Royalties battle hotting up

The State Government has challenged the accuracy of an Auditor-General’s report on iron ore royalties as it continues its efforts to abolish ‘concessional’ royalty payments by BHP Billiton and Rio Tinto.

The mining giants are resisting the Government’s push for higher royalties, which could increase their annual payments by an estimated $60 million.

They claim the ‘differential’ rates currently paid compensate for their historical and current investment in infrastructure in the Pilbara and the extra obligations they face in areas such as downstream processing.

They have been partially backed in this view by the Auditor-General’s 2004 report on State Agreement Acts, which said: “The reasons for royalty concessions in the iron ore industry are historic.

“The royalty rates imposed in the iron ore agreements ratified in the 1950s to 1970s were part of the overall negotiated package, which reflected trade-offs to the private sector for its significant investment in capital infrastructure in the state’s North West, for example towns, railways, roads and ports.”

However, a spokesman for the Department of Industry and Resources, who contacted WA Business News on behalf of State Development Minister Alan Carpenter, said “the reduced royalty rates had nothing to do with infrastructure.

“The reason given for those differential rates in the Auditor-General’s report was incorrect,” the spokesman said. “The companies have been told that impression was wrong.”

BHP and Rio currently pay royalties on most of their ‘fines and fine ore’ production at the rate of 3.75 per cent, a rate the Government wants increased to 5.625 per cent.

This would bring them into line with royalties paid by other iron ore producers, which are covered by the royalties schedule in the Mining Act 1978.

Royalties on ‘lump’ ore would continue at 7.5 per cent while royalties on ‘beneficiated’ ore would remain at 5.0 per cent.

Notably, BHP and Rio already pay the higher royalty on fines produced at their Yandi mines, as this production is covered by State Agreements negotiated in the 1990s.

The haggling over iron ore royalties comes at a time of soaring prices, increased production and booming profits.

As a result, iron ore royalties are estimated to increase to $763 million this year (see table).

Mr Carpenter believes the buoyant market has created an opportune time for the Government.

“The moment has arisen for the Government to renegotiate, from a position of some strength, this historic anomaly,” he told parliament last week.

The negotiations over iron ore royalties, which Mr Carpenter said he intended to pursue “very vigorously”, coincide with negotiations over diamond royalties paid by Rio Tinto subsidiary Argyle Diamonds.

Argyle has requested financial support from the State Government to ensure its proposed underground expansion can proceed.

The Government says BHP and Rio have already been compensated for their investment in iron ore infrastructure through rental concessions. Specifically, they were given a 15-year rental holiday on land they leased for the development of town sites, railways and ports.

After 15 years of operation they were required to start paying ‘rental’ of 25 cents per tonne on exports of iron ore.

The Government says the ‘concessional’ royalty on ‘fines and fine ore’ was introduced because that type of ore was largely unmarketable in the 1960s and 1970s.

The concession was meant to encourage producers to develop markets for the product and to discourage dumping of fine ore and fines as waste.

Fines and fine ore are now considered valued products and account for about 70 per cent of annual production.

Auditor-General Des Pearson said he was unaware of new information on royalties concessions.

“At the time we did the report, the reference we included in the report was the understanding we had,” he said.

He reiterated the main finding of the report. “The main focus of the department has been on facilitation [of new projects],” Mr Pearson said. “They need more robust and ongoing management of the agreements through their life.”

IRON ORE ROYALTIES

• 2003-04: $305m
• 2004-05: $462m
• 2005-06: $763m
• 2006-07: $803m
• 2007-08: $684m
• 2008-09: $706m

Source: Budget Papers