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Parliamentary Questions

Question Without Notice No. 611 asked in the Legislative Council on 13 September 2017 by Hon Robin Scott

Parliament: 40 Session: 1
Answered on

      611. Hon ROBIN SCOTT to the minister representing the Treasurer:
      (1) Is the Treasurer aware of an ABC Goldfields report published on the internet at 1.05 pm on Monday, 11 September 2017 quoting Westgold Resources' managing director, Peter Cook, to the effect that the government is treating gold, which carries substantial post-mining and processing costs, the same as it treats iron ore, for which the costs are much less?
      (2) In the light of the threshold of $Al 200 per ounce below which the intended gold tax increase would not operate, does the Treasurer agree with the statement made by Mr Cook —
          ''At $1,200 an ounce, there's virtually no gold industry left in Australia on the current cost base,''
I thank the honourable member for some notice of the question. The following information has been provided by the Treasurer.
      (1) It is recognised that the post-mining processing costs of gold and iron ore are different, which is why the iron ore royalty rate is 7.5 per cent. The ''Mineral Royalty Rate Analysis'' conducted under the former government compared royalty arrangements by mineral against a benchmark of revenue from royalties that should be broadly equivalent to 10 per cent of the total mine-head value of a mineral to help ensure a fair return to the Western Australian community from the exploitation of its mineral wealth. It was recognised that under an ad valorem royalty system, the percentage of total mine-head value returned by a royalty rate would vary around this benchmark. In relation to gold royalties, the review found that the gold industry had consistently provided a return to the community that is materially less than both the benchmark and the return provided by other commodities. For example, in 2013 gold's royalty return as a percentage of mine-head value was around half that of iron ore. In submissions to the review, the gold industry argued that its mining costs were a higher proportion of total costs than other commodities. The review found that although mining costs in the industry vary from project to project, they were, on average, no higher than for other commodities. The ''Mineral Royalty Rate Analysis'' also included a comparison of royalty rates with other Australian States and Territories. New South Wales and South Australian royalty rates are four per cent and 3.5 per cent respectively. Queensland has a tiered royalty rate of 2.5 per cent to five per cent. When the Australian gold price rises above $890 an ounce, Queensland's gold royalty rate rises to five per cent, which is much less than the Australian dollar threshold of $1 200 an ounce proposed for Western Australian producers.
      (2) Argonaut Research produced its gold sector production wrap on 2 August 2017, which indicated that the gold sector finished the June quarter with a weighted average all-in sustaining cost—AISC—of $1 077 an ounce versus a gold price of $1 675 an ounce. The gold price is not forecast to fall below $1 200 an ounce over the forward estimates. Consensus estimates, based on Consensus Economics' August survey of 29 private forecasts and using an exchange rate assumption of US79c, indicate that the gold price will average just below $Al 600 an ounce in 2017–18, rising to around $Al 620 an ounce to 2020–21. The minimum forecast is for a gold price of $Al 430 an ounce in 2017–18 and $Al 380 an ounce by 2020–21. At $A1 600 an ounce, the increase in royalty is $A20 an ounce or $A14 an ounce after company tax. This is estimated to be around three to four per cent of the average profit margin of producers, as indicated by Treasury modelling, with similar findings from Macquarie Bank, as reported in The West Australian yesterday, of a modest impact on earnings. At the minimum forecast price of $Al 380 an ounce, the increase in royalty is just $12 an ounce after company tax. Around 80 per cent of Western Australian production currently has an AISC of less than $Al 380 an ounce. The gold industry is not motionless. AISC is not independent of the gold price as producers are incentivised to bring higher cost production on line when the gold price is high, as it currently is at around $A1 670 an ounce. If the gold price were to fall in the future, average costs would be expected to fall in response as producers mothball higher cost operations. The $A1 200 an ounce threshold recognises that at this price, the industry would be finding conditions more difficult, and the government reduces the royalty rate back to 2.5 per cent.