Queensland's new coal royalty program

Company News

by Peter Milios

After a decade-long freeze, the Palaszczuk government announced that it would be increasing royalties on the production of coal, sending waves of concern through the coal-mining industry. Already one of the highest royalty scheme structures in the world, the additional tax requirements has the potential to have a negative impact on the companies, workers, and investors of this industry.

The original three-tier coal royalty regime allowed the Queensland government to take 7% of revenue up to $100 a tonne, 12.5% of the sales between $100 and $150 a tonne, and 15% of any revenue above $150 a tonne.

The Treasurer, Cameron Dick, has now added three new tiers to that system to capture extra profits from the soaring coal prices. The Government will now take 20% for prices above $175 per tonne, 30% for prices above $225 per tonne and 40% for prices above $300 per tonne.

To put this into perspective, the NSW coal miners pay a maximum royalty rate of 8.2%.

The Queensland government is forecasting the new regime, which comes alive on July 1st, to generate $1.2bn in the 2023 financial year. However, the QRC are estimating that the coal royalty program could fetch the government $14bn in the next financial year, whilst other analysts are saying that it could reach $18bn, according to Mark Ludlow, of the Australian Financial Review.

On a positive note, the revenue generated is expected to go toward Queensland’s health industry, delivering $1.6bn for mental health services, 2200 additional hospital beds and funding for new hospitals in, Toowoomba, Bundaberg, and Coomera over the next six years.

Mr. Dick believes that these measures are necessary to provide, “provide a sustainable and ongoing source of funding to assist Queenslanders in need.”

In addition, coal mining companies have been reaping the benefits of record high prices over the previous nine months. This started when the Russia-Ukraine conflict threatened global supplies, then, more recently, several coal-fired power plants have been forced to shut down within Australia amid recent demand increases due to the current cold front.

However, the magnitude of this increase in tax, without proper consultation with mining officials, has put pressure on coal mining companies and its stakeholders.

“The cost of doing business in Queensland is already high, and further cost pressures will discourage investment, operational growth, job creation and local business spending,” Edgar Basto, President Minerals Australia at BHP, told Reuters.

The new tiers would also damage opportunity for future growth.

The recent high prices enable these coal companies to make more investments, which will create jobs and support regions, boosting the overall economy within Queensland.

Anglo American CEO, Nick Barlow states that, “we need higher price periods to make these investments,” in mining operations, including the costs in mining equipment, mining areas and infrastructure.

In addition, the coal sector is highly cyclical, so coal companies haven’t always been able to capture these recent benefits.

From July to December of 2020, the Australian coal industry lost over $2bn collectively when the prices were dire.

Similarly, profits shrunk when the prices were low between 2013 and 2016.

Pembroke Resources, a privately owned company with a coking mine in the Bowen Basin of Queensland, has invested $450m into the mine over the past six years and has not been able to relish on any of the recent high coal prices.

Yancoal (ASX:YAL) states that the new royalty scheme will force them to reassess the feasibility of future expansion within Queensland.

However, despite these new royalty structures, coal miners with well managed operations are still likely to obtain profitability for the foreseeable future.

This is because the top tier rates only apply at the margin – meaning if the price of coal was $305 per tonne, the new 40% tax rate will only apply to that last $5.

Professor John Quiggin from the University of Queensland’s School of Economics agrees, stating “raising these rates is not going to lead anyone to close down.”

As a result of this understanding of the new top tiers, the markets have rebounded from the announcement made last week.

Terracom Ltd (ASX: TER) is trading 9% higher to $0.60, New Hope (ASX: NHC) is up just over 2 per cent to $3.32 and Stanmore Resources (ASX:SMR) has increased from $1.57 to $1.92 following the news made last Tuesday.

Peter Milios

Peter Milios is a recent graduate from the University of Technology - majoring in Finance and Accounting. Peter is currently working under equity research analyst Di Brookman for Corporate Connect Research.

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