Gold royalty likely to be shelved (March 30, 2004)

The government of South Africa is expected to scrap a proposed 3% royalty on revenue from gold mining companies with operations in the country. The industry has warned that the royalty would force them to close mines and lay off workers.

Gold mining profits have dropped from record levels in 2002, mostly owing to the rand’s 81% rise against the U.S. greenback since 2001.

Cash costs surged 50% between the fourth quarters of 2002 and 2003, to US$295 (R1,935) per oz. gold. The average global cash cost is US$235 per oz.

Production of the yellow metal in South Africa fell to 374 tons last year from a high of 611 tons in 1992.

The government has proposed taxing mining companies and oil producers between 1% and 8% of sales, depending on the commodity. Companies mining diamonds, for instance, would face a royalty of 8%, whereas those producing gold and platinum would pay royalties of 3% and 4%, respectively. The royalties would come into effect in 2009.

The proposed royalties are seen as a way of increasing revenue. The mining industry pays relatively little in income tax, and the royalties would raise R3.5-R4 billion annually.