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Uranium Royalty (Northern Territory) Bill 2008

CHAIR —Welcome. Senators Eggleston, Furner and Pratt are appearing via teleconference. Mr Angwin, do you wish to make an opening statement?

Mr Angwin —The Australian Uranium Association welcomes the opportunity to appear before this committee. The association supports the bill. By way of background, the association represents all of Australia’s uranium mining and exporting businesses and most of the country’s major explorers. The Commonwealth maintained ownership of the Northern Territory’s uranium when self-government was granted to the Territory in 1978. Uranium is now in greater demand around the world than when self-government was granted, and there are prospects of mining for uranium in the Territory. The demand for uranium globally is being driven by the need for greater suppliers in nuclear energy to meet rising expectations of future prosperity, to respond to energy security concerns and to provide clean fuel to help meet the challenge of climate change.

The association’s economic modelling, based on conservative assumptions, is that production of Australian uranium could increase from around 10,000 tonnes per year, as it is now, to 30,000 to 40,000 tonnes per year by 2030 in response to that rising demand. The modelling shows that under conservative assumptions about the growth of nuclear power overseas, for which uranium is the fuel source, the expansion of uranium mining in the Territory would have the following economic impact in the Territory to 2030 compared to a base case: gross Territory product would be on a $2.3 billion higher, consumption in the Territory would be $844 million higher, investment would be $405 million higher and government revenue would be $330 million higher. Those dollar amounts are expressed in net present value terms. The employment effect is modest: an average of 260 jobs each year from about 2020, with a smaller annual average number of additional jobs before then. These are additional to the existing jobs.

The Northern Territory has about 13 per cent of Australia’s uranium. Apart from the Ranger mine, there are deposits in the Territory that are potential mines: the Angela and Pamela deposits south of Alice Springs, Napperby to the north-west of Alice, Mount Fitch which is south of Darwin, Koongarra which is south of Ranger, and Bigrlyi which is 390 kilometres north-west of Alice Springs. The global growth in demand for uranium and the Territory’s prospectivity for uranium have given rise to the need to establish a legislative framework for the regulation of the royalty arrangements for uranium.

The bill’s regulation impact statement describes the Commonwealth responsibility as:

... to establish a regulatory framework conducive to investment—

that is, the Commonwealth supports the development of the uranium industry in the Territory. The statement goes on to say:

... for private investors to undertake ... exploration and mining within that framework based on their overall assessment of the range of factors ... involved.

That is what private investors do, and our industry operates that way. In the absence of such a framework, investors would be unable to assess fully the range of factors involved. The absence of a generalised royalty arrangement would mean the arrangements for uranium would have to be decided on an ad hoc basis each time a mining proposal emerges, and a piece of financial information vital to project development economics would be missing. That would inhibit the growth of the uranium industry in the Territory. Broadly, that is the case for a legislated royalty arrangement for uranium.

The second question is: what form should the royalty arrangement take? In considering that, the minister appears to have taken into account the fact that the generalised minerals royalty arrangements for the Territory provide for profit based royalties of 18 per cent, with no provision for the deduction of privately negotiated royalties from the statutory royalty. The bill seeks to apply that arrangement to uranium.

There are differences of view about the basis for royalty payments in regard to uranium and to mining royalties in general. The argument for a profit based royalty is that profit based royalties are less likely to distort investment decisions than revenue based arrangements. That is because profit based royalties are payable when revenue exceeds costs, whereas revenue based royalties are payable when revenue is earned, regardless of the costs. Revenue based royalties may unfavourably impact on the decision to invest because they affect project economics both early and late in the life of a project, when revenue may not be sufficient to generate profit. This could make a difference to investment decisions. As I have used it here, the word ‘distort’ means ‘cause otherwise economic material to be left behind because the extraction cost is not taken into account’.

We agree with that analysis and adhere to the view that the Commonwealth’s general economic policy approach should not distort investment decisions. The magnitude of the impact on investment decisions of one or other of the possible approaches to royalty arrangements is contentious—we acknowledge that. However, we submit that it is far less contentious to argue that a royalty arrangement for uranium that is different to the royalty arrangements for other minerals would lead to a more onerous investment framework for uranium. In particular, we submit that a revenue based arrangement for uranium, when the generalised royalty arrangement for the Territory is profit based, would distort investment and development decisions against uranium. If the royalty arrangement for uranium did not take extraction costs into account while the royalty arrangements for other minerals did, there would certainly be a distortion that would cause otherwise economic material to be left behind. We seek a framework that is neither advantageous to the uranium industry nor disadvantageous to it compared to other minerals. For that reason, we support the bill.

