Answers to Questions

AUDITOR-GENERAL'S REPORT

In reply to the Hon. D.W. RIDGWAY (20 November 2007).

The Hon. P. HOLLOWAY (Minister for Police, Minister for Mineral Resources Development, Minister for Urban Development and Planning):

1. In response to your first question, I advise that there is no requirement under the Roxby Downs (Indenture Ratification) Act 1982 that BHPB 'submit to an external audit', rather the relevant clause in the Indenture is 32 ROYALTIES, subclause (5) that authorises me as the Minister for Mineral Resources Development to 'so request within 6 months of the furnishing thereof in respect of any return…an auditors report on the said return by it's external auditor'.

This power also extends to the state Auditor-General or a registered auditor approved by the Minister and it is important to note that only those authorised bodies may request or receive this information, which is to be treated on a strictly confidential basis.

I have not requested such a report as I have been satisfied that the department's royalty assessment processes provide assurance that mining royalties are correctly collected under the Roxby Downs (Indenture Ratification) Act 1982.

2. Over the years the government has received significant mineral royalty payments from BHP Billiton and the former WMC.

To date, Olympic Dam has directly contributed over $370 million in royalty payments, with more than $305 million received since 1998; however it is very important to understand that royalty revenue is just one part of the overall economic benefit this huge operation has brought to the State through its 'multiplier effect' on employment opportunities, building of infrastructure, payroll tax, GST and so forth.

The Olympic Dam mine is a very complex, poly-metallic mine, where sales usually take place months in the future as products are delivered to point of sale – this is particularly so for uranium. BHPB must make a best commercial estimate of the price, necessitating complex reconciliation calculations once the sale price has been determined. When large numbers of metals contracts are being renegotiated and global prices are varying substantially during a return period, over and under estimating of value and deductions is inevitable. These 'overs' and 'unders' are reconciled in subsequent returns, and carefully checked by experienced PIRSA staff.

PIRSA carefully reviews BHPB's published production figures for each commodity/product as a detailed cross-check against the company's quarterly returns and seeks explanation of any anomalies or inconsistencies. In particular, staff analyse historical trends from the mine site, compare data with other similar producers in Australasia, review data from other sources such as Customs records and consult with royalty departments in other jurisdictions. When irregularities or anomalies are observed, the company is called on for an explanation.

More generally, continuous public disclosure to the ASX of financial data (e.g. negotiation of new contracts, sales revenue, hedging, etc) and operational issues provides general market intelligence and reference data to PIRSA.

I believe such analysis and oversight has enabled PIRSA to capture the appropriate royalty revenue from Olympic Dam.

3. The government is currently involved in detailed discussions and negotiations on a revised Roxby Downs Indenture through the Olympic Dam Expansion Task Force. PIRSA and BHP Billiton are currently working through a process to review the current process for royalty calculation as it is considered to be in the state's and company's interest that this be undertaken.

For an expanded Olympic Dam, the government and the company are seeking to develop a royalty methodology that is flexible enough to be in place over the long-term, fair, respects/recognises confidentiality requirements, simple to apply, transparent and auditable.

In recognition of the importance of the royalties from Olympic Dam, the Chief Executive of PIRSA has sought the assistance of the Auditor-General in a review of any proposed new royalty calculation methodology that may result from discussions with BHP Billiton.

With these measures in place, I am confident that the state will receive its full entitlement of ongoing, significant revenue from the operation.

4. In response to your final question, this government is fully committed to maximising mineral royalty returns to the state.

During 2005, my Agency took the lead in Government with the full support of the Treasurer, to develop two significant royalty amendment bills for the extractives and metals mining sectors. Following the preparation of comparative studies with other mining jurisdictions and wide consultation with industry and other relevant stakeholders, a new regime for metal, energy and industrial mines has delivered to government the higher royalty rate for all existing mines of 3.5 per cent (an increase from the previous 1.5 per cent to 2.5 per cent range) as well as a lower rate of 1.5 per cent for the first five years of new mines, recognising the capital risk of the early stages of mine development. The new arrangements streamline and clarify royalty calculations.

Also, a dedicated mineral royalty unit has been formed within PIRSA, with plans to further recruit or engage independent expertise to complement the knowledge and the analysis and audit capabilities of the team. The unit has developed the state-of-the-art Tenement Management System that ensures a high level of detail in relation to mineral production, values and royalty is recorded and analysed. PIRSA is fully committed to a number of further initiatives that will strengthen the controls over the collection of mineral revenue and royalties.

As mentioned in the earlier question, in recognition of the importance of the royalties from Olympic Dam, the Chief Executive of PIRSA has sought the assistance of the Auditor-General in a review of any proposed new royalty calculation methodology that results from discussions with BHP Billiton.

I am confident that the current royalty revenue, along with that to be collected in the future from not only the expansion of Olympic Dam but from the exciting growth of our diverse minerals sector, will indeed be most diligently collected under a competitive, transparent and verifiable regime.