Mineral and Petroleum Resources Royalties Bill

1
Mineral and Petroleum Resources Royalties Bill

• September 2008

2
Contents

• 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

3
Mineral and Petroleum Resources Royalty Bill (B
59 2008)

1. Definitions
2. Imposition of royalty
3. Determination of royalty
4. Royalty formulae
5. Earnings before interest and taxes (EBIT)
6. Gross sales
7. Small business exemption
8. Exemption for sampling
9. Rollover relief for disposal involving going
   concerns
10. Transfer involving body of unincorporated persons
11. Arms 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

4
Ownership of Land and Minerals

• Surface rights
• Mineral rights
• Land restitution and land reform
• Indigenous communities
• State

5
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

6
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 nations
  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.

7
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.

8
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)

9
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)

10
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)

11
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)

12
Refined and Unrefined minerals (clause 1, and
Schedules 1 and 2)

• Refined (Schedule 1)
• 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.

13
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 arms 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

14
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 arms 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

15
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

16
Tax rates formula (clause 4) (X EBIT/Gross
Sales 100)

• 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.

17
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 lt zero, assumed to be zero.

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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

19
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)

20
Estimated Mineral Royalty RatesY 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
  B 12.5 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
21
  Mining R million StatsSA, P0044 28 March 2008 2006 2007
1 Turnover received 203,467 291,737
2 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
10 EBITDA 31.0   37.2
22
 Financial ratios Est. Royalty Rates   Financial ratios Est. Royalty Rates 
  Mining R million StatsSA, P0044   Mining R million StatsSA, P0044 2006 2006 2007 2007
  Estimated Royalty Rates   Rate   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
23
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

24
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

25
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

26
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
13. Refunds
14. Penalty for underestimation of royalty payable
15. Adjustment if estimated royalty
16. Interest
17. Administration of Act
18. Applicability of Income tax Act
19. Reporting

27
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

28
Thank you
29
Mining and Mineral processing
30
THE FOUR STAGE BENEFICIATION PROCESS (Chamber of
Mines)
Mining
Manu-facturing
31
Mineral Beneficiation Value Chain (Mintek /
DME)Capital requirements Services

• Exploration
• Geophysics
• Drilling
• Survey
• Mining
• Drilling
• Cutting
• Hauling
• Mineral processing
• Crushing
• Hdyro-met. Plant
• Material handling
• Furnaces
• Refining
• Smelter
• Furnaces
• Electro-winning
• cells, Casters
• Value addition

• Exploration
• GIS
• Analytical
• Data processing
• Mining
• Mine planning
• Consumables
• Sub-contracting
• Mineral processing
• Comminution
• Grinding, media
• Chem / reagents
• Refining
• Reductants
• Chemicals
• Assaving
• Value addition
• Design
• Marketing

32
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
         
33
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
34
Mineral Range Range Unit Sold at Ratio
Chrome Ore 37 46 Cr2O3 48 95.8
Manganese 37 48 Mn 50 96.0
Iron Ore 61 64 Fe 66 97.0

Mineral Range Range Unit Sold at Ratio
Chrome Ore 37 46 Cr2O3 34 108.8
Manganese 37 48 Mn 35 105.7
Iron Ore 61 64 Fe 59 103.4
35
Mineral Royalties

• International comparison

36
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

37
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

38
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).

39
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

40
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.

41
Tanzania

• Mineral royalties are payable on gross revenue,
  less transport and sales costs (called the
  netback value)
• The rates are
• Diamonds 5
• All other 3
• 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 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 arms- 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.

42
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 companys 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 3 (minimum)
• 31 to 70 3 0.225 (OR), maximum 12 (B
  4.45)
• 71 to 100 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.

43
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.

44
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

45
USA - Nevada

• Net proceeds / Gross Proceeds ()
• Less than 10
• 10 to lt 18
• 18 to lt 26
• 26 to lt 34
• 34 to lt 42
• 42 to lt 50
• 50 or more

• Rate
• 2.0
• 2.5
• 3.0
• 3.5
• 4.0
• 4.5
• 5.0