 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 4 th 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

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

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

(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.

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)

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)

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

of profitability but commonly based on

the quantity of material produced or its

Tax base = Gross Sales less

• 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)

Refined and Unrefined minerals

(clause 1, and Schedules 1 and 2)

• Iron ore; (between 61% to 64% Fe)

• Coal – various grades

Gross Sales - Refined: Schedule 1

(clause 6)

– 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

Gross Sales – Unrefined: Schedule 2

(clause 6)

– 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

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

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.

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

EBIT: Adjustments (clause 5)

• No deductions for financial instruments (other than hedges against mineral sales)

• No deduction for the royalty itself (to avoid

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

Estimated Mineral Royalty Rates

Y = 0.5 + X/12.5 (Refined)

Y = 0.5 + X=/9 (Unrefined)

Profitability Refined

Unrefined / Concentrate

EBIT/ Gross Sales (%) Min = 0.5 Min = 0.5

Mining: R million: StatsSA,

P0044: 28 March 2008 2006 2007

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

Financial ratios Est Royalty Rates Financial ratios Est Royalty Rates

Mining: R million: StatsSA,

Rollover relief and

• 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

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

• General Anti-Avoidance Rule:

– Standard for most tax acts

• Fiscal Stability:

– Fixed parameters of formulae guaranteed

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)

– 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

Mineral and Petroleum Resources

Royalty (Administration) Bill

(B 60 – 2008)

1 Definitions

2 Registration

3 Cancellation of registration

4 Election for unincorporated body of persons

5 Payments in respect of estimated royalty

6 Submission of return and final payment

7 Form, manner and place determined by Commissioner

8 Maintenance of records

9 Notice of assessment

10 Reduced assessments

11 Withdrawal notice of assessment

12 Time limit for notice of assessment

14 Penalty for underestimation of royalty payable

15 Adjustment if estimated royalty

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

Thank you

Mining and Mineral processing

THE FOUR STAGE BENEFICIATION PROCESS

(Chamber of Mines)

Stage Mineral beneficiation

process category Process flow-chart

Labour intensity

Capital intensity

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

Run-of-mine ores

Washed &

sized concentrates

Mattes/slags/

bulk chemicals

Ferro alloys/

pure metals

Steel/ alloys

Worked shapes &

forms

Worked shapes &

forms

Worked shapes &

Medium to high

Industry Cluster

Mining

Mining

Refining / Manufacturing

Manufacturing

Mining

facturing

Manu-Mineral Beneficiation Value Chain

(Mintek / DME) Capital requirements & Services

• Mining

– Mine planning – Consumables – Sub-contracting

• Mineral processing

– Comminution – Grinding, media – Chem / reagents

• Refining

– Reductants – Chemicals – Assaving

• Value addition

– Design – Marketing – Distribution

Estimated royalty rates –

Mineral Range Unit Sold at Ratio

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

high-value 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

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

• Concentrate material: 5.0% 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”

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).

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;

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.

• “net back value” means the market value of minerals FOB at the point of

export from Tanzania, less –

– 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 orother 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

• 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:

• 31 to 70 3 + 0.225 * (OR), maximum 12% (B = 4.45)

• 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