Mineral and Petroleum Resources Royalties Bill

4 March 2008

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Contents

• Background• MPRDA• Why mineral royalties?• Tax base• Tax / royalty rate(s)• Comments on 2nd draft • Value chain – mining and beneficiation process• Proposed revised tax base (gross sales minus allowable deductions –

3rd draft• Fixed royalty rates – 2nd draft• Proposed formula based progressive royalty rates – 3rd draft• Marginal mines• Tailings & mine dumps• State leases and community royalties• 3rd draft Bill • Estimated revenue

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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

• Major concerns raised by industry:– Royalty rates too high– Selling price (gross revenue) as the tax base too broad, argued for

profit as tax base– No relief for marginal mines and small scales miners – Argued that there will be a double royalty as the Bill was silent on

Community royalties• 2nd draft of Royalty and Petroleum Resources Royalty Bill

released for public comment on 11 October 2006• 3rd draft of Royalty and Petroleum Resources Royalty Bill

released for public comment on 6 December 2007

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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.

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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.

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“Community / private royalties”

“In the Canadian example, private and government royalties are not mutually exclusive. A producer of mineral commodities in Canada will pay provincial mining tax and royalties, regardless of whether private parties have negotiated a royalty on production. The private royalty may be acknowledged in the treatment of income for mining taxes as an allowable deduction. The only exceptions to the combined private and public royalty payment occur where Aboriginal groups have negotiated with the government to collect royalties on their ancestral lands”. (James Otto, et al – The World Bank, page 126)

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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)

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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)

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Tax Policy and the Design of a Single Tax System;Dr Parthasarathi Shome, IMF, March 2003,

International Bureau of Fiscal Documentation - Taxation of non-renewable resources (p.115).

“If the government owns mineral and petroleum resources, it is cast in a dual role; it is the owner of taxable resources as well as a sovereign taxing power. As owner of mineral rights, it will seek the maximum return on it assets as payment for resource extraction, separate from any income tax.

The conventional view is to limit the use of royalties since they raise the marginal cost of extraction, obviating marginal projects.

An alternative view is that, since royalties reflect the opportunity cost of resource extraction, they are not distortionary.

This is the correct view; if companies cannot meet this price the resource should be left in the ground. Indeed, a case can be made that much over-exploitation of natural resources has occurred globally due to the lack of adequate reflection or recognition of the opportunity costs of extraction in nominal cost calculations. This has had, and continues to have, deleterious cross-country and inter-generational ramifications”.

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A Primer on Mineral Taxation; Thomas Baunsgaard, September 2001

IMF Working Paper (WP/01/139)

• Royalties can be applied in a variety of forms, some are based only on production volume, but more typically they are assessed on the value of production.

• Some royalties are progressive with a rate that increases with the mineral price.

• Ease of administration and asymmetrical information could influence the type of royalty regime.

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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)

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Tax base: Net smelter return (NSR)

“This type of royalty is determined as a percentage of the value received from the sale of the product produced at the mine site. Costs associated with further downstream processing are deducted before calculating the base value for the NSR royalty.

In the case of high-unit-value commodities such as gold or diamonds, these downstream costs are relatively insignificant, because the mine producers a nearly pure product.

In the case of base metal concentrates, the net smelter value would be net of smelting charges, refining charges, transportation charges, and any profits generated along this chain”. (James Otto, et al – The World Bank, page 126)

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Royalty rates

“In nations with royalty taxes the trend has been to reduce the rates at which they are assessed, until today, with the exception of diamonds and certain other precious stones, ad valorem rates usually do not exceed 3 to 4 per cent”. (James Otto, et al – The World Bank, page 37)

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2nd Draft Royalty Bill:Tax base

• Gross Sales Value =

• Amount received after adjustment for foreign currency transactions; plus (+)

• Value reduction by seller; plus (+)

• Financial assistance; minus (-)

• VAT, transport & insurance; minus (-)

• Bad debts.

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Value-based royalties (Otto, et al, p.52)

• “Value-based royalties should be easy to calculate but often are not. The degree of complexity will depend largely on how value is defined”.

• “Sales / market value adjusted by subtracting out specified costs: – The most common adjustment is to deduct from sales

value all costs such as transportation, insurance, and handling that incurred from the mine site to the point of sale.

– Another common value is net smelter return, in which the taxable amount takes into account the return to the producer after smelting and refining charges are taken out”.