If the committee were persuaded that revenue based royalties are to be preferred to profit based royalties, then it should recommend that that be addressed as a Territory wide issue, an issue that would have to be addressed for the Northern Territory royalty regime generally. In that case, the committee should recommend to the Commonwealth government that it engage with the government of the Northern Territory to establish a review of the mining royalty arrangements for the Territory overall.

The issue for the committee is whether uranium should be treated the same or whether it should be treated differently to other minerals for the purposes of a royalty arrangement. Our submission, drawing on the analysis just presented, is that there is no basis for a different treatment for a scheme for uranium royalties in the Northern Territory. Put in the obverse, there is a good case for treating uranium in the same way as other minerals for royalty purposes.

Finally, the association wishes to indicate that it supports the bill’s major platforms as well as the bill overall. We support a royalty regime for uranium that applies equally to projects on Aboriginal land and on non-Aboriginal land. We support a royalty regime for uranium that provides that royalty payments made by a mine operator should be passed by the Commonwealth to the Northern Territory and an equivalent amount paid into the Aboriginal benefit account. We support the Northern Territory administering the royalty regime on behalf of the Commonwealth. That is my opening statement and I would be happy to take questions from the committee.

CHAIR —Thank you. You have raised the point that a revenue based system is less likely to distort investment decisions by the uranium industry, and I think you make the argument that it is no different from any other mineral. However, we have had submissions from groups that do regard uranium to be different from other minerals—but that is not the main import of my question. There is an argument that, because Aboriginal groups may not get revenue until the mine makes a profit, and given the sensitivity of uranium as a mineral, they may choose not to agree to mining at all. Do you think there is any basis to that from an industry point of view?

Mr Angwin —I am not sure whether there is any basis for that or not. I think that would have to be tested in practice a bit. Our experience is that opinions in Aboriginal communities about uranium are diverse. There are clearly some Aboriginal communities which have concerns about uranium—that is certainly true—but equally our experience is that that is not a universal view amongst Aboriginal communities. If I may add a point of information on that, our association recently agreed with some prominent Aboriginal Australians to establish an Indigenous dialogue group. The underlying assessment of those who are members of that group, particularly the Indigenous people who are members of that group, is that uranium is in fact a mineral which should be mined. I just offer that as a piece of evidence contrary to the hypothesis that you have put to me.

CHAIR —Some submitters have also argued that at the other end of the process, when the mine is closing down, there might be additional rehabilitation and post-closure monitoring and mitigation involved with uranium. Some submitters have suggested that therefore the uranium mining industry should pay an additional royalty.

Mr Angwin —Under the current arrangements for mines in Australia—and I will speak about the three mines which currently operate in Australia—each of those makes provision for closure and rehabilitation of their mines. At Ranger the current balance sheet provision, I believe, is in the order of $182 million. That is on the balance sheet. In the case of Olympic Dam, I think the figure is $82.6 million and in the case of the Beverley mine, run by Heathgate, the provision is $7.63 million. I think they are the figures, but if they are not I will correct them. So my response to that is that the mines already make provision for that in their balance sheets.

Senator LUDLAM —Will those amounts that you just mentioned in the case of the three mines that are currently operating be sufficient to completely rehabilitate the sites post closure?

Mr Angwin —I understand that those amounts are provided in the balance sheets on the basis of what I think is called the closure model, which those companies have used to estimate the rehabilitation costs for the mines. I suppose you could argue about the terms of the model, but you have to make an estimate in some way, and that is the way that I understand they have made those estimates.

Senator LUDLAM —I guess it would be different from mine to mine as well, but is it the intention that the amount that is being put away would be enough that the taxpayer is not going to be left with some sort of rehab burden at the end of the process?

Mr Angwin —Yes.

Senator LUDLAM —Was there a reason that you did not mention Jabiluka in your opening statement? That is the largest uranium deposit in the Territory.

