Impact of the South African Mineral Resource Royalty on Cut-off Grades for Narrow, Tabular Witwatersrand Gold Deposits

"A mineral resource royalty is payment to the holder of mineral rights for the utilization of the mineral resource. In South Africa, this payment is made to the State as holder of the mineral rights (The Mineral and Petroleum Resources Royalty Act of 2008). The principle purpose of this research paper is to identify if the State is benefitting from the mineral resource royalty by considering its impact on seven individual Witwatersrand gold mines.For this study, a simple financial optimiser model was created in Microsoft Excel that links the ore flow, block listing and the cash flow (excluding or including the cost of the mineral resource royalty). Mixed integer linear programing (the Excel Solver function) is utilised to optimise either profit or NPV (at 9% and 12%) by adjusting the cut-off grade.The impact on each of the seven mines mine was different but overall R7.9 billion is estimated to be paid in mineral resource royalty over their expected remaining lives. Due to the cost of the mineral resource royalty and increasing the cut-off grades, the total revenue decreases by R10 billion. A significant portion of this lost revenue would have been paid to the State in the forms of other taxation including company income tax which decreases by R2.8 billion. It is recommended that an industry wide investigation be conducted to determine if the resource royalty is adding to the State’s revenue, or destroying value including premature job losses. IntroductionTaxation of mining companies has become a very topical subject in the context of the postapartheid South African economy. There have been increasing calls for equitable re-distribution of mineral asset wealth for the benefit of all South African citizens and not just to an elite few. As part of the Mineral and Petroleum Resources Development Act (MRDPA) of 2002, the Mineral and Petroleum Resources Royalty Act of 2008 was introduced and came into effect in 2010 (South African Revenue Services, 2008). A mineral royalty is payment to the holder of mineral rights for the utilization of the mineral resource. In the case where the holder of the mineral right is the State, then this payment is made to the State (Cawood, 1999). Studies on the potential impact of the mineral resource royalty on the minerals industry have been conducted during the formulation of the Act and subesquently. These include Cawood and Macfarlane (2003), who suggested a cap of no more than 3% (Cawood and Macfarlane, 2003), as well as Cawood (2011), who predicted rising cut-off grades and thus reducing mineral reserves. In 2013, Grobler completed a Masters in the Faculty of Economic and Management Sciences at the University of Pretoria and concluded that the impact of the mineral resource royalty on the economy is positive. She stated that the royalty has caused operating expenses to increase, but this does not appear to be significant. Furthermore, she stated that the royalty has not affected the way the mining industry operates (Grobler, 2014)."