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Northern Territory

Jun 9, 2010

Life under NT’s profit-based royalty regime: Xstrata has no complaints

Under the Northern Territory's profit-based royalty regime, Xstrata's McArthur River mine has only paid royalties for 2 years out of the 15 years it has been operating.

Despite Xstrata’s vehement opposition to the Federal Government’s RSPT proposal, it seems to have found life under the Northern Territory’s profit-based royalty regime very comfortable indeed.

Xstrata owns the McArthur River Mine, which is one of the world’s biggest lead, zinc and silver deposits. The mine, about 80 kilometres south of Borroloolla, commenced operating in 1995 under MIM, back when Xstrata was just a motley gathering of mining investments by Swiss-based tax avoiders Glencore. Xstrata bought MIM in 2003.

The NT is the only jurisdiction in Australia to have a purely profit-based royalty regime — introduced by those rabid communists the Country Liberal Party in 1982. The CLP originally wanted to introduce it at 35% but were browbeaten by the mining industry into setting it at 18%. Recently, Paul Henderson’s NT Government bumped it up to 20%. The NT royalty allows losses to be carried forward, but only against the same project — not used across a company’s operations like the RSPT would permit.

It also allows for creative accounting in determining what Net Value will be the basis for the royalty. That’s why first MIM, and then Xstrata, never paid a cent of royalties throughout the life of McArthur River to the NT Government — all perfectly legally.

It was only after Xstrata’s 2006 proposal to turn MRM into an open-cut mine that required the diversion of the McArthur River that attention was focused on its failure, and that of its predecessor, to pay anything.

The NT Government has consistently refused to reveal what royalties it has received from the mine, citing the confidentiality requirements of its Taxation Administration Act. In 2006, a document was leaked to the NT ABC showing not just that the mine paid no royalties, it was receiving a $5m pa subsidy from the Government.

The Xstrata proposal to expand the mine, and its approval by Clare Martin’s Government, infuriated traditional owners and environmentalists who took court action to overturn the NT Government’s approval and the approval of the expansion by then-Federal Environment Minister Ian Campbell. Action in the Territory Supreme Court to overturn the NT Government’s approval was successful, prompting Clare Martin to rush through emergency legislation in May 2007 to restore the mine’s approval.

Federal Court action to overturn the Federal approval was also successful in December 2008. Xstrata had to immediately shut down the mine. By 20 February last year, Peter Garrett had confirmed the mine’s approval, and it reopened immediately.

But after the fuss about MIM/Xstrata’s failure to pay any royalties from the mine, in July 2007 Xstrata suddenly produced a royalty payment: a half-year payment of $13m. It attributed the payment to improved profitability due to the conversion to open-cut mining — despite incurring a $110m cost to convert the mine and divert the McArthur River into a canal. Intriguing circumstances in which to make the mine’s first profit in 12 years of operation.

The subsidy to Xstrata, which Territory sources say has increased to $8m a year, has continued.

The Northern Territory Treasury told Crikey it was not permitted to reveal taxation details about individual entities — the same line its officials gave a Senate inquiry last year, which considered the NT royalty system and heard extensive evidence about MIM/Xstrata’s failure to pay royalties. However, Xstrata Zinc, the Xstrata subsidiary that operates MRM, was more forthcoming about what royalties it has paid since 2007.

The mine did pay a royalty in 2008, a spokeswoman told Crikey, although without revealing how much. However, none was paid in 2009. This was blamed on the two-month closure and the GFC — and because of Xstrata’s capital investment program. “Xstrata has invested $340 million in capital expenditure in MRM since acquiring the company in 2003. The NT Treasury audits MRM’s financial reports annually to assess the royalty payment due. MRM has complied fully with the terms of the McArthur River Project Agreement Ratification Act 1993, the Mineral Royalty Act and development approval conditions,” said the spokeswoman.

The chances of the McArthur River mine even paying back what it will receive in Government subsidies over the course of its life don’t look good.

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7 comments

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7 thoughts on “Life under NT’s profit-based royalty regime: Xstrata has no complaints

  1. Mark Duffett

    This case is pretty strong evidence against a profits-based tax, yes? So now you’re arguing against the RSPT, Bernard?

    If I may again be permitted the modest cough of the minor pundit, I did say that creative accounting was likely to be a problem for the RSPT, right at the outset:

    …the sector that will certainly be strengthened is the accounting industry. Expect a lot of innovations in this area as companies (particularly multinationals) look to divorce as much of their profit reporting from their Australian mines as possible, e.g. by cross-subsidising overseas operations.

    Whatever their other shortcomings, at least mineral royalties have the great advantage of being very easily measured and levied.

