Written by Scott Langford, Lachlan Fahey, Danielle Parry, Jordan Osrin.
Victoria appears to be primed for a new 'gold rush'. With gold production at record levels, and significant increases in gold exploration expenditure, employment, and foreign investment interest in Victorian gold mines, a resurgence of Victoria's gold industry is under way.
This is all occurring at a time where we are seeing a combination of global uncertainty, and a weak Australian dollar, pushing the price of gold to record highs for Australian producers.
Victoria's gold industry 'renaissance' has been buoyed by the State Government's decision to release about 1,500 square kilometres of land within the North Central Goldfields region for exploration. This new gold rush comes with a price, however, as the new year sees the introduction of Victoria's first gold royalty.
North Central Victorian Goldfields Ground Release
On 29 October 2019, the Victorian Government ("Government") released 4 blocks of prospective exploration ground ("Blocks") to a competitive tender process. The Blocks range in area from 327 to 512 square kilometres, in the North Central Goldfields region. They are located in a prospective exploration region near the highly successful Fosterville Gold Mine (owned by Toronto-based Kirkland Lake Gold).
A map displaying the location of each Block may be accessed on the Government's website via this link.
Given the region's storied history, the focus of the tender process is on exploration for gold deposits. The Geological Survey of Victoria has estimated there may be up to 75 million ounces of gold yet to be discovered in northern Victoria. However, except for coal and gas, the Government is also willing to consider tenders that propose exploration for other minerals.
The Government has emphasised that the evaluation process for awarding the Blocks will consider companies with a record of responsible minerals exploration. The Government has also indicated that it will, in selecting the successful tenderer(s), look favourably upon companies that demonstrate a commitment to engaging with Traditional Owners, local stakeholders and local communities, and providing benefits to local communities by boosting jobs. Indigenous communities will also be given the opportunity to assess each applicant's ability to develop relationships with Traditional Owners and work with consideration of cultural heritage.
The successful tenderer will be given the exclusive right to apply for a minerals exploration licence over the relevant Block(s). This application will be made in accordance with the usual process under the Mineral Resources (Sustainable Development) Act 1990 (Vic) (the "Act").
The Victorian Government has recently announced an extension for submissions, to allow companies to comply with additional information requirements, which the Government has announced in order to more closely align with the requirements imposed on applicants under the Mineral Resources (Sustainable Development) (Mineral Industries) Regulations 2019 (Vic) (the "Regulations"). Companies now have until 14 February 2020 to submit a tender for one or more of the Blocks.
New Victorian Gold Royalty
The release of new land for minerals exploration in the central Victorian region came just months before the introduction of Victoria's first gold royalty.
The Victorian Government took the State's emerging gold industry by surprise when, as part of the 2019-20 Victorian State Budget, it announced it would remove the exemption of gold from royalties. On 1 January 2020, a royalty, set at 2.75 per cent of the net market value of gold produced, came into effect. The royalty will not apply to the first 2,500 ounces of gold production per annum, with mining licences being the only types of permits affected by this change. The Government has previously said that it expects to reap about $56 million over four years through the royalty.
Prior to the introduction of this royalty, gold was the only mineral (other than brown coal) exempt from royalties in Victoria. This placed Victoria as the only major gold producing jurisdiction in Australia that did not collect a return on gold production. The Government announced the change to Victoria's royalty regime to "bring parity and consistency, by ensuring that the Victorian community receives a similar return from the mining of resources in the State, to those in other parts of Australia, and across the globe." In the absence of this change, Victoria would have remained an outlier as the only significant Australian gold producing jurisdiction that did not collect a royalty or resource rent tax on gold production.
The comparative table below sets out the applicable gold royalty rate and 'royalty free' threshold in Victoria and other jurisdictions in Australia:
||Gold royalty rate|| 'Royalty free' thresholds
|New South Wales|| 4%
|Queensland|| Between 2.5% and 5% (depending on average metal prices)
||Not payable on first $100,000 of the total value of gold mined at a site and sold in a financial year.
|| 3.5% (for refined gold products)
5% (for mineral ore and concentrate gold products)
|Victoria|| Previous rate: n/a
New rate: 2.75%
|Not payable on first 2,500 ounces per annum.
|Western Australia|| 2.5%
||Not payable on first 2,500 ounces per annum.
|Tasmania|| 1.9% of net sales, plus profit (up to a maximum royalty rate of 5.35% of net sales)
||10% = rebate on royalty payable for gold doré produced in Tasmania from a mine in Tasmania.
|Northern Territory|| The greater of:
||Not payable where the annual gross revenue of a production unit is less than $500,000.
How will the Victorian gold royalty work?
Prior to the introduction of the gold royalty, the Regulations provided that royalties for any mineral, other than gold or lignite (brown coal), are payable by the holder of a mining licence or the holder of a prospecting licence at the rate of 2.75 per cent of the net market value of the mineral produced.
The Government has amended the Regulations to remove the exemption of gold from royalties. Removing this exemption will mean that holders of a mining licence will be required to pay a royalty on gold produced under the licence at the rate of 2.75 per cent of the net market value of the gold produced.
Under the amended Regulations, a royalty is imposed on the "net market value" of the gold produced, which is the market value of the mineral at the time it is first sold, transferred or disposed of, less any costs reasonably, necessarily and directly incurred by the licensee in connection with the sale, transfer or disposal (including insurance, freight and marketing expenses).
The royalty will only apply to gold produced under a mining licence – accordingly, it does not apply to gold produced under a 'lesser' tenure, such as a miner's right permit. Furthermore, it will not apply to the first 2,500 ounces of gold produced under a mining licence during each financial year. Gold producers will also receive the benefit of the full 2,500 ounce low-production threshold during the initial six-month period from 1 January 2020 to 30 June 2020.
Who will be affected by the gold royalty?
The gold royalty will apply to all existing and future Victorian mines that produce gold under a mining licence. This royalty will only affect mines that produce over 2,500 ounces of gold per financial year, and will only apply to gold produced after 1 January 2020. The current top gold producers in Victoria include:
- Kirkland Lake Gold, which owns the Fosterville Gold Mine and produced 281,997 ounces of gold in the 2017-18 financial year;
- Castlemaine Goldfields, which owns the Ballarat Goldfield and produced 38,858 ounces of gold in the same year; and
- Mandalay Resource Corporation, which owns the Costerfield mine and produced 26,905 ounces of gold in the same year.
The Fosterville Gold Mine, which became one of the most profitable gold mines in Australia after deep drilling operations uncovered high-grade gold deposits in 2015, is projected to bear the large majority of the estimated $56 million the Government expects to raise over the royalty's first four years.
The recent increase in exploration activity in the Victorian gold industry may mean that additional mines will become subject to the royalty in the future. Simulations by the Geological Survey of Victoria suggest that there may be up to 75 million ounces of gold still located underground in northern Victoria, which has spurred renewed activity and investment in current operating mines, as well as new exploration activity. For instance, the Stawell Gold Mine was reopened in 2017 after its acquisition by Arete Capital. In January 2019, Stawell poured its first gold bar since closing in December 2016.
How has industry responded?
The gold royalty has met with both criticism and, perhaps more surprisingly, support from the Victorian gold industry.
Opponents of the royalty comprise many mining companies and the Minerals Council of Australia, whose concerns include:
- lack of consultation with industry prior to announcing the royalty;
- decreased investment in the gold industry as a result of the royalty;
- hindrance of further exploration and development needed to maintain or grow production;
- discouragement of gold exploration in Victoria;
- negative impact on the viability of small local gold mines;
- confusion in the industry as to how the royalty will be calculated; and
- the potential for the State to raise much more money from the industry than it has forecast, the large majority of which would come from the Fosterville Gold Mine.
Proponents of the royalty include gold explorer Navarre Minerals, whose managing director, Geoff McDermott, has stated that the royalty "is a very small amount and at the end of the day the minerals belong to the state and we want to pull our weight like other industries."
After not being consulted prior to the Government announcing the gold royalty, the gold industry and other interested parties were given the opportunity to make submissions on the proposed royalty and the amended Regulations, as part of a public consultation process. The gold industry's submissions largely reflected the views set out above, and included suggestions for improving the royalty, such as expanding exemptions to the royalty, reducing the royalty rate and raising the annual 2,500 ounces production threshold for the royalty to apply.
On 9 December 2019, following consideration of all submissions on the proposed gold royalty and the exposure draft of the amended Regulations, the responsible Minister gave notice in the Victorian Government Gazette recommending that the consultation draft of the amended Regulations be 'prescribed' without amendment. In short, the Government stated that it considered that the proposed changes to the gold royalty in submissions from industry were not compatible with the State's existing royalty regime or announced policy objectives.
The amended Regulations were published in the Victorian Government Gazette on 10 December 2019, at which point the amendment came into effect as a new statutory rule. This means that, for the first time in Victoria's history, a royalty is imposed on gold production in Victoria, effective from 1 January 2020.
The amended Regulations can, however, still be disallowed in whole or in part by resolution of either Victorian House of Parliament. A copy of the statutory rule must now be laid before each House of the Parliament within the 6th sitting day after notice of the making of a statutory rule was made in the Gazette. The statutory rule can then be disallowed in whole or in part if a notice of a resolution to disallow the statutory rule is given in either House of Parliament.
As the amended Regulations were released after the final Parliamentary sitting week for 2019, industry and the Opposition will have to wait until the amended Regulations are tabled in Parliament when Parliament next sits in February 2020, to launch a disallowance motion against the gold royalty.
The Victorian Opposition has already announced that it will move to disallow the amended Regulations, saying that the "tax grab" will negatively impact investment and employment. Overturning the gold royalty will be a difficult task for the Opposition, however, as the Labor Party currently controls 18 of the 40 seats in Victoria's upper house (the Legislative Council), while the Liberal National Party coalition only controls 11 seats. This means that 10 of the 11 'crossbenchers' would need to oppose the royalty for the disallowance motion to succeed.
Assuming the amended Regulations are not disallowed in this way, the gold royalty will remain in effect from 1 January 2020.
Peter Ker, 'Gold explorer says Victoria's royalty hike is 'only fair'', Australian Financial Review, (Article, 27 March 2019), < https://www.afr.com/politics/gold-explorer-says-victoria-s-royalty-hike-is-only-fair-20190527-p51rj3>.
 In 2017, the Western Australian Labor government abandoned plans to increase the state's gold royalty rate from 2.5% to 3.75%.
See p 48 of the Regulatory Impact Statement (for the proposed amendment to the Regulations to remove the exemption of gold from royalties) for international gold royalty rates: accessible at <https://s3.ap-southeast-2.amazonaws.com/hdp.au.prod.app.vic-engage.files/3615/6876/6354/RIS-Gold_royalty.pdf>.