This article was written by Stuart Courtney, Ari Rosenbaum and Mark Giuseppini
On 11 September 2017, the Court of Appeal of the Supreme Court of Western Australia in Placer Dome Inc v Commissioner of State Revenue  WASCA 165 allowed an appeal by Placer Dome Inc (PDI), holding that:
- the decision of the WA State Administrative Tribunal (Tribunal), which had dismissed PDI's application to review a determination made by the Commissioner of State Revenue (Commissioner), should be set aside; and
- the matter should be remitted to a differently constituted Tribunal for reconsideration of certain matters.
Although the decision concerns the old land rich provisions in the Stamp Act 1921 (WA) (Act), this judgment contains significant guidance that should be applicable to valuing goodwill generally and to valuing land in the context of the current landholder duty provisions, in particular with respect to transactions in the mining sector.
The case involved an acquisition of shares in PDI by Barrick Gold Corporation as part of a merger of two of the world's largest goldmining companies, resulting in the creation of what was at the time the world's largest goldmining business. At the time of the acquisition, PDI had significant goldmining interests in Western Australia.
The Commissioner assessed stamp duty payable on the acquisition for approximately $55 million. This was on the basis that PDI was a 'listed landholder corporation' under the Act. A corporation was a 'listed landholder corporation' under s 76ATI if, among other things, the value of all land to which the corporation was entitled was 60% or more of the value of all property to which it was entitled.
PDI objected to the Commissioner's assessment, claiming that its land to asset ratio was below 60% (and that it was therefore not liable for duty on the acquisition). In 2014 the Commissioner disallowed PDI's objection. PDI then applied to the Tribunal for review, which was dismissed.
On its appeal to the Court of Appeal, PDI contended that the Tribunal erred:
- by failing to distinguish between the value of the land held by PDI and the value of the business which it conducted using that land; and
- by accepting evidence which had relied on the use of gold futures prices for the purposes of valuing PDI's land assets.
Valuation of PDI's landholdings
The Tribunal had preferred a 'top down' approach to valuing PDI's land. This essentially involved taking the value of the acquisition as a proxy for all of PDI's property and then subtracting the value of PDI's non-land assets (including goodwill), leaving a residual value for the land assets. The Tribunal accepted the Commissioner's contention that PDI had no goodwill of any value because the value of a mining company producing a fungible commodity like gold would generally correspond to the value of the land from which the commodity was produced.
The Court agreed with PDI that the Tribunal erred in its approach to valuing PDI's landholdings. This was on the basis that the Tribunal's approach did not accord with the natural and ordinary meaning of the words used in s 76ATI, which required an ascertainment of the value of the land to which PDI was entitled. The Court held that land can, and should, be valued using conventional valuation principles (i.e. by reference to the price which a willing but not anxious vendor could reasonably expect to obtain, and a willing but not anxious purchaser could reasonably expect to pay after proper negotiations between them have been concluded).
Although the Court acknowledged that there may be cases in which the value of the land could be derived through the process of deduction proposed by the Tribunal, this was not such a case. This was because some of the components that added value to PDI, a substantial going concern, did not correspond to identifiable items of property. The Court found that the Tribunal had erroneously confused the sources of PDI's goodwill with PDI's goodwill itself (which, based on the evidence, the Court found would be substantial). In those circumstances, the Court held that it would be essential to value the goodwill of the business with accuracy if the top down approach was used to value the land. To value the goodwill accurately would require an accurate valuation of all of PDI's tangible assets (including its land) first. This meant that the task of valuing PDI's goodwill under the top down approach would be an unnecessary distraction from the statutory task of valuing the land.
The Court also held that the Tribunal erred in holding that s 33(1)(c) of the Act required land in the form of mining tenements to be valued using the top down approach. Under section 33(1), when applying the ordinary principles of valuation, among other things, it is to be assumed that a hypothetical purchaser would, when negotiating the price of the land or other property, have knowledge of all existing information relating to the land or other property. The Court found that the Tribunal's conclusion required land in the form of a mining tenement to be valued as a fully operational mine, by reference to a hypothetical transaction in which the purchaser acquires not only the land, but the rights to continue the employment of all personnel and to continue operating the mine as a going concern. The Court held that such an approach cannot be sustained by any of the language contained in s 33(1)(c), which is concerned only with access to information.
The goodwill issue
The Tribunal had concluded that there was no evidence to support the claim that PDI's business included a substantial amount of goodwill (other than goodwill for accounting purposes). However, the Court found that there was ample evidence of substantial goodwill in PDI's business being derived from:
- the technical capabilities of its personnel;
- its global operating structure;
- its development of innovative mining techniques;
- its "strong and experienced project group";
- its management systems and structures; and
- the economic benefits that an acquirer could realise by merging PDI's business with its own business.
Use of commodity futures prices to value a miner's assets
A separate issue considered by the Court was whether it was appropriate for the Tribunal to accept evidence of the value of PDI's land assets by reference to a discounted cash flow methodology utilising the price of gold futures at the date of acquisition (and where these are not available, escalating those prices indefinitely at an annual rate (real) of 2%).
The Court held that the price of gold futures contracts is not an estimate of the future spot price of gold, and that parties to transactions for the sale and purchase of goldmining assets assess price by reference to factors including:
- the current price of gold;
- estimates of the future price of gold; and
- historical averages.
This case contains a number of useful principles applicable to the valuation of goodwill and land, particularly in a landholder duty context.
If you are considering acquiring shares or units in a landholder, you should consider the impact of this case. We have significant experience in this area and can assist you with working out the best approach to valuation issues.