Mr Angwin —I understand that the company there regards Jabiluka’s future as being in the hands of the local Aboriginal people, who have currently withheld their agreement to the development of the mine. That is mainly the reason I did not mention it.

Senator LUDLAM —That is also the case at Koongarra, though, you are no doubt aware.

Mr Angwin —Correct. You are right about that. I understand that recently—and I have only seen this in a press report—the local Aboriginal people have said that they did not favour the development of Koongarra. That is true.

Senator LUDLAM —I thank you for tabling this document. Is this a document that your association commissioned or was involved in producing?

Mr Angwin —We commissioned that, yes.

Senator LUDLAM —Presumably you endorse its findings?

Mr Angwin —Yes, we do.

Senator LUDLAM —Do the projections of future growth in the industry include mining at Koongarra and Jabiluka?

Mr Angwin —I think for the purposes of the modelling they do take that into account, yes.

Senator LUDLAM —There are a couple of different scenarios in here, but what it essentially says is that in the high-growth scenarios virtually every economic deposit in the country is mined out to 2030.

Mr Angwin —I am not quite sure what you mean by high-growth scenarios. We modelled two scenarios essentially about the demand for uranium. One is an aggressive approach to climate change policies and the other is a less aggressive approach. The figures that I have given for this inquiry are based upon the more conservative of those two approaches.

Senator LUDLAM —The more conservative of the two is that by 2030 there will be about 900 reactors.

Mr Angwin —That is correct, yes.

Senator LUDLAM —And that takes into account that by 2030 nearly everything that is currently operating today will have closed?

Mr Angwin —I would have to check the exact details of that, but if you are reading it currently you may well be right.

Senator LUDLAM —I have just been skimming it. This was produced at the end of 2007, when the market was right at the peak, and since then things have—

Mr Angwin —It was produced over the period from about November and I think we published it in April last year.

Senator LUDLAM —The reason I am going into this in detail—I know it is not directly germane to what we are inquiring into today—is that since this was produced the markets, or at least the world spot markets, have deteriorated considerably. Are you a bit concerned that this might not be quite as rosy as it is—

Mr Angwin —No, we are not because the price assumption we make with regard to the price paid for uranium is a long-term contract price. The price that has been used for the model is US$100 per pound by 2030. Yesterday, I think the spot price was US$41.25 per pound. The current long-term contract price is somewhere between US$70 and US$90 per pound. So there is some gap between the current long-term contract price and the contract price used for modelling purposes, but the point is that that contract price is the contract price in 2030. We are reasonably confident that the model stands up to the changes in the market.

Senator LUDLAM —When we spoke last, which was at a JSCOT hearing only a couple of weeks ago, I asked you about the prospect of surplus highly enriched uranium being dumped on the fuel market if disarmament proposals come to fruition, which we obviously all hope that they will. Does this report consider those factors?

Mr Angwin —I think it takes into account that the current agreement between Russia and the United States, under which Russian nuclear weapons are dismantled and the highly enriched uranium in them is down-blended and sold to the United States in order to provide fuel for the US nuclear power industry, would end in 2013, but it has not taken into account a large-scale disarmament program such as is now being sponsored by President Obama. At the time we did that, it would have been a reasonable thing to have done because there was uncertainty about what would happen after 2013.

Senator LUDLAM —Okay, but it is not taking that into account, obviously. To come back to this inquiry, and picking up on a comment that you made earlier, regarding Ranger, would you remind me of the amount that you said they have in the bank for the rehab.

Mr Angwin —I believe it is $182 million.

Senator LUDLAM —And they are parking a little bit in there every year?

Mr Angwin —I think that is the case. If there is anything to add to that answer, I will add it, but I believe that is the case.

Senator LUDLAM —All right, just in rough numbers. I know that when Ranger was initially established they needed to provide for integrity post closure for 10,000 years. Is that amount of money intended to see through that entire period of time?