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Tax base : Gross sales minus allowable deductions (?)

1 Smelting

2 Refining

3 Processing

4 Primary crusher

5 DMS plant, sintering

6 Recovery

7 Sorting

8 Transport & insurance

9 Throughput

10 Security

11 Port, shipping & insurance

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Allowable deductions as a % of Gross Revenue

(Average for 5 years: (A, all) & (B, excl. specific marketing & other)

    A B

1 Gold 0.5% 0.4%

2 Diamonds 12.1% 7.4%

3 PGM 8.7% 8.0%

4 Manganese 22.5% 19.5%

5 Mineral Sands 21.5% 21.4%

6 Coal 24.6% 21.6%

7 Chrome 23.7% 23.4%

8 Iron Ore 27.9% 27.9%

9 Base Metals 37.4% 37.3%

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2nd Draft: Royalty rates (1)

Group Minerals Rate %

1 Unpolished natural diamond (gem and industrial), crystalline quartz (smokey quartz, citrine, rose quartz, amethyst, rock crystal), cryptocrystalline quartz (jasper, opal), chalcedony (blue lace agate, moss agate, onyx, rainbow chalcedony), chalcedonic replacements (silicified wood, tigers-eye), blue asbestos (crocodolite), beryl (emeralds, aquamarine, morganite, heliodor, goshenite, bixbite),chrysoberyl (cat’s eye, alexandrite), corundum (rubies, sapphires), garnet (almandine, pyrope, almandine-pyrope, grossular, spessartine, uvarovite), lolite, kyanite, sodalite, sugilite (royal lavulite, royal azel), tourmaline, verdite (serpentine), topaz, copper minerals (azurite, malachite, chrysocolla), enstatite, epidote, feldspar group (moonstone, amazonite) and spinel.

5

2 Andulasite, asbestos, vermiculite, silliminite, kieselguhr, calcite, granite, marble and siltstone.

1

3 Feldspar, fluorspar, barytes, gypsum, magnesite, mineral pigment, sulphur, silica, talc, slate, shale, attapulgite, bentonite, flint clays, kaolin and fire clay.

0.5

4 Limestone, lime and dolomite, phosphate rock, salt, quartzite, schist, plastic clays, fire clay (construction grades), kaolin (construction grades) aggregate and sand.

0

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2nd Daft: Royalty rates (2)Group Minerals Unrefined

rate %Refined rate %

5 Platinum Group Metals (platinum, palladium, rhodium, iridium, ruthenium and osmium).

6 3

6 Chrome, manganese, silicon, vanadium, iron, cobalt, copper, nickel, lead, zinc, antimony and tin.

4 2

7 Illmenite, rutile and zircon. 3 2

8 Gold and silver. 3 1.5

Energy

Group Mineral Specification Rate %

9 Coal.Above 15% Ash Content. 1

Below 15% Ash Content. 3

10Hydrocarbon fuel (oil and gas).

Mining in water deeper than 500 m. 1.5

Mining in water shallower than 500 m. 3

11 Uranium.

Oxide (yellow cake) and Uranium Hexafluoride. 1.5

Uranium concentrate. 3

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Tax rates – proposed formula base royalty rates

• Y = A + X/B

• Where:

# A = minimum rate# X = EBITDA / Gross Sales (Revenue)

(Profitability)

# B = a fixed number

• What are the typical values for X ?

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EBITDA / Gross Sales

EBITDA / Gross Sales (%) 2003 2004 2005 2006

World's top 40 mining companies 25 31 37 44

South African mining companies 31 30 27 38

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Royalty Rates Option 1 : Y(1) = 0.5+ X/12.5; Option 2: Y(2) = X/12.5,

Option 3: Y(3) = 0.5+X/15 Where: X = EBITDA/ Gross Sales (Revenue )

Royalty rates 1 2 3

B = 12.5 12.5 15

Min Rate 0.5 0.0 0.5

EBIDTA/ GS      

0 0.50 0.00 0.50

1 0.58 0.08 0.57

4 0.82 0.32 0.77

5 0.90 0.40 0.83

10 1.30 0.80 1.17

15 1.70 1.20 1.50

20 2.10 1.60 1.83

25 2.50 2.00 2.17

30 2.90 2.40 2.50

40 3.70 3.20 3.17

45 4.10 3.60 3.50

50 4.50 4.00 3.83

55 4.90 4.40 4.17

60 5.30 4.80 4.50

70 6.10 5.60 5.17

80 6.90 6.40 5.83

90 7.70 7.20 6.50

100 8.50 8.00 7.17

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Progressive Royalty Rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

