URANIUM ROYALTIES IN AUSTRALIA

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1 URANIUM ROYALTIES IN AUSTRALIA Bill Crawshaw Australia has 27% of the world's known low cost resources of uranium (at US$80/kg of uranium) and currently has three producing mines. Increasing interest in exploration and development of uranium deposits in Australia is being driven by anticipated increases in national and global energy demand and concerns to reduce the level of carbon dioxide emissions from the stationary energy sector. Governments charge a royalty on minerals produced within their jurisdiction to provide a benefit to the community from the exploitation of a community owned resource. This paper covers the royalty regimes which currently apply to uranium in Australia and the considerations involved in establishing a royalty regime for uranium in the Northern Territory, where the Commonwealth has retained ownership of uranium resources. 1. INTRODUCTION In Australia, mineral and petroleum resources are in general owned by the Australian and State and Territory Governments on behalf of the community. The relevant Governments impose charges (resource taxes and royalties) on the extraction of mineral and petroleum resources to ensure that the community benefits from the development of those resources. The variety of different resource taxation or royalty regimes may be grouped into output-based and profit-based royalties. Output-based royalties may be levied as a constant dollar per unit of output (specific royalty) or as a constant percentage of the value of output (ad valorem royalty). Profitbased taxes and royalties are levied as a percentage of either the economic rent or accounting profit from a project once the project earns a defined positive net income. A hybrid royalty system may combine elements of an ad valorem with a profit-based royalty. 1 Profit-based royalties are more economically efficient and less distorting of investment decisions compared with specific and ad valorem royalties. This is because profit-based royalties take account of output, prices and costs; whereas specific royalties are based solely on output and ad valorem royalties are based on output and price. While the applicable royalty regime is a consideration in investment decisions, a World Bank report in 2006 noted that "royalties are just one of a number of variables affecting the ability of mining countries to attract new investment, and it is important not to exaggerate their overall significance. A country s geologic potential, political stability, and overall taxation regime are likely to be of equal or greater importance." Manager, Resources Taxation Section, Projects and Taxation Branch Resources Division Department of Industry, Tourism and Resources. For additional information on royalty systems, see Chapter 4 of a Report of the Ministerial Council on Mineral and Petroleum Resources on A Review of Australia's Resource Industry Fiscal Regimes and their International Competitiveness, June 2006, which may be found at James Otto et al, Mining Royalties - A Global Study of Their Impact on Investors, Government, and Civil Society, 2006, p 227. See full report at:

2 326 Articles (2007) 26 ARELJ 2. INCREASED INTEREST IN URANIUM Energy production is a key driver of economic development and global energy demand is forecast to increase by 50% between 2006 and As emissions of greenhouse gases from nuclear power stations are quite small, nuclear power generation can provide a low emission base load alternative to coal-fired power generation. A number of countries, particularly China and India, are increasing their planned nuclear power generation capacity as part of their total energy mix. In Australia, nuclear power generation has also been mooted as a possible means of addressing forecast increase in electricity demand while at the same time reducing the greenhouse intensity of Australia's power generation sector. Anticipated increases in global and national energy demand and concerns to reduce the level of greenhouse gas emissions from the stationary energy sector are driving the increased interest in exploration and development of uranium deposits in Australia. Exploration activity for uranium in Australia has increased considerably in recent years from $10.5 million in (representing 1.3% of total mineral exploration expenditure) to $102.1 million in (representing 6.3% of total mineral exploration expenditure). 3 Most of this increase has been in South Australia and the Northern Territory (NT) where existing uranium mining operations are located 4 and governments are supportive of uranium mining. 3. URANIUM ROYALTIES IN AUSTRALIA In Australia, some jurisdictions (New South Wales, Victoria and Western Australia) have no royalty regime for uranium as they have a no uranium mining policy. South Australia, Queensland, and Tasmania have royalty regimes for uranium. While Queensland has a 2% ad valorem royalty for uranium it also currently has a no uranium mining policy. South Australia applies an ad valorem royalty of 3.5% ex mineral production tenement and new mines may qualify for a reduced royalty of 1.5% ad valorem for the first five years. This is the same royalty regime which applies to most minerals produced in South Australia. 5 Two uranium mines are currently operating in South Australia Olympic Dam and Beverley. Tasmania applies a hybrid royalty which comprises an ad valorem component of 1.6% of net sales value plus a profit component whose percentage rate increases as the mine's profit increases. The maximum royalty is limited to 5% of net sales value. This is the same royalty regime which applies to most minerals produced in Tasmania. At present, no uranium is produced in Tasmania Mineral and Petroleum Exploration, Australia, 8412, March Quarter 2007, p 12, Australian Bureau of Statistics (note that statistics are prorated based on the September, December and March quarters). Uranium exploration expenditure increased in South Australia from $5.3 million in to $55.2 million in and in the Northern Territory from $4.8 million in to $28.8 million in Mineral and Petroleum Exploration, Australia, 8412, March Quarter 2007, pp 11 and 12, Australian Bureau of Statistics (note that statistics are prorated based on the September, December and March quarters). For further information on the royalty regimes applicable to various minerals in Australian jurisdictions, refer to the June 2006 Report of the Ministerial Council on Mineral and Petroleum Resources (MCMPR) on A Review of Australia's Resource Industry Fiscal Regimes and their International Competitiveness which may be found at:

