July 1, 2003

Criticism piles against royalty bill

The draft Mineral and Petroleum Royalty Bill continued to attract strong criticism yesterday for its potential to deter investment in the mining industry, but treasury officials said they would reserve comment for “a month or so” to get a wider range of comments. The bill, a key companion piece to the Mineral and Petroleum Resources Development Act, which passes the ownership of mineral rights from private to state hands, has been attacked by mining houses and financiers alike.

Finance minister Trevor Manuel told mining executives at the end of April he would stick to plans to levy royalties, but was willing to discuss concerns over proposals to impose a levey of between 1 percent and 8 percent on gross sales. The latest criticism came yesterday from Eric Lilford of Investec’s Resource Finance department, who said that while the act was “workable” and could “make a substantial contribution to enticing investment,” the royalty bill “seems to be rather punitive to the industry”. “The impact of the royalty bill in its current form will be far-reaching and extremely damaging over the long-term. In principle, it is intended to generate revenues for the country, but in reality, it will result in unintended adverse consequences,” Lilford said. He was particularly concerned that the bill would reduce the fundamental values of all mineral properties while royalties would take precedence over debt redemption. ‘Therefore, providers of finance may have to consider longer facility terms or require greater equity contributions by the sponsors,” Lilford said. “This will contribute to higher project hurdle rates, resulting in less attractive projects not being financed. ‘As a consequence, the greatest repercussion will be felt by black economic empowerment groups. ”While income to the state would be increased initially, “over the longer term, mines will have shorter lives, leaving or uneconomic to mine in the ground. This may in due course lead to wide-scale unemployment in the mining industry, possibly negating the earlier benefits,” he said.

Current mining taxation rates were already internationally competitive but the royalty would effectively be an additional tax, which would reduce profits and have a direct impact on shareholder value, he said. “The impact that this legislation, combined with the mineral act, will have on mineral property and project values is not to be underestimated,” Lilford said. A Chamber of Mines study had found that the introduction of a 3 percent royalty in thegold sector would have a major negative impact on the viability of many mines, particularly affecting new projects, he said. (BUSINESS REPORT, Johannesburg)

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