Update on mineral royalty rates in Western Australia

No increase in mineral royalty rates in the 2015-16 State Budget

The Western Australian Government (Government) has confirmed in the 2015-16 State Budget that mineral royalty rates will not be increased as a result of the Mineral Royalty Rate Analysis Final Report 2015 (Review).

In the Review, which was published on 25 March 2015, the Department of State Development and the Department of Mines and Petroleum recommended 18 changes to the current system of mineral royalties, including:

• increasing the ad valorem rate for gold from 2.5% to 3.75%,
• introducing an additional royalty tier of 3.75% for minerals that are subject to more intensive processing than is typically used to produce concentrates, and
• keeping the 10% benchmark rate as a gauge of fair return to the community.

When the Review was published, the WA Mines and Petroleum Minister Bill Marmion ruled out any immediate royalty increases for commodities in the 2015-16 State Budget. On 14 May 2015, the 2015-16 State Budget confirmed that no increases will be introduced.

The decision not to increase royalty rates seems to have been met with widespread relief from miners, mining services contractors and industry groups, in particular the gold sector. In a media release, the Chamber of Minerals and Energy of Western Australia Chief Executive Reg Howard-Smith welcomed the move and said that it provided royalty rate certainty for the WA resources sector.

Iron ore royalty forecasts cut

The Government has also cut its iron ore royalty forecasts from a peak of almost $5.5 billion in 2013-14 to $3 billion in 2015-16. This represents a decline from 19.5% to 11.5% of total government revenue, and is largely due to a sustained fall in the iron ore price.

The Government expects the 2015-16 iron ore price to be US$47.50 per tonne, which is just slightly lower than the Commonwealth Government’s forecast of US$48 per tonne. Last year, the Government forecasted a 2014-15 price of around US$123 per tonne.

Iron ore volumes are expected to rise from 632 million tonnes in 2013-14 to 716 million tonnes in 2014-15 and 799 million tonnes by 2018-19. The three biggest iron ore miners, BHP Billiton, Rio Tinto and Fortescue Metals Group are expected to account for 92.8% of all production volume in 2014-15, and 94.2% of royalty income.

For further information, please contact Jay Leary, Partner, Perth, or your usual Herbert Smith Freehills contact.