Mr Angwin —I think the 10,000 years is one of the parameters of their operating licence. I think the question here is about tailings dams principally, but also about the rehabilitation and care of a mine after the mine has closed. In that regard, it is true to say that you cannot monitor a uranium mine for 10,000 years, neither can you monitor any other mine. But the task in regard to a tailings dam or a former uranium mine is essentially not a monitoring task; it is an engineering task. The task of managing a former uranium mine is essentially the same as managing the closure rehabilitation of any other mine. Guidelines and standards for best practice exist for doing that, and in the case of uranium, ARPANSA—the Australian Radiation Protection and Nuclear Safety Agency—produces the definitive framework guide, the Minerals Council produces a guide, the Department of Resources, Energy and Tourism produces a best practice guide on the techniques for managing mine closures and for managing tailings in any mine according to the mine type, the geography, the geology and the weather conditions of each particular site. The mining industry and the engineering profession are experienced in managing mine closures in all kinds of environments. It is a core capability and the mining industry does that well. There will be individual cases of poor performance and they will excite some emotions, but they are not good guides to the risks in managing the closure or rehabilitation of former mines.

Senator LUDLAM —But the closure requirements on Ranger, which are more stringent than other mines around the place, that is twice the age of the pyramids.

CHAIR —Senator Ludlum, we have got other senators who—

Senator LUDLAM —We must march on?

CHAIR —Yes, I think we need to get back to it.

Senator LUDLAM —Okay, I will come back directly. Can you tell us: mining or mining proposals in other parts of the country, do their royalties operate on a profit basis as is proposed for the Northern Territory?

Mr Angwin —No, there are different minerals royalties arrangements in other states.

Senator LUDLAM —You said that the mining industry certainly prefers a profit based regime for royalty assessment. Are you proposing that that be the case in other parts of the country too?

Mr Angwin —The argument I am putting though, is that the royalty arrangement for mining generally in the Northern Territory is a profit based royalty arrangement. Our industry has no desire to be treated any more advantageously or any more disadvantageously than any other mining operation. We wish to be treated in the same way in the Northern Territory as other mining operations.

Senator LUDLAM —I have some questions about the origin of this piece of legislation, the way it came about. You have a seat at the UIF?

Mr Angwin —I am a member of the UIF, my association is.

Senator LUDLAM —Was it a consensus or was it a majority decision around moving forward with this model of assessing royalties?

Mr Angwin —In the end, there was an agreement in the UIF. I generally do not trail my coat in answer to questions that you have not asked me, but it is arguable that the UIF has a wide range of interests represented on it, including land councils and Treasury officials in the case of this particular working group.

Senator LUDLAM —Are there any environmental interests represented on the UIF?

Mr Angwin —They weren’t. I understand they were invited to be members of the UIF, but they declined.

Senator LUDLAM —Sure.

Mr Angwin —The last thing I would say on that question is that while I understand that there may be some interest in the provenance of the report, the more important question is about the merits of it. If I can be so bold as to say to you, Senator: the issue here is to judge what is done on the merits rather than what the provenance of it was.

Senator LUDLAM —I will come back later, if there is time.

Senator EGGLESTON —We have heard there are other minerals being mined in the Northern Territory. What do they include? I believe it is bauxite, manganese, iron and gold. Is that not the case?

Mr Angwin —It is probably all of those. I am no expert in those, but I imagine that is correct.

Senator EGGLESTON —The royalties they pay are paid on a profit basis, I gather.

Mr Angwin —That is correct.

Senator EGGLESTON —I believe the only uranium mine working at the moment is Ranger.

Mr Angwin —That is correct.

Senator EGGLESTON —And that is paid on a volumetric royalty basis.

Mr Angwin —That is correct too, and I think that is due to the historical position of the mine.

Senator EGGLESTON —Yes, I believe that is the case. It is proposed that Ranger will be excluded from any change. Is that right?

Mr Angwin —Yes, that is true.

Senator EGGLESTON —This would mean that any future uranium mines would be paying royalties on a profit basis and that would be consistent with other mining activities in the Northern Territory.

Mr Angwin —Yes, it would.

Senator EGGLESTON —One of the issues that was raised in the hearings we had in Darwin last week—one of the concerns I suppose is a better way of putting it—is that in some way Aboriginal communities will be disadvantaged by a profits based royalty system. In fact, Ranger would remain volumetric. The Northern Land Council, in their submission supporting the bill, said both systems will provide a similar quantum of royalties over the duration of the mine. Would you agree that that is a fair comment?

