On 27 March 2020, the Western Australian government introduced (with effect from 28 March 2020) changes to the royalty regime for lithium minerals in the Mining Regulations 1981 (WA) (Mining Regulations). The changes were introduced by the Mining Amendment Regulations (No. 3) 2020 (Amending Regulation), published in the Government Gazette on 27 March 2020.

The introduction of the Amending Regulation follows the government's earlier announcement on 11 October 2019 that it would introduce a 5% cent feedstock royalty rate for lithium hydroxide and lithium carbonate, where those are the first products sold and the feedstock is spodumene, to encourage downstream processing and manufacturing. The October 2019 announcement came after a review into lithium royalties as part of the government’s Future Battery Industry Strategy, including consultation with the industry during 2019.

Existing regime

In Western Australia, under the Mining Regulations, royalties are calculated on either an ad valorem basis (generally, a percentage of gross sales revenue from the applicable mineral, less allowable deductions) or on a specific per tonne rate.

Prior to the Amending Regulation, there was a 5% ad valorem royalty payable on all 'Lithium Minerals' at the first point of sale, with no differentiation based on the form of the product actually sold (for example raw ore, spodumene (lithium concentrate) or lithium hydroxide).

Amending Regulation

There are three key changes introduced by the Amending Regulation, being to:

• Limit the 5% royalty which was payable on all 'Lithium Minerals' to only lithium 'concentrate' at the first point of sale ('concentrate' is a defined term in the Mining Regulations, and captures spodumene, the primary lithium product produced in Australia that is the feedstock for other valued-added lithium products in Australia);
• Introduce a new provision into the Mining Regulations (regulation 86AE) which applies where:
  • the sale of lithium concentrate is to a 'related corporation'; or
  • lithium concentrate is not sold but is used as feedstock in the production of lithium hydroxide or lithium carbonate,
    
    and which, in either of those circumstances, gives the Minister the power (from time to time) to determine a method for working out the royalty value of the lithium concentrate that takes into account prices obtained for lithium concentrate of the same or a similar grade; and
• Where lithium concentrate is used as feedstock, alter the time when the royalty will be payable, which will be following the quarter in which the lithium concentrate was 'used'.

As a result of the Amending Regulation the royalty rate for lithium hydroxide and lithium carbonate should be 'capped' at 5% of the value of the lithium concentrate used to produce those products, rather than 5% of the value of the lithium hydroxide or lithium carbonate.

However, there remain some questions regarding how the new regime will be implemented, including:

Pricing methodology: What methodology will the Minister determine is to be used to calculate the royalty value of the lithium concentrate (including what price references will be used, given the absence of a recognised market pricing index)? Will the Minister consult on the proposed methodology? Will 'allowable deductions' still be applicable?

Royalty determination: Will the determination be a one size fits all approach, or will there be alternates within the methodology? Will the Minister alter the determination from time to time and, if so, how often? Given the fluctuations in the spodumene price, this may have implications for entities selling on term and fixed price sale contracts.

Place of processing: Does the new regime apply regardless of the place of processing (for example, where the lithium concentrate is processed overseas)?

Royalty payable on other lithium minerals: As the revised 5% royalty applies only to lithium concentrate (or lithium hydroxide or carbonate produced from lithium concentrate), what royalty will be payable on other lithium minerals and at what stage of processing? For example, will the 'default' or 'fall back' ad valorem royalty regime (which applies where there is no specific royalty for a mineral (or for the particular form in which a mineral is sold) apply for other lithium minerals (e.g. lithium bearing ores)?

As the Amending Regulation has only recently been introduced, some or all of these questions may be answered by the WA Government in a subsequent policy or guidance document.

Please contact our team if you would like any assistance regarding the application of the new regime on your business and options to manage this change.