  2. jungarrayi

    I seem to recall some serious questions were asked about X-Strata in a (4-corners?) programme some years ago regarding the permanent “mothballing” of a cobalt deposit in WA. Did X-strata ever provide a satisfactory response? Glencore (Xstrata’s “creator”) conrolled a huge cobalt deposit in South Africa? at the time.
    Sometime after, Xstrata tried to gain control of Roxby Downs (the worlds largest? uranium resource), only to be beaten by the “Big South African”.
    If the Rudd Government hadn’t betrayed remote Aboriginal Australia the way it did (I live on a “prescribed area”) they’d have my full sympathy in relation to the “super tax”.
    As for “we’ll take our projects elsewhere”. I’m a geologist and fail to see how they can.
    Tectonic plates move very slowly.
    As for the patronising advertisements (from both sides), too much repetition is counterproductive. Bloody annoying aren’t they?

  3. John Bennetts

    This is the type of behaviour which we have come to expect from large miners. Allow me to add a few more words which may or may not hit your funny bone:
    International
    Swiss based
    Secretive
    Zugg, tax haven
    Privately owned
    Large
    Tax avoidance
    Transfer payments.

    Read into these words what you may. I believe that Xstrata is not the kind of corporation which would hang onto a loss-making operation for more than a decade, in the hope of future profits. They are much too smart for that.

    In fact, it appears that they are much too smart for NT tax collectors, who once again have clearly failed in the game of hide and seek which passes for international accounting in the 21st century.

  4. Legrosbisson

    A subsidised mine is hilarious, isn’t it? The NT government was hoodwinked by a simple transfer pricing method which newly independent African countries had learned to provide against by the mid 1970’s. One has to be confident the federal government would be less prone to being duped in this way.

    In this case the mining subsidiary sold ore to a barge company subsidiary, which then carried the ore to deepwater ships in the Gulf of Carpentaria. Any profits were made by the barge company and others up the vertically-integrated set of subsidiaries.

    Xstrata’s recent dramatic RSPT-responding announcement to media of cancellation of projects is another favourite of this company. Xstrata put the NT Government under great pressure with announcements it was running out of ore on its side of the riiver and would have to close, with television advertised loss of local jobs, if river diversion was not approved pronto. The NT G arranged this, granting approvals which were nullified in Court for lack of proper process, then legislating away the process hurdles in order to meet Xstrata’s deadline.

    The river was diverted in the nick of time to save the jobs, but separate litigation commenced and held-up the mine expansion into the river bed. Xstrata then found that ore already on its original side of the river – ore it had told government and the public was uneconomic – could carry it through after all, explaining this with unspecified technological improvements.

  5. davidk

    Would you people please leave Xstrata alone. Don’t you know they create hundreds of jobs out of the goodness of their hearts and saved us from the GFC. Surely a small consideration from the NT government is little to ask in return for their expertise.

  6. Bennelong Time

    Did Xstrata or the NTG consider the Mens Initiation site that has been wiped from existence, damaging not only the Rainbow Serpent (the river) but the religious vitality & cultural integrity 0f Gulf descendants?!
    Surely a small consideration that doesn’t cost $8m is little to ask, & in return, all they need to do is f@*k off!

    PS. The Mining Tax Rally in Perth was the swankiest protest I’ve ever seen, most of the suits, jewelry & watches could fund all the upcoming protest campaigns across the country this year!

  7. jungarrayi

    I first became aware of price transference in 1971. As a young geologist I had been involved in a coal search in WA for an exploration company owned by the largest individual owner of bulk shipping capacity in the world. DKL also controled an iron ore deposit and manganese deposits in WA. In Canada I met a geologist that had also worked for a company owned by DKL. In his case he’d been involved in exploration for phosphate in Morroco.
    Because of failure to find coal in the Kimberleys DKL’s scheme never came to fruition.
    This is how it works, coal, iron and manganese mines in WA are run at a loss (hence would be immune to a profits based tax, or most taxes for that matter). The product: a high manganese content lump iron ore, supplying a niche European market- at a time when all iron ore exports from Australia were to a much closer Asia. The ships then back-load phosphate (the Nauru etc. sources nearing exhaustion at the time) from the loss producing Morrocan mines. So Morroco’s super-tax, if they had one, would have been to no avail.
    Meanwhile the Panamanian or Liberian registered bulk carriers, fully loaded in both directions, make huge untaxed profits.
    The big miners “chicken little” posture doesn’t impress me one bit. Neither does Kevin Rudd’s arrogant policy by decree. As for the Mad Monk, heaven forbid!