EBIDTA / Gross Sales = X

Rate

1, B=12.5, min=0.5

2, B=12.5, min=0

3, B=15.0, min= 0.5

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Why (advantages of) a formula based royalty rate structure &

allowable deductions • The derived rates are related to the ability to pay – makes it a more

equitable (fairer) system• It avoids the problem of different specific rates for different minerals –

perceived discrimination • It provide automatic relief for marginal mines – avoid problem of how to

define a marginal mine• Profitability of mines highly correlated with commodity prices • Government share in both the upside benefits and the down side risk

of commodity prices--------------------------------------------------------------------------------------------• However, should guard against the manipulation of EBIDTA• Should reward inefficiencies and / or penalise efficient mines--------------------------------------------------------------------------------------------• Allowing for certain deductions avoids penalising mines that

beneficiate• Also take account of the location of the mine in relation to the market

3rd draft Bill

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Tax base

• First draft Bill • Gross sales and deemed mineral prices • No account taken of beneficiation expenses

• Second draft Bill • Attempted to take account of beneficiation

activities by way of a dual rates system (differential rates for refined and unrefined materials)

• Third draft Bill• Shifts away from dual rate system towards an

allowance for deductions of beneficiation related expenses

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Tax base = Adjusted gross sales (gross sales minus allowable deductions)

• Tax base has been set in a manner that preserves competitiveness

• Does not negatively impact on beneficiation activities

• Take account of the location of the mine• Ensures that the State receives an equitable

consideration for its non-renewable resources• Limit impact of potential creative accounting• Minimizes connected party avoidance

schemes

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Tax rate: EBITDA used to determine progressive rates

• EBITDA (earnings before interest, depreciation, and amortisation)

• Base is stable and equitable - the effects of different financing options are limited

• A measure of profitability

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Part I: Definitions• The royalty only applies to geographical areas within

the confines of a mineral resource right (i.e., mineral or petroleum) granted under the Mineral and Petroleum Resourced Development Act (“MPRDA”)

• The royalty only applies to extractors – persons that “win or recover” minerals under the ambit of their mineral resource right for their own benefit

• Mineral resources are broadly defined to include minerals and petroleum and any part thereof whether it be processed, beneficiated or otherwise transformed (i.e., liquid gold, iron sludge)

• “Transfer” of a mineral resource acts as the trigger for the royalty. Transfer applies to the initial disposal of beneficial ownership (not just title) of a mineral resource.

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Part II:Charging Provision: Section 2

• The royalty is imposed on every extractor

• Royalty payable equals the royalty rate x tax base (aggregate gross sales less allowable deductions)

• The charge applies per assessment period (i.e., per six months)

• All royalty revenues paid into National Revenue Fund

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Royalty rates: Section 3

• The royalty rates are based on the following formula (per assessment period):

EBITDA x 100 Aggregate gross sales x 12,5

• The royalty rate fluctuates in line with the operating profits (i.e., earning before interest, taxes, depreciation and amortisation) for mineral resources transferred (i.e., sold) during a 6 month period (i.e., assessment period)

• EBITDA = earnings are limited to actions associated only with extraction, recovery and processing in SA per the extractor’s accounting records used for financial reporting (i.e., EBITDA does not take into account earnings from extraction of foreign minerals)

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(EBITDA): Earnings before Interest, Taxation, Depreciation and Amortization / Gross Sales

EBITDA/Gross revenue %

  2002 2003 2004 2005 2006 Average

DIAMONDS 51.0 34.6 37.4 49.4 57.6 46.0

MANGANESE 45.5 41.8 28.9 49.3 43.4 41.8

IRON ORE 37.2 27.3 23.5 46.8 53.2 37.6

MINERAL SANDS 50.5 40.8 29.4 29.5 37.3 37.5

PGM 40.4 26.9 28.1 29.4 45.0 34.0

GOLD 46.3 32.3 15.3 4.1 33.0 26.2

COAL 32.7 20.2 26.4 27.3 23.8 26.1

CHROME 7.1 15.8 17.1 12.3 9.1 12.3

BASE METALS 4.5 -5.9 1.5 -0.1 23.7 4.7

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Royalty Rates (3rd draft)

