A recent tax court ruling in favour of junior miner Tharisa Minerals has set a new precedent for calculating royalty payments for platinum group metal (PGM) miners.
On Friday, the country's tax court ruled that the Mineral Royalty Tax imposed by the SA Revenue Service (Sars) on Tharisa in 2015 and 2017 was based on a misguided one-size-fits-all formula that did not take into account the “operational realities” of PGM recovery.
Tharisa said it expected to receive an earnings boost from the ruling, which called on the company to recalculate the amount it owed to the nation’s tax collector. It had aside $56.8m in provisional funds for the royalty as of last September.
“While the process has been lengthy, the outcome vindicates Tharisa Minerals’ position and highlights the need for more clarity from a legislative perspective,” said Tharisa CFO Michael Jones.
Royalty rates and PGM grade
The Mineral Royalty Tax is one component of the tax burden that local mining companies face on an ongoing basis. It is calculated as a percentage of gross sales and earnings before interest and tax (ebit).
In the case of unrefined PGMs, the royalty tax rate depends on the grade of the material, with higher grades implying better earnings and thus demanding higher taxes.
However, Tharisa’s average grade for PGMs was below 150 parts per million (ppm), the threshold for “unrefined minerals” under the Mineral and Petroleum Resources Royalty Act, during the two years under review.
As a result, Sars had artificially inflated the company’s gross sales and ebit as though it had met the 150 ppm standard, rounding up the miner’s bill to the corresponding tax rate.
Tharisa contested the grossing-up methodology, arguing that the calculation of gross sales and ebit values and Sars' methodology for calculating the cost of beneficiating the concentrate to the specified 150 ppm were not representative of mining industry realities.
Impact on earnings
While a specific earnings guidance can only be released once the company completes a detailed recalculation, the effect is expected to be “materially favourable to earnings per share”.
“The judgment now provides certainty for the life of mine in determining mining royalties, taking into account the unique characteristics of our ore body.
“Importantly, it confirms that royalties should not be levied on notional or artificial income, which is especially prejudicial to producers mining lower-grade ore bodies,” said Jones.
- Sets a legal precedent: Clarifies that Mineral Royalty Tax should reflect actual ore grades, not inflated estimates.
- Impacts the wider PGM industry: Lower-grade platinum miners may benefit from fairer royalty calculations.
- Highlights legislative gaps: Shows the need for clearer rules in the Mineral and Petroleum Resources Royalty Act to prevent similar disputes.
Lawyers at corporate law firm ENSafrica said it remained to be seen how Sars, absent a successful appeal, would give effect to the judgment in redetermining the taxpayer’s mineral royalty liability.
“If the deeming-up requirement is, in fact, applied in line with the judgment, it appears that gross sales will decrease while deductible costs increase, resulting in a materially lower royalty liability,” the firm
“Arguably, this produces an absurd outcome. While the legislative rationale for deeming down (ie, not penalising beneficiation) is coherent, this judgment casts further doubt on the rationality of the so-called deeming-up requirement under the Royalty Act.”
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