Mining royalties are currently a hot topic in the industry as governments globally implement, or consider, rises in mining royalties and taxes. In Brazil for example iron ore royalties are set to increase if a sliding scale comes into effect. Royalties on diamonds, gold and niobium likewise will be increasing. Conversely, in at attempt to aid the struggling construction industry, royalties on civil construction minerals (copper, sand, vermiculite etc) will be reduced.
In the Democratic Republic of Congo miners are also up in arms about royalty increases to that county's minerals. Regardless, the country's president has signed into law a new mining code that doubles the royalties payable on the country's mineral extracts, notably copper, cobalt, tantalum, gold, tin and diamonds. The move comes as the global price of cobalt in particular surges on the back of increased demand from the electric car industry. Cobalt is a primary component in the batteries required to power these vehicles and the DR Conga currently produces around 60% of the world's cobalt. Cobalt royalties could further increase if the government decides it's a strategic mineral.
In Australia, the Western Australian state government factored in royalty rises in their state budget last year whilst the Northern Territory is set to become the only mining economy globally using a hybrid based system to calculate royalties. This hybrid system will require miners to pay either 20% of profits (the existing system) or a royalty based on the value of gross mineral production revenue, whichever is greater. This value-based royalty will also scale up the longer the company is operating.
But what is a royalty anyway?
As indicated by the term itself, 'royalty' is the name given to a right or privilege that has been retained by the Crown (or government of a country). We can trace its use back to at least 1400 when it was used by the British Crown to refer to rights and privileges it (the crown) retained. Notably this applied to what was referred to as 'crown land' and any assets on that land. The concept of crown land is still alive and well in many Commonwealth countries today, where it refers to land owned by the government of that country.
Government owned land however is not just restricted to Commonwealth, or ex Commonwealth countries. Most governments in most countries own a fair percentage of the land in their country. And in some countries that ownership extends to certain aspects of privately owned land as well. Notably to what lies below the ground! In other words, that chunk of real estate you are spending a large percentage of your life working to pay off and finally own, may only be yours to a certain depth below ground. And height above ground too incidentally. This means any minerals that may lie in the ground beneath your property may not be yours at all.
The laws around ownership of minerals on private land vary from country to country but many governments have ensured they retain all rights to 'precious' or strategic minerals. Traditionally this means gold and silver plus a few others depending on their commercial value to the country. So if you were to find a gold deposit on your land, in many countries you would not legally own this gold deposit. Your government does. And your government would probably have the right to dig it up or allow a mining company to dig it up. Granted, you would likely be paid some form of compensation for losing your land and you may, as the owner of the surface land, find you must be approached to grant right of access but that could well be about the extent of your rights.
Additionally your government, as the legal owner of the gold, will probably charge the mining company a type of rent or compensation in return for allowing said company to dig it up. This is a mining royalty. Just how much royalty the mining company needs to pay the government generally depends on the value, volume or profit they make from that gold. It's the same principle with other minerals.
Most governments retain ownership of most important minerals and deposits. This is regardless of who owns the surface land above them. This includes water (notably underground water), coal, oil, gas, iron ore and most precious or commercially important minerals.
Having said this, there are still certain types of minerals and deposits that are generally exempt from government ownership, although obviously there will be exceptions in countries where these are deemed to be commercially significant resources. Private land owners for example are usually allowed to retain legal ownership of commodities like limestone, clay, gravel etc located on their property.
Tax Plus Royalties Equals A Lot Of Money
A key fact about royalties is that they're payable on top of the corporate taxes already paid by mining companies. In a country like Australia, it means that big mining companies like BHP Billiton are contributing nearly 9 billion AUD annually to the Australian economy. Roughly half of this is by way of royalties whilst the other half is corporate tax. In fact, the Deloitte Access Economics' Minerals Industry Tax Survey 2017 found that for the decade ending 30/6/2016, the Australian Mining Industry paid AUD$185 billion in royalties and corporate taxes.
The Effects Of Increasing Royalty Rates On Mining Employment
So what of the flow effect of mining royalty increases on mining projects themselves and ultimately on employment prospects within the industry? The mining industry claims that any increase in royalties seriously hampers both current and future mining projects. Certainly in the case of marginal operations they have a point. Any operation that is currently struggling to make a profit will feel the pinch. And one of the first things that usually happens when a mining company is feeling the pinch financially are staff cuts. Current employees deemed superfluous to requirements are laid off and hiring is put on hold. However, it has to be said that when the global prices for some of these commodities increases out of sight, it's understandable that developing economies like the DR Congo want a greater share of the proceeds.