Yesterday, at the Resources Discussion Lunch held at the Catchment Brewing Co., West End, attendees reflected on the large financial markets correction that had just occurred, but remained optimistic about the global economy. Resources sector veteran Rob Murdoch was an excellent MC who facilitated a highly enlightening and entertaining discussion of critical trends and issues affecting the sector. As you would expect at such a gathering, the issue of royalty rates was raised, and AMEC CEO Warren Pearce presented on a new Queensland Gold Royalty Rates Discussion Paper from Grant Thornton which argues:
…the current royalty rates payable by gold producers in Queensland are harming the competitiveness and future growth prospects of the local gold sector.
The report compares Queensland’s gold royalty rate, at current gold prices, of 5% with rates in NSW, SA and WA in the 2-3.5% range, and argues Queensland’s higher rate makes it less likely Queensland would see exploration for gold than other states.
The discussion paper is very interesting and should encourage further investigation, particularly by the Queensland Treasury. Alas, the discussion paper does not present any economic modelling of the impacts of changes in the gold royalty rate on Queensland Government revenue (possibly an impact of up to $20 million p.a.) or on resources sector investment and jobs. While it’s very unlikely we’d see a gold mining boom similar to the 19th century boom again in Queensland, a more competitive royalty regime may encourage some additional economic activity and jobs that would be welcome in regional Queensland.
Queensland Economy Watch 
Wouldn’t a profit-based gold tax overcome any disincentive to explore for gold in Queensland – and give it a competitive advantage?
Yes, that’s one option raised I should have mentioned in my post. Thanks Bob!
Gene
Interesting post as always.
Given the production and market risks associated with any new gold mining venture, I fail to see how a marginal difference of a couple of percentage points in the royalty rate (and only during favorable market conditions) would have any material impact on investment decisions. And where is the proof there is a problem? A higher ad valorem royalty rates is akin to a lower gold price received by the miner. No matter how much I squinted when looking at Figure 3 of the report prepared by Grant Thornton (gold price and production), I couldn’t see any relationship between the gold price and production. So what is the policy deficiency we are trying to fix here?
I know as economists we are supposed to promote profit/rent-based royalties. But do these theoretically purer options actually work as planned? Profit-based approaches seem to be a soft target for gaming by the mineral and energy sector transfer pricing (and similar) strategies. Don’t believe me? On seek.com.au today there are 74 vacancies for transfer pricing experts and 1 vacancy for an actual economists working on new projects. Simply, the commercial incentives from gaming regulatory and royalty regimes are pretty substantial. Unfortunately regulators and tax collectors don’t have the same direct incentives to be smarter/creative.
Having skim read the report by Grant Thornton, I kind of like the Queensland approach. It provides little opportunity to avoid the royalties (overcomes the gaming problem of profit-based approaches), is not materially higher than the competing jurisdictions in times of lower gold prices (no loss of competitiveness when the actual threat of shutdown is greatest), and ensures the rents attributable to higher gold prices are shared when the market dictates.
Over the lifetime of a mine, there might be a negligable impact on investments from having a marginally higher royalty rate during the good times, but I didn’t see any evidence in the report I read.
If anything, the question to Queensland Treasury should be…. Why would Queensland adopt the systems used elsewhere that encourage gaming and provide little return to the community (who own the gold resource in the first place)?
Great observations Jim. Many thanks! That’s really concerning how many jobs there are for transfer pricing experts. I’ll have a look at Seek.