Option 2: Y = X/12.5; Option 1 : Y = 0.5 + X/12.5; Option 3: Y = 0.5 + X/15)

Royalty rates 1st Draft 2nd Draft 3rd Draft

          Option 2 Option1 Option 3

%   Refined Unrefined Average B =12.5, & 0 B=12.5, & 0.5 B=15, & 0.5

DIAMONDS 8 n/a 5 5 3.7 4.2 3.6

MANGANESE 2 2 4 3 3.3 3.8 3.3

IRON ORE 2 2 4 3 3.0 3.5 3.0

MINERAL SANDS 2 2 4 3 3.0 3.5 3.0

PGM 4 3 6 4.5 2.7 3.2 2.8

GOLD 3 1.5 3 2.25 2.1 2.6 2.2

COAL 2 1 3 2 2.1 2.6 2.2

CHROME 3 2 4 3 1.0 1.5 1.3

BASE METALS 2 2 4 3 0.4 0.9 0.8

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Aggregate gross sales: Section 4

• Aggregate gross sales calculated per assessment period is interpreted broadly and includes a full range of benefits obtained for mineral resources transferred (i.e., debt reductions or discharge, property or service barter consideration, insurance payments)

• Unquantified amounts do not form part of aggregate gross sales until becoming quantifiable

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Allowable deductions: Section 5 - 1

• A limited set of deductions are allowed to be offset against the amount of aggregate gross sales to calculate the tax base

• The limited deductions cover only beneficiation (i.e., a level of processing prescribed by the Minister by way of regulation) and transport related (including insurance) expenditures associated with mineral resources transferred during an assessment period

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Allowable deductions: Section 5 - 2

• Allowable deductions only include direct expenditures associated with beneficiation (i.e., indirect expenditures are not deductible – management fees, administration and marketing costs)

• “Processing” means all forms of screening, crushing, washing, sintering, smelting, refining performed within SA for purposes of deriving mineral resources from mineral bearing substances

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Deemed amounts and transfers: Section 6

• These rules are designed to prevent avoidance• The first rule prevents under collection of the royalty

by persons that sell a mineral resource without adding its normal beneficiation activities

• The second rule prevents under collection of the royalty by triggering the royalty once a mineral is exported with or without sale (the mineral resource has left SA’s administrative control)

• The third rule prevents over-collection of the royalty by triggering the royalty before it applies to beneficiation activities that are not otherwise conducted by industry

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Bad debts & Currency conversion

• Write off for bad debts: Section 7• This section provides relief for bad debt write-

offs (i.e., reduce royalty payable to the extent extractor has incurred a royalty charge for minerals it sold but will not receive payment)

• Currency conversion: Section 8• All amounts that arise in foreign currency (i.e.,

sales and expenses) must be converted to the rand at the spot rate when they are received or incurred

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Part III: Relief measures

• Deemed amounts and transfers: Section 6

• In support of small business, relief is provided that allows for complete exemption of the royalty otherwise payable

• To get the relief, the extractor must during an assessment period :

– (1) not have a turnover in excess of R5 million; – (2) the royalty liability cannot exceed R50 000;– (3) the extractor must be a SA resident; and – (4) the extractor must be registered with the

Commissioner• To prevent avoidance, the section also contains anti-

income splitting rules

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Part III: Relief measures

• Exemption for sampling: Section 10

• This section provides relief from the royalty otherwise payable to extracted mineral resources that are exported (i.e., transferred) for analysis

• To prevent avoidance, the aggregate export value of the exported mineral resources for sampling cannot exceed R20 000 per assessment period

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Part IV: Anti-Avoidance Rules• Arm’s length value: Section 11

• This section lays out the internationally accepted definition of arm’s length price.

