Sandfire in row over royalties
A QUIBBLE over royalty payments way out west has given the market a timely reminder about just how special Sandfire Resources' DeGrussa copper deposit really is.
The copper exporter was accused by the Western Australian government of under-paying its royalty obligations this week, and told that failure to make up the $7 million shortfall could see the company stripped of its mining lease.
While that would normally sound like bad news, closer inspection shows that Sandfire may be a victim of its own success.
Copper is usually exported in processed metal cathodes or as a concentrate, and WA has set royalty rates for both those types of exports: 2.5 per cent and 5 per cent respectively.
But parts of the DeGrussa deposit contain such high copper grades that Sandfire has been able to simply dig it out of the ground, crush it, and sell it abroad.
This type of export is known as "direct shipping ore" or "DSO", and Sandfire has shipped about 150,000 tonnes of it since May.
"DSO is very, very rare in copper and is more common in bulk commodities like iron ore and coal. It's exceptionally unusual unless you've got something pretty special like Sandfire discovered," said Simon Tonkin from Patersons Securities.
Copper grades of 1 per cent are usually enough to spark serious interest, but the DSO shipped by Sandfire averaged more than 24 per cent copper.
With no set royalty rate for DSO in the copper section of the WA regulations, Sandfire applied the highest rate in the copper rules: the 5 per cent slug usually placed on concentrate exports.
But the WA government has blown the whistle, declaring that a catch-all footnote in the rules means Sandfire should be paying 7.5 per cent on its DSO. That footnote refers to minerals that are "not specifically listed" in the WA regulations, and sets the DSO royalty at 7.5 per cent.
Despite the fact copper does have a specific royalty listing, the government has decided Sandfire will be captured by the footnote, and must pay the $7 million shortfall by February 4.
Sandfire - now a $1.3 billion company - will have no trouble paying the money, but managing director Karl Simich hinted this week he would not simply concede on the issue. He said Sandfire was happy to pay its full royalty rate "once it has been appropriately determined".
"We look forward to pursuing it through the proper channels in order to arrive at the correct conclusion," he said.
DSO exports will soon finish, leaving Sandfire to focus on its priority: exporting concentrates from DeGrussa.
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