Mr Angwin —I am looking at the summary of the economic modelling outcomes, which is appendix 2 to the regulation impact statement. Unless I am reading this incorrectly, that seems to be largely true. Perhaps not largely true, but approximately true. Table 2 in the summary of economic modelling outcomes suggests that the nominal royalty cost under an ad valorem royalty arrangement would be $289 million in the base case, $347 million in the high case. On the profit royalty arrangement, it is $213 million on the base case and $490 million on a high price case. Again, subject to modelling—and there can always be debate over modelling—they seem to be in about the same ballpark.

Senator EGGLESTON —Thank you very much for those figures. I am not sure that we have them in the committee’s briefing papers. I might be wrong, but if we do not have them, I wonder if you might be able to table them? The Chair might provide guidance on that.

CHAIR —The figures just given by Mr Angwin?

Senator EGGLESTON —Yes.

Mr Angwin —The figures I have read are from the regulation impact statement provided by the minister.

Senator EGGLESTON —Do we have a copy of that, Chair?

CHAIR —I think we would, or we can easily obtain it.

Senator EGGLESTON —If you could, I would be very grateful.

Mr Angwin —No doubt if I have misread what is here, the department, which I understand is following me, will correct me.

Senator EGGLESTON —Thank you very much. One of the other issues that cropped up last week fairly consistently from various witnesses was this question of funding of Aboriginal communities. In fact, the funding of Aboriginal communities and Aboriginal services in the Northern Territory, as in other parts of Australia, is not really dependent on mineral royalties. Would you agree with that?

Mr Angwin —No, I do not believe it is.

Senator EGGLESTON —In fact most of it comes from government sources—the Commonwealth and the Territory providing social security and various other services, from health to education to support for art centres and so on. I think it is very important to establish that the bulk of funding for Aboriginal communities does not come from royalties and that the funding would continue—that is, funding from the government and sources from which funding for Aboriginal communities generally comes from—regardless of any change in the royalties system. I have to say that those sorts of arguments about support for Aboriginal communities are a little bit left of field because the main issue is the royalties payment to Aboriginal communities, and this will apply, will it not, to future uranium mines, not those that exist already?

Mr Angwin —Obviously Ranger already pays royalty arrangements to Aboriginal communities. The existing uranium mine in the Northern Territory pays royalties to Aboriginal communities. Future royalties paid by the industry will find their way to the benefit of Aboriginal communities via the Aboriginal Benefits Account.

Senator EGGLESTON —Thank you, but in fact they will not be the principal source of funding to those—

Mr Angwin —They will not be the principal source of funding—that is correct.

Senator EGGLESTON —So, in other words, what we are looking at now is a plan to have a consistent royalty payment system for all mining operations across the Northern Territory.

Mr Angwin —That is what I believe the minister’s intention is.

Senator EGGLESTON —Thank you very much.

CHAIR —I realise this is a bit of a hypothetical question for you. The Northern Land Council talked about negotiated payments. Obviously payments will be delayed until a mine is profitable. They talked about the possibility of negotiated payments. Some of those royalty payments might be brought forward, if you like, to cover the period when the Aboriginal communities need to adjust to the start-up period of the mine. Do you believe that that would be something that the uranium industry would look at sympathetically?

Mr Angwin —Our general disposition in this area is to acknowledge that our industry can be one of the routes—not the only route—for addressing Aboriginal disadvantage, and Aboriginal economic disadvantage in particular. Before I go on to the rest of my answer, I just want to make clear that we are not saying that the uranium industry is the sole route to the removal of Aboriginal economic disadvantage. I want to say that because sometimes I am verballed on that question, and I do not want to be verballed. Let me make that point clear. We believe that our industry can make some contribution to Aboriginal economic development. Part of the brief of the Indigenous Dialogue Group, which I mentioned earlier, will be to help us improve our performance in that area, whilst the content and outcome of negotiations which are conducted between individual uranium companies and the Aboriginal communities with which they deal will be for them to decide—both sides of those arguments—on what works best. If the Northern Land Council puts that on the agenda, it will be one of the things that our industry will have to negotiate. Broadly, the answer is yes. That sounds a bit longwinded, but I think the answer is yes.

Senator LUDLAM —Going directly to the objects of the bill, have you, your association or your members done in any economic modelling on how payments might differ according to the two different means of assessing royalties?

Mr Angwin —Is the issue you are getting at the difference between the revenue base and the profit base?