• Transactions should only be respected if the parties involved strive to obtain the best advantage without consideration of the royalty

• Otherwise, Government reserves the right to adjust and substitute artificial prices with arm’s length price (i.e., the fair and reasonable price that two independent persons would arrive at in an open market without regard to the royalty)

• The Commissioner is empowered to adjust and substitute:

– (a) earnings (i.e., EBITDA); – (b) gross sale value of mineral resources transferred; and– (c) beneficiation and transportation related expenditures

that are deductible

42

Part IV: Anti-Avoidance Rules

• General anti-avoidance rule: Section 12• This section provides the Commissioner with

the power to target mineral resource transfers or schemes that inappropriately undermine the application of the State royalty

• Under this power, the Commissioner may recharacterise the transfer or scheme applicable to the royalty (plus penalties and interest thereon) for purposes of preventing the circumvention of the royalty

• The Commissioner’s decision to invoke this anti-avoidance rule is subject to objection and appeal

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Part V: Fiscal Guarantee

• Duration: Section13 & Terms and Conditions: Section 14

• These sections provide extractors with long term stability in respect of the ad valorem royalty rate formula

• Provide certainty for an investor that will commit substantial long-term mining investments

• Section 13 empowers the Minister to enter into fiscal stability agreements with extractors for the duration of their mining rights (i.e., minerals, oil and gas)

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Part V: Fiscal Guarantee• For purposes of capturing business practices

and creating flexibility, fiscal stability agreements:

– (a) may be assigned; – (b) may be concluded for mineral resource rights

currently held (or about to be held);– (c) remain in force and effect if an extractor

increases or decrease its ownership interest in a mining right; and

– (d) may be unilaterally terminated by the extractor if more favourable circumstances arise

• Section 14 stabilises the substance of this Act (i.e., the royalty rate base and rate components – Parts I, II, and III) for holders of fiscal stability agreements

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Part V: Fiscal Guarantee

• Fiscal stability protection seeks to provide investors with protection against additional indirect royalties over and above the royalty imposed by this Act or any other Act (i.e., windfall profits tax on extracted mineral resources). However Government reserves the right to amend such an agreement at any time for anti-avoidance purposes

• The State’s breach of the fiscal stability agreement entitles the extractor to damages (i.e., compensation or alternative remedy that makes them whole)

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Administration

• For purposes of royalty collection, all mineral resource extractors must register with the Commissioner

• A registered person must submit a return and payment of the royalty due within 30 days of the end of each assessment period (i.e., 6 months)

• The provisions of the Income Tax Act are incorporated to bolster administration support

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Estimated Revenue (slides 28, 29 & 42)

2006Gross Sales R million

Adjusted Tax BaseR million

Fixed ratesAverage

FormulaB = 12.5 + 0Option 2

FormulaB = 12.5 + 0.5Option 1

FormulaB = 15.0 + 0.5Option 3

PGM 53,904 48,931 2,202 1,330 1,575 1,353

Coal 31,182 23,486 470 490 608 526

Gold 26,001 25,822 581 541 671 580

Diamonds 9,441 8,263 413 304 345 295

Iron Ore 9,068 6,400 192 193 225 192

Mineral Sands 3,939 3,101 93 93 109 93

Manganese 1,230 902 27 30 35 30

Chrome 2,333 1,775 53 17 26 23

Base Metals 1,602 986 30 4 9 8

TOTAL 138,701 119,666 4,061 3,002 3,601 3,100

Background

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Tax base: Value based royalties (gross …)

“ Value can be determined in many ways, with the most common being the value of the mineral in the following circumstances:

• Determined by the gross revenues from sales• Determined by the gross revenues derived from sales less

certain allowable costs, such as transportation, insurance and handling

• As reflected in a net smelter return (adjusted for smelter and refining charges)”. (James Otto, et al – The World Bank, page 51)

“When comparing the royalty rates in different jurisdictions, care must be taken not to compare rates unless the royalty base is identical”. (James Otto, et al – The World Bank, page 62)

50

Tax base: Profit based royalties

“To the extent that profit-based royalties are generally thought to be less economically disruptive, the question arises as to why they are grossly underrepresented in most regulatory and fiscal regimes. The explanation clearly rests with the fact that profit-based royalties introduce the following:

– Significant additional administrative costs, …. – Difficulties in determining the profit base at project level …..– Exposure to risk-averse governments to:

• The vagaries if commodity prices affecting revenue stability• The project risk inherent in different mineral deposits• Inefficient (higher cost) project operators; and • Risk arising from the higher or lower level of technical and managerial

competence of various project proponents.

At the extreme, a combination of cyclically low prices and management incompetence could result in state- or publicly owned mineral resources being depleted, possibly for many years, without the government collecting any royalties or income tax. This situation would hardly represent an economically rational use of the resources”.

