By Stephen Bell
PERTH--Gold producers in Australia's most resource-rich state
have banded together to resist any increase in royalties on sales
of the precious metal, fearing a further blow to an industry
already battered by falling prices and rising costs.
The Western Australian government is reviewing royalty payments
on a range of minerals produced in the state as it seeks to boost
revenue in the face of weaker commodity prices, and to tackle
ballooning debt that has knocked down its credit rating.
Gold miners have been concerned ever since the premier of the
state, Colin Barnett, told the state legislature last week that the
current royalty on sales of the metal--currently 2.5%--was "a
little light on" compared with those applied to other minerals.
Western Australia's Gold Royalties Response Group, which
successfully lobbied against a previously mooted royalty increase
three years ago, Friday said it had re-formed.
The biggest producers in the 10-strong group are South Africa's
Gold Fields Ltd. (GFI.JO), which recently bought three mines in the
state from Barrick Gold Corp. (ABX), and U.S.-based Newmont Mining.
Smaller homegrown peers, including Perth-based Doray Minerals Ltd
(DRM.AU), are also involved.
The group said it was preparing a submission to the government's
review before the end of the month and would then seek meetings
with Mr. Barnett, as well as the state's mines and petroleum
minister.
Doray's managing director, Allan Kelly, said a higher royalty
may cause more gold mines to shut down following a spate of
closures and redundancies over the past few months.
"Anything that adds to the cost base has the potential to make
some of these mines marginal," he said in an interview. He added
that a hike in royalty payments could also undermine future
investment in the industry at a time when companies like Barrick
have already abandoned gold mines in the country's biggest
gold-producing state.
Gold miners paid 218.9 million Australian dollars (US$206.5
million) in state royalties in 2012 --up 4% on the previous year as
global bullion prices surged. Gold was one of the saving graces for
the government after mineral and petroleum royalties in the state
fell by the same percentage to A$5.1 billion amid falling commodity
prices linked to China's slowdown.
Still, gold prices have weakened significantly this year as
investors sold the metal on speculation the U.S. would soon taper
its bond-buying program, leading to gains in some so-called risk
assets as global economic prospects appeared to brighten. Investors
often buy gold as a store of value.
Gold prices have slumped to around US$1310 an ounce from close
to US$1700 an ounce in January, ending a strong run that dated back
to 2001.
The rapid decline has dented the profitability of many
Australian gold operations, with a depreciation of the local dollar
since April proving insufficient to offset the price slump.
Over the past decade, Australia has also become a high-cost
location for gold production due to rising staff and material
costs--Australia's Bureau of Resource and Energy Economics cited
the country as the second-most expensive location after South
Africa last year.
Western Australia's government is under increasing pressure to
cut spending and lift revenue after Standard & Poors last month
cut the state's prized AAA credit rating to AA+. The government has
taken on extensive debt and boosted spending on infrastructure to
exploit a decadelong mining boom driven by China's rapid
urbanization.
The boom in mining investment has recently begun to slow,
however, driving up unemployment and creating fresh problems for
Western Australia's government to tackle.
In August, the government gave some details of its review of the
royalty system, but didn't say which raw materials would likely
face increases. It said the review would look to eliminate
inconsistencies in the way royalties were levied on different
minerals and projects.
Recent state budget papers estimated A$180 million more in
royalty revenue for the government in fiscal 2015-16 as a result of
the review. Earlier this week, Mr. Barnett told reporters the
review had no target other than to ensure miners paid "correct"
royalties based on the "in-ground" value of minerals before they
are processed.
"But probably gold has been mentioned, alumina could be another
one," Mr. Barnett said.
- Write to Stephen Bell at djnews@dowjones.com
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