3 Uranium Royalties in Australia 327 When it granted self-government to the NT in 1978, the Commonwealth Government retained ownership of uranium in the NT and the power to approve the development of uranium mines. To date the Commonwealth Government has determined royalties for uranium mining operations in the NT on a case by case basis taking into account a range of relevant considerations, including the world market for uranium, any payments negotiated with traditional owners, the loss or damage likely to be suffered by any indigenous communities affected by such mining operations and the royalty rates set for other mines. This has resulted in ad valorem royalties being set at 5.5% for Ranger, 3.75% for Nabarlek and 5.25% for Jabiluka. The Nabarlek mine has been mined out and rehabilitated and the Jabiluka development did not proceed. The Ranger mine is the only uranium mine presently operating in the NT. Under the current Ranger arrangements, the ad valorem royalty of 5.5% is collected by the Australian Government, and then shared between the Aboriginal Benefits Account (ABA) 6 (4.25%) and the NT Government (1.25% as a grant in lieu of uranium royalties 7 ). This represents a cost neutral position for the Australian Government. The broad objectives of the Australian Government s Uranium Industry Framework 8 announced in August 2005 include the reduction of impediments to the development of Australia s uranium resources. One of the impediments identified was the uncertainty surrounding the fiscal arrangements which would apply to any new uranium mining operations in the NT. The establishment of a new royalty regime for uranium would improve regulatory certainty for potential investors in new uranium exploration and mining projects in the NT and ensure that the community receives a fair share of the value generated from the development of uranium resources. The Uranium Royalty Sub-Group (URS) was formed under the Uranium Industry Framework to consider the issues relevant to the establishment of a new royalty framework to apply to uranium produced from new mines in the NT. The URS comprised representatives of the key stakeholders, namely: relevant Australian Government departments (Industry, Tourism and Resources, Treasury, Finance and Administration and Prime Minister and Cabinet); the NT Treasury; the NT uranium mining industry; and the Central and Northern and Land Councils, representing traditional owners The Aboriginal Benefits Account ABA has been established and maintained under s 62 of the Aboriginal Land Rights (Northern Territory) Act Subsection 64(3) of the Act requires the ABA to pay to affected Aboriginal communities and groups 30% of the royalty equivalents relating to the mining operations on their land. Aboriginal Land Councils also receive funding from the ABA for their administration costs. Refer to Clause 66 of the 1978 MOU on Financial Arrangements between the Commonwealth and the NT governments. The 1.25% equates to the royalty rate for minerals under the NT Mining Ordinance at the time of NT Self-Government in Uranium Industry Framework, Report of the Uranium Industry Framework Steering Group, September 2006.