(James Otto, et al – The World Bank, page 68)

51

THE FOUR STAGE BENEFICIATION PROCESS (Chamber of Mines)

Stage Mineral beneficiation process category

Process flow-chart Labour intensity

Capital intensity

1

2

3

4

The action of mining andproducing an ore or

concentrate (primaryproduct)

The action of converting aconcentrate into a bulktonnage intermediate

product (such as a metalor alloy)

The action of converting theintermediate goods into a

refined product suitable forpurchase by both small &

sophisticated industries (semis)

The action ofmanufacturing a final

product for sale

Run-of-mineores

Washed &sized

concentrates

Mattes/slags/bulk

chemicals

Ferro alloys /pure metals

Steel/ alloysWorked

shapes &forms

Workedshapes &

forms

Workedshapes &

forms

High High

Low High

Low High

Medium tohigh

Medium tohigh

IndustryCluster

Mining

Mining

Refining /Manufacturing

Manufacturing

Mining

Manu-facturing

52

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

– Rolling & moulding– Machining– Assembling

• 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 – Distribution

53

Marginal Mine relief

• 2nd Draft – Definition problem ?– Minimum rate = 0.25% of fixed rate– Cliff edge problem

• e.g. gold (0.25% of 1.5% = 0.375%) & 1.5%

Proposed formula based royalty– Automatic relief– Minimum rate ??– Gradual / no cliff edge problem

54

Marginal Mines “The difficulty of defining when a mine is a marginal mine remains a challenge. … both

marginal and startup mines should, in principle, not be required to pay a royalty unless or until they are in a tax-paying condition. This is an objectively determinable position and could be used as a point of departure with possible adjustments to ensure that non cash deductions which would normally affect the tax-paying position of a mine (such as depreciation) are not taken into account”.

Life of mine - Production Lifecycle

1. Pre – production (years 1 to 6) 6

2. Production Build-up (year 7 to 10) 4

3. Full production (years 11 to 21) 11

4. Ramp down production (years 22 to 32) 11

“The economics of a coal mine is largely volume dependent. The “start-up” and “winding down” phases are periods in which annual saleable production volumes are increasing towards and decreasing away from equilibrium steady state target levels, respectively. It is in these phases of a mine’s life that short-term cash flows and profitability of a mine are under pressure ”.

Life of mine – Production Lifecycle

1. Start-up (years 1 to 5)

2. Stabilization & growth (years 6 to 12)

3. Maturity (years 13 to 26)

4. Winding down (years 27 to 35)

55

Tailings & Mine Dumps

• “ … definitions of “residue stockpile” and “residue deposit” in the MPRDA. … dumps created prior to conversion to mining rights issued under the MPRDA do not fall within either of those definitions. The MPRDA does, therefore, not regulate the processing of those dumps. Since royalties are, in principle, only payable in respect of mining that takes place under a right issued in terms of the MPRDA, royalties should not be payable.

• Sale of minerals extracted from residue stockpiles or residue deposits created by discarding material mined under mining rights issued in terms of the MPRDA should attract royalties in the same way as any other mineral that is sold during mining operations”.

• “ …profit margins from the re-treatment of tailing are low. The imposition of royalties at the full rate will probably make most re-treatment projects uneconomic”.

56

State Lease payments & community royalties

(PGM, Coal, Diamonds, Base metals)

• 1% of gross revenue• Y = 20 -120/X + 11/4 (X = Profit / Revenue)• 11/2 % of 80% of value of metal content in concentrate of platinum, palladium, etc. + 11/2%

of revenue from sales of ruthenium, silver, etc.• 10% of lease earned profits• Y = 15 - 90/X + 11/4---------------------------------------------------------• State mining leases R0.63 / ton escalating by 10% annually • Private royalty only--------------------------------------------------------

• Section74 of the Precious Stones Act 73 of 1964, Item 9(7) of MPRDA provides that a lease of this nature would continue in force and effect.

• 4.5% on gross sales community royalty --------------------------------------------------------• Community royalty payments, 2% of net turnover (Gross turnover less carriage, insurance &

freight). Minimum royalty of R100 00 p/a increased by CPI from January 1998. Paid monthly in arrear.

• (ROM tons mined, minimum R20 000 pa, 30 cents per metric ton (ROM) heavy mineral bearing sand escalating at 7% pa, compound with effect from 1 November 1998.

• Notarial Mineral Lease Agreement. 5% of taxable income before beneficiation or R100 000 (Clause 8 of the Mineral Lease Agreement)