$1bn extra over four years: concession rate runs out for BHP and Rio in Pilbara

THE decades-old concessional state royalty rate on iron ore "fines" is coming to an end for Pilbara supremos Rio Tinto and BHP Billiton, with the new rate to cost an extra $1.06 billion in its first four years.

By InvestSMART · 22 Jun 2010

By InvestSMART ·
22 Jun 2010

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The West Australian government has also extracted a one-off $350 million payment from the pair, which will be directed to a special-purpose account to help fund Perth's new children's hospital.

While the removal of the concessional royalty rate has been on the cards since 1995, it is the proposed $US116 billion ($A132.8 billion) iron ore production joint venture between Rio and BHP that has given WA Premier Colin Barnett the leverage to secure the new deal.

That was because the iron ore production joint venture depended on the government agreeing to amend state agreements to allow the sharing of infrastructure and the blending of iron ore products across the now separate infrastructure networks in the Pilbara.

With those amendments secured, approvals from competition regulators in Australia and overseas remain the only hurdles for the proposed joint venture.

"This is a win-win deal which gives the companies greater flexibility to integrate their operations and ensures a better return to the community," Mr Barnett said. He said the old royalty arrangement had recognised the pioneering role Rio and BHP played in developing the Pilbara's iron ore riches.

Their royalty rate on iron ore "fines" (as distinct from lump ore) rises to 5.625 per cent, bringing the companies into line with other WA producers.

Under the Rudd government's proposed resource tax, miners would receive a refundable credit for state royalties.

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Frequently Asked Questions about this Article…

What change did the WA government make to the concessional royalty rate for iron ore fines for Rio Tinto and BHP?

The WA government ended the decades-old concessional royalty on iron ore “fines” for Rio Tinto and BHP. Their royalty rate on fines rises to 5.625%, bringing the pair into line with other Western Australian producers.

How much will the royalty change cost Rio Tinto and BHP over the first four years?

According to the announcement, the new royalty rate will cost Rio and BHP an extra $1.06 billion in its first four years.

Was there any additional payment required from Rio and BHP as part of the deal with the WA government?

Yes. The state extracted a one-off $350 million payment from the two companies, which will be directed to a special-purpose account to help fund Perth’s new children’s hospital.

Why did the WA government use this opportunity to remove the concessional royalty rate now?

The proposed US$116 billion (A$132.8 billion) iron ore production joint venture between Rio and BHP gave the WA government leverage to secure the royalty change. The joint venture depended on the government agreeing to amendments to state agreements, so Premier Colin Barnett used that negotiating position to secure the new deal.

What amendments to state agreements were needed for the Rio‑BHP joint venture?

The amendments allow the sharing of infrastructure and the blending of iron ore products across the now separate Pilbara infrastructure networks—changes that were required for the proposed joint venture to proceed.

What approvals are still required before the Rio‑BHP Pilbara joint venture can go ahead?

With the state agreement amendments secured, the remaining hurdles are approvals from competition regulators in Australia and overseas.

How did Premier Colin Barnett describe the royalty change and the joint venture for the community and investors?

Premier Barnett called it a “win‑win” that gives the companies greater flexibility to integrate operations and delivers a better return to the community. He also noted the old royalty arrangement acknowledged Rio and BHP’s pioneering role in developing Pilbara iron ore.

How does the federal government’s proposed resource tax interact with state royalties for miners?

Under the Rudd government’s proposed resource tax, miners would receive a refundable credit for state royalties, meaning state royalties paid could be offset against the federal resource tax liability.