Senator LUDLAM —Yes—whether you have done an assessment or how you informed your thinking, I suppose, as to whether the mining company, the taxpayer or the Aboriginal community would be better off, or when royalties might be paid for a given equivalent mine.

Mr Angwin —No, we have not done that modelling. We note that those issues were addressed within the uranium industry framework and were also addressed in the minister’s regulation impact statement. But, no, we have not done that modelling.

Senator LUDLAM —Okay, so I presume that—

Mr Angwin —I should add the association has not done that modelling, but I cannot speak for the companies on that issue, I am afraid. I do not know whether they have or not.

Senator LUDLAM —All right, but I am presuming it is not just guesswork. It was said, I think in the Northern Land Council’s submission, that they figured over the life of a given mine it would be roughly equivalent, that according to the two different models of assessing royalties you would wind up even at the end of the day.

Mr Angwin —That is what the modelling in the regulation impact statement also appears to indicate.

Senator LUDLAM —But that is not something that you have done or the industry has done.

Mr Angwin —No, we have not done that.

Senator LUDLAM —All right. There have been some concerns raised up to now about the possibility of subsidiaries of companies essentially just offshoring profits or using transfer pricing, to use this kind of model to essentially do the taxpayer and the landowners out of royalties. Have you any comments to make on that possibility?

Mr Angwin —We favour maximum transparency in any legislative or other arrangements affecting our industry. We believe a profit based royalty would be and should be as much evidence based as a revenue based scheme. By the way, I think you could raise similar concerns as have been raised about those kinds of issues under both of those royalty arrangements. I can understand why that issue has been raised. Perhaps, Senator, if that were a worry for this committee then it could ask the relevant minister in the Northern Territory for advice on the extent to which that practice has occurred in the Northern Territory under the Mineral Royalty Act to date and on that basis make some recommendations about how it should be dealt with in future.

Could I just add that I have had a look at the Mineral Royalty Act. It contains, amongst other things, a formula by which the rate of royalty has to be calculated. It provides for what is called a royalty return to be made every year. That requires, amongst other things, the royalty payer to state:

(c) the quantity of a mineral commodity sold or removed ...

(d) the name and address of the smelter, refinery or mill to which a mineral commodity recovered was sent;

(e) the name and address of, and relationship between, any person with an interest in the production unit and the operator of the smelter, refinery or mill—

and I think that goes directly to the question you raise—and the valuation of the mineral commodity et cetera. It also contains provisions for powers of inspection, requirement to answer questions, produce documents—all the usual things that you would expect.

Senator LUDLAM —We found last week in Darwin, when we had officers from that agency before us, that it was like pulling teeth, to be polite about it, to get any information at all. I recognise that is in the act, but, when it came down to comments on what individual companies may or may not have done and how payments were being made, the system up there is absolutely opaque. It makes Western Australia look like a model of transparency. So, in order to provide the transparency that you are clearly advocating here, is your industry willing to forego those sorts of secrecy provisions?

Mr Angwin —I am not quite sure where you are leading me with this question, Senator. What I am saying—

Senator LUDLAM —It was impossible for this committee to tell from the officers of the department up there what a company had paid in royalties in any given year or how it had been assessed. It is a complete black box, unlike other states. The concerns that were raised by other senators and me were that with a revenue based model you look at the number of tonnes that have gone out and the price and you say, ‘Okay, that’s the royalty.’ You do not run into all these possibilities of gaming the system and using transfer pricing or other ways of hiding profits.

Mr Angwin —I think I dealt with a very similar question at the JSCOT proceedings we were both at last week. I think the answer I gave then was that, subject to good reasons, transparency is to be preferred over the alternatives. So, to answer the question again: subject to good reasons, yes, I do think transparency is exactly what should be the case. Again, the point I make to you is that perhaps it is possible to go back to the Northern Territory department and/or its minister and ask them perhaps not so much about individual companies but about the record of the industry overall. If your question is: ‘Would companies in our industry wish to voluntarily disclose the royalty payments they make?’ could I take that on notice. First of all, I do not know what the current practices are in regard to that. Second, I would have to seek advice from my members about their views on that question.

Senator LUDLAM —I would appreciate that. Thank you.

CHAIR —Thank you, Mr Angwin, for coming in this morning and assisting us.

[11.16 am]