4 328 Articles (2007) 26 ARELJ 4. CONSIDERATIONS FOR A NEW URANIUM ROYALTY IN THE NORTHERN TERRITORY The key issues for consideration which arose from the initial stakeholder consultation process were: the type of royalty regime which should apply to new uranium mines in the NT; whether private royalties negotiated between a mining company and a Land Council on behalf of Aboriginal traditional owners should be deductible in calculating a profit-based statutory royalty; options for allocating royalties from poly-metallic mines (ie mines producing two or more different ores, one of which is uranium) between the Commonwealth and the NT; and arrangements for administering uranium royalty collections. 4.1 Type of Royalty Regime The considerations on the type of royalty regime relate to whether an ad valorem, profit-based or hybrid royalty is the most appropriate regime and whether the same statutory royalty regime should apply to new mines on Aboriginal land 9 and non-aboriginal land in the NT. As each type of royalty has pros and cons, developing a recommendation as to the appropriate regime involves weighing up those pros and cons, the particular circumstances in the NT and the extent to which each is consistent with Australian and NT Government royalty policy. Profit-based royalties are more economically efficient than ad valorem royalties and are less distorting of investment decisions. Uranium prospects of more marginal viability would have a greater chance of being developed under a profit-based royalty regime. From the perspective of governments and Aboriginal traditional owners who benefit directly from royalty returns, the other considerations are that in periods when little or no profit is earned, little or no royalty would be payable and royalty receipts are likely to fluctuate more widely under a profit-based royalty than under an ad valorem regime. Profit-based royalties are also generally more complex to administer than ad valorem royalties. However, a counter consideration to this is that the NT has applied a profit-based royalty regime to non-uranium minerals since 1982 and the local mining industry is familiar with its operation. As ad valorem royalties would be payable from the commencement of production, they can deter initial investment, particularly in respect to smaller and higher cost projects of marginal viability. They can also result in premature mine closure as the resource is depleted and unit costs increase. On the other hand an ad valorem royalty may provide a more predictable flow of royalty receipts to government and traditional owners. Hybrid royalties trade off economic efficiency for a measure of revenue predictability while maintaining the administrative complexity of a profit-based royalty. 4.2 Deductibility of Traditional Owner Royalties Where a mining company seeks access to Aboriginal land in the NT to conduct exploration and mining activities, the Aboriginal Land Rights (Northern Territory) Act 1976 (ALRA) requires the company and the Land Councils, on behalf of Aboriginal traditional owners, to negotiate agreements for the grant of an exploration or mining interest, including terms and conditions 9 Aboriginal land as defined under the Aboriginal Land Rights (Northern Territory) Act This does not include land under the Native Title Act 1993.

5 Uranium Royalties in Australia 329 relating to payment. While individual agreements are confidential, it is understood that such payments generally include negotiated royalties of around 2% of the value of production. The main issue is whether the negotiated royalties in agreements between mining companies and Land Councils should be an allowable deduction in calculating a statutory profit-based royalty. Some of the considerations involved in examining this issue are how negotiated royalties with traditional owners are handled in other jurisdictions and how other private mineral royalties on non-aboriginal land are treated under the mineral royalty regime in the NT. Other considerations are the total effective royalty which would be payable by industry, the potential effect of deductibility of traditional owner negotiated royalties on the level of statutory royalty payable and the extent to which the benefits to industry of such deductibility would be clawed back through company income tax. 4.3 Allocation of Royalties from Poly-metallic Mines If new mines are established in the NT at which uranium is mined in conjunction with other minerals, the administration of mineral royalties has the potential to be complex if the royalty adopted for uranium is different from that applying to other minerals owned by the NT Government. The relevant consideration is how the costs from a poly-metallic mine would be allocated between uranium and non-uranium minerals. For example, the costs of mining and milling of ore and the separation processes would be common to all the minerals produced, while the costs of concentrating uranium ore would be specific to the uranium production stream. The other relevant consideration is whether royalty administration of poly-metallic mines could be minimised for both the mining company and the NT Treasury if the royalty regime for new uranium mines was consistent with that already applying to other minerals in the NT. 4.4 Arrangements for Administering Uranium Royalty Collections The relevant considerations in relation to this issue are whether the NT Treasury should administer the collection of uranium royalties on behalf of the Australian Government and the options for the ABA and the NT Government to share in the benefits of royalty receipts from new uranium mines. Coming to a conclusion on these issues also requires account to be taken of the requirements in the ALRA governing the payment of royalty equivalents to the ABA and the Australian Government's obligations to the NT under the 1978 Memorandum of Understanding on Financial Arrangements between the Commonwealth and the Northern Territory Governments (MOU). Subsection 63(1) of the ALRA requires the equivalent of all royalties received by the Australian or NT Governments from mining projects on ALRA land to be paid into the ABA. Clause 66 of the MOU requires the Commonwealth to make a grant to the NT of an amount in lieu of uranium royalties. 4.5 Status of Uranium Royalty Sub-Group Report Following consideration of a broad range of issues, the report of the URS on a royalty regime for new uranium mines in the Northern Territory has been presented to the Uranium Industry Framework Implementation Group (UIFIG). The UIFIG has considered the report and referred it to the Australian Government for consideration.