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Can Benga Deliver On Its Coal Royalties Promises?

November 15, 2020

             My second post to this blog noted that Benga promises to deliver $1.7 billion in royalties and taxes to the provincial and federal governments. Here I analyze the royalties component. The analysis leaves me puzzled and unconvinced. I simply cannot see how Benga arrives at its conclusion that, on average, Alberta will collect $30 million in royalties from this mining venture

What is a Royalty?

Alberta defines a royalty as “the price the resource owner charges developers.” A royalty is like a tax in the general sense that royalty proceeds end up in the government’s coffers. But it is different in an important way. A royalty is what a government receives for giving someone the right to use or exploit a natural resource that the public, through either the provincial or federal government, owns. As a levy for simply using the resource, a royalty may be levied on whatever resource a company is exploiting both before and after its operation generates income. Governments don’t have to levy any royalties and, if they do, they don’t have to be very high.

 

Coal Mining Royalty Rates in Alberta, B.C., and Australia

When it comes to coal mining in Alberta and B.C., governments levy very low to low royalty rates. Table 1 presents the respective royalty rates set for metallurgical coal mining in these two provinces. Although the rates are very similar, the first tier royalty rate in Alberta is less than the rate set in B.C. Alberta’s second tier rate, on the other hand, is slightly higher than the rate in B.C.

In Alberta these two tiers are set according to whether a mine has reached “payout.” This refers to the date, after a mine commences production, when its cumulative gross revenues equal its cumulative costs and allowances. Contrary to what Benga’s Houston said in the hearing on October 30th, the post-payout coal royalty rate in Alberta is one percent of mine mouth revenue plus 13 percent of net revenue, not just 13 percent of net revenue as he claimed. In B.C., a post-payout mine would pay whatever royalty generates the most revenue.

 

Table 1: Coking Coal Royalty Rates in Alberta and British Columbia
1st Tier (pre-payout in Alberta) 2nd Tier (post-payout in Alberta)
Alberta 1% of mine mouth revenue (MMR) 1% of MMR + 13% of net revenue
British Columbia 2% of net current proceeds 13% of net revenue
Mine mouth revenue equals a mine’s gross revenues from sales minus permitted costs and allowances such as transporting coal to a port. Net current proceeds equals gross revenue minus current operating costs (excluding capital costs).

 

It’s interesting to note that the coal royalty rates in Alberta and B.C. are significantly lower than Queensland, Australia coal royalty rates. Australia is the world’s leading exporter of metallurgical coal. The State of Queensland royalty is 7% of the value of coal if the average coal price is $100 or less. The Queensland royalty rate is progressive in the sense that the percentage increases as the value of the coal increases. See Table 2 for the Queensland royalty rates.

 

Table 2: Coal Royalty Rates, State of Queensland, Australia
Average price per tonne for period Rate
Up to and including $100                        7%
Over $100 and up to and including $150 First $100:   7%                                                  Balance:    12.5%
More than $150 First $100:    7%                                                 Next $50:   12.5%                                             Balance:       15%
Prices are in Australian dollars. On November 15, 2020 one Australian dollar was worth 95 cents Canadian.

 

Benga’s Royalty Forecasts

As noted in my previous post, Benga’s royalty payments to the provincial government will vary, among other variables, according to the price of coking coal. Benga’s impact assessment offered three benchmark coal prices (in U.S. dollars) for calculating royalties: $100, $140, and $200 per tonne. Remember too that these benchmarks are in “real” 2019 dollars. With inflation, the nominal or current dollar value of these benchmarks will increase over time. Table 3 presents Benga’s estimates of the annual average in royalties it will pay over the 23-year life of the project.

Table 3: Estimates of Benga’s Average Annual Royalty Payments to Alberta, (millions of Canadian dollars)
$100 USD/tonne $140 USD/tonne $200 USD/tonne
Average Annual Royalty 6 30 65

Put another way, if $140 USD was the price Benga realized for Grassy Mountain coal over the life of the mine, the company would pay Alberta $30 million every year in royalties. Over the mine’s project operating life of 23 years, the Alberta treasury would receive $690 million in royalties in 2019 dollars.

 

Why Benga’s Royalty Forecasts Are Unreasonable

            During her cross-examination of Benga on October 30th, Ifeoma Okoye questioned whether Benga’s forecasts are reasonable (along with Richard Secord, Ifeoma is representing AWA and the Grassy Mountain Group at the hearing). Part of her questioning used Alberta’s most recent Coal and Mineral Development in Alberta Year in Review. She pointed out that, between 2015 and 2019, Alberta’s bituminous mining companies collectively paid royalties ranging from $5.1 million to $11.3 million. She then asked Benga to explain how the company “would be paying 30 million, which is three to six times more in royalties than is paid by all the companies combined to the Alberta Government?” (my emphasis)

Houston defended his company’s forecast by saying “I come back to my previous statement that we need to be careful not to confuse high-quality metallurgical coal with any bituminous coal.” He suggested that some bituminous coals would be sold as thermal coal and the market price of thermal coal had been as much as 50% lower than high-quality metallurgical coal. Houston said: “So I think it’s only natural that the value generated by producing high-quality metallurgical coal as we’re proposing is greater than the production of other bituminous coals that may fall into the thermal category.” According to Houston’s logic, since Grassy coal will be more valuable per tonne than bituminous thermal coal it’s reasonable to believe that Benga can deliver three to six times the royalties that all bituminous coal companies in Alberta collectively generated in 2017.

Data from 2017 take the legs out from under Houston’s answer. In 2017, only two Alberta mines produced bituminous coal: Teck’s Cheviot mine and Westmoreland’s Coal Valley mine. Cheviot produced metallurgical coal while Coal Valley produced bituminous thermal coal. Together, these two mines paid $11,285,563 in royalties to Alberta. This was the year Okoye was referring to when she asked Benga how it could pay three times more in royalties than the bituminous sector paid.

Westmoreland’s 2017 annual report under Canada’s Extractive Sector Transparency Measures Act states that, in 2017, Coal Valley paid $1,200,000 in bituminous thermal coal royalties to Alberta. Teck, therefore, paid $10,085,563 in royalties to Alberta. Since Benga’s forecast royalty payment of $30 million is three times what Teck alone paid in metallurgical coal royalties in 2017, Houston’s use of different market values for metallurgical and thermal coal didn’t offer a convincing answer to Okoye’s question. His explanation doesn’t hold water.

We’ve heard a lot in this hearing about the range of coal quality. Might it be the case then than the metallurgical coal produced at Cheviot was significantly lower in quality than what Benga claims Grassy will produce? I think it’s doubtful that this is the case. In the original Joint Review Panel hearing on the Cheviot project, Cardinal River Coals (the company that sold the Cheviot mine to Teck) told the Panel of “its unique achievement of maintaining an “AA” coal quality rating from the steel mills which purchased its coal…” Macdonald, Langenberg, and Gentzis, writing for the Alberta Research Council in 1989, ranked Luscar Group coals “in the low-volatile to high-volatile bituminous “A” range.” Cheviot produced, as the Northern Miner said in 2001, a “high-quality bituminous metallurgical coal.”

If this second coal quality comparison doesn’t support Benga’s position, we’re running out of defenses for Benga’s claim. Coal prices might offer one last justification for Benga’s claims. If metallurgical coal prices were very low in