Mining royalty review: Grandfathered permits costing Crown hundreds of millions of dollars

None of the country’s largest miners – coalminers Bathurst Resources, BT mining, and gold and silver miner OceanaGold – has ever paid the 2013 royalty rate.

Massey University professor Glenn Banks called the grandfathering provisions “extensive loopholes” that he estimated will cost New Zealand hundreds of millions of dollars, especially as large new mining projects currently being assessed for consents under the Fast-Track Act are on grandfathered royalty terms.

He said any review should consider how to end the grandfathering.

The largely unchanged state of royalty obligations since 2013 is, in part, a function of how little new mining has happened in New Zealand over the period and of the extended length of time it takes companies to achieve fully consented new projects.

Mining companies emphasise that the government permits constitute contracts, which should not be unilaterally changed.

OceanaGold’s senior vice-president for legal and public affairs, Alison Paul, previously told the Herald that miners make large up-front investments in exploration on assumptions around the potential return on investment, and it would be inappropriate to retrospectively change what is, in effect, a contract.

An OceanaGold spokesman said executives were in business planning meetings and were not available to comment on the upcoming review.

Bathurst Resources did not respond to a request for comment.

Royalties are intended to compensate the owner of a non-renewable resource, in this case the Crown, and ensure a fair financial return.

This week, the Ministry of Business, Innovation and Employment (MBIE) issued a tender for advice and economic modelling to inform a review of New Zealand’s royalty regime for minerals, excluding petroleum, next year.

The review will assess whether current royalty settings deliver a “fair financial return to the Crown” and will consider alternative approaches to ensure the regime remains fit for purpose.

A spokeswoman for Resources Minister Shane Jones said that “all aspects of the current regime will be evaluated and used to inform policy recommendations” and that no decisions will be made until after the next general election.

The last royalty change came into effect in May 2013. The minerals royalty rate rose to an annual 2% of a miner’s net revenue or 10% of accounting profit, whichever is higher – the rate applies to large, so-called tier 1 projects.

The previous rate, fixed in 1996, is 1% of net revenue or 5% of accounting profit.

In addition, a brief 2008 regime dispensed with the accounting profit measure and fixed the royalty rate at 1.5% of net revenue for a handful of permits.

Some current permits carry royalty terms that predate the 1996 regime.

When royalty rates rose in 2013, existing mining permits were exempt from the new regime, and, in addition, any new mining permits issued after 2013, which are considered subsequent to precursor prospecting or exploration permits issued under previous regimes, also receive grandfathered terms.

In the case of Bathurst’s most recently issued mining permit (60138), granted in July, the royalty rate was grandfathered on the basis that the permit is subsequent to an exploration permit granted in 2002.

Grandfathered terms also persist through permit duration extensions for existing permits and even through permit land extensions used to expand permitted acreage, under certain terms.

MBIE data shows that, of the dozen new tier 1 mining permits issued since 2013, seven carry the royalty terms of the 2013 regime, and, of these, only one is in active production: it forms part of the Rajah Mine near Greymouth, which produces hard coking coal used in steel-making.

The balance of those new tier 1 permits carry terms related to earlier royalty regimes.

“Frankly, it’s ludicrous that the country increased royalty rates 12 years ago because we decided that we weren’t getting as much in royalties as we should be getting, we doubled those rates, and we’re still not receiving any of that increase. It’s also becoming very clear that in many cases, we won’t be getting those new rates for many, many decades into the future,” Banks told the Herald.

Mining projects typically pay larger sums in tax, including corporate tax and employee income tax, than their royalty obligations. Stats NZ figures show that mining jobs are among the best-paid in the country; however, royalties are viewed by many as symbolically significant, since they represent the Crown’s direct share of the value of non-renewable resources.

Patrick Phelps, manager of mining advocacy group Minerals West Coast, said he was unaware of how extensively New Zealand’s current production is grandfathered to pre-2013 royalty regimes.

He said he’d be happy for MBIE to consider whether this is appropriate, a matter on which he said he doesn’t have a well-formed view, though he emphasised that mining returns are uncertain, and that New Zealand must remain competitive if it wants to attract mining investment in a world where such capital is highly mobile.

He emphasised that mining is responsible for very considerable foreign direct investment, which constitutes an economic good that is additional to direct tax and royalty payments.

The Government aims to double New Zealand’s mineral exports to a value of $3 billion annually by 2035, and thereby plump economic growth.

Labour’s resources spokeswoman, Megan Woods, declined to comment because the party has not yet announced its energy policy.

While a National Government under Prime Minister John Key brought in the royalty regime of 2013, Labour left the regime unaltered through its six years as the Government to 2023.

It is not unusual for countries to include sunset provisions in any grandfathering allowed when royalty regimes change, though it is frequently contentious and sometimes subject to legal challenge.

Green Party resources spokesman Steve Abel told the Herald, “It will be shocking to most people to know how many mining companies pay such low royalties based on these archaic regimes”.

The party’s Green Budget promises to double the 2013 royalty rate, to 4% of net revenue or 20% of accounting profit, whichever is higher.

Abel also said any new permits must be based on the royalty rate at the time of issuance, “not on the grandparented rate from the date of exploration”.

“Furthermore, we would look at retrospectively correcting royalty rates so that they were consistent with the royalty rate at the time of being issued,” he said.

The Greens are also against permitting any new hard rock gold, coal or seabed mining.

Earlier this month, the party announced that it aims to revoke any consents or permits handed out under the current fast-track process for such projects.

Two important new gold mining projects, listed under the Fast-Track Act and not yet in production, will also pay the 1996 royalty rate if they go ahead.

In the case of OceanaGold’s Waihī North expansion, currently under consideration for full consenting, one of its two relevant mining permits (60541) was issued in 2020 and runs to 2060. The permit is a “subsequent permit” to an exploration permit granted in 2003. The royalty rate is grandfathered to the 1996 regime.

The second permit (41808) was issued in 2004 and extended; it runs to 2044. An extension of duration was granted in 2023 for a period of 15 years, starting in 2029. In addition, the area the permit covers has been increased twice – in 2017 and in 2020 – through “an extension of land”. This permit also carries a 1996-era royalty.

OceanaGold estimates that the Waihī North project will generate royalties to the Crown of $131 million over a lifetime of roughly 10 years (based on paying 5% of accounting profits); Banks said a back-of-the-envelope calculation suggests that if the project were subject to the current royalty regime, it would generate $261m in royalties.

A second OceanaGold project listed under the fast-track legislation is an extension of its Macraes mine, known as Macraes Phase Four.

The project relies on two mining permits, 41064 and 52738. The former was issued in 1993 and expires in 2030 – under the current grandfathering provisions, an extension would preserve the permit’s 1996-era royalty obligations. Permit 52738 is subject to the 2008 royalty regime and bears a royalty obligation of 1.5% of net revenue.

In addition, Endura Mining’s planned Snowy River mine near Reefton, which is fully consented and not a fast-track project, is also grandfathered to the 1996 royalty regime. First commercial production is expected in 2027.

Other fast-track mining projects carry current 2013 royalty obligations. These include: Santana Minerals’ planned Bendigo Ophir mine in Central Otago; Trans-Tasman Resources’ Taranaki VTM Project to mine ironsands from the seabed; and likely Bathurst Resources’ Buller Plateaux Continuation and Rotowaro Continuation projects.

An MBIE spokeswoman said Bathurst has not submitted a formal fast-track application for the Buller and Rotowaro projects, but that the ministry understands that minerals mining permits that may be sought for these projects under the Fast-Track Approvals Act would be subject to 2013 royalty rates.

New data from New Zealand Petroleum & Minerals shows that in fiscal 24/25 the Crown’s take from gold royalties rose 26% to $11.6m, lifted by an international gold price that climbed past US$3400 an ounce, and has recently soared past US$4000 an ounce.

Gold production totalled 213 koz (213,000 troy ounces) in the year, slightly lower than 220 koz in 2023. OceanaGold’s Macraes and Waihī mines contributed 84% of the total output.

Coal royalties declined from $3.66m to $1.78m, driven by lower prices and slightly lower output at the Stockton Mine, owned by BT Mining Limited, a joint venture between Bathurst Resources and Talley’s Group.

Coal production in the year was 2,509,426 tonnes.

Tier 1 mining accounts for the overwhelming majority of the value of New Zealand’s coal and minerals production.