WA royalty hike threatens gold industry

Annual gold production in Australia continued its slow upward trend in the 2017 financial year, according to gold consultants, Surbiton Associates.

Australian gold production for 2016/17 was 9.6 million ounces, or 299 tonnes, up almost 2.5 per cent on the previous financial year.

In the June quarter, output was 5 per cent higher than the March quarter at 75 tonnes.

“With almost 300 tonnes produced in 2016/17, the gold mined was worth around $A16 billion at the average spot price for the year,” Surbiton director Sandra Close said.

“Australia is the world’s second largest gold producing country and gold is our third largest commodity export after iron ore and coal.”

However, Close warned there was a real concern in the gold sector that higher royalties may be imposed which would have negative economic consequences, would undermine confidence and would discourage investment.

“The Western Australian government is once again flagging a possible increase in mineral royalties in its forthcoming state budget,” Close said.

“About 70 per cent of Australia’s gold is mined in WA, so the state government must think very carefully before imposing any increase in the gold royalty.”

WA Premier Mark McGowan claimed earlier this year the state’s Budget position was the worst since the Great Depression due to lower tax revenues and a subdued state economy.

“Too often, the mining industry and especially the gold sector are seen as easy targets by governments trying to increase their revenue,” Close said.

“But increasing financial burdens on the generators of wealth can have unintended consequences – in mining it can mean higher cost operations close, with the resultant loss of jobs and tax revenues.

“Has it been forgotten that during the Great Depression the gold industry was one of the few bright spots in the WA economy? It was one industry that allowed WA literally to dig its way out of financial difficulty.”

Close said a simple definition of “ore” is material that can be mined and treated at a profit. Every increase in costs, be they the cost of labour, fuel, taxes or mineral royalties, means that some material that is profitable to mine and process today, will become unprofitable tomorrow, because of the higher costs.

“As a result, some material will be left in the ground rather than being efficiently mined and processed,” Close said. “This is a waste of the state’s natural resources which are administered by the government on behalf of the people.”

Close said it was important that, via the royalty system, the WA community derive a fair return for the minerals that are exploited by mining companies.

However, Close warned it is vital that this amount be carefully determined, to avoid ‘killing the goose that lays the golden egg.’

“Royalties paid to the government might be only one of a number of similar payments that have to be made by a mining company,” Close said.

“Often payments are also made to Aboriginal custodians under Native Title agreements and sometimes also to previous holders of the mining leases being worked.

“It should be remembered that these payments must be made irrespective of whether the mining company is actually making a profit. As much as 10 percent of a company’s revenue may be eaten up in royalties and similar payments, in addition to taxes and other charges.”

Close said that mining is a long-term, high-capital cost business and investment decisions must be made on a long-term basis. If governments impose extra charges then investment confidence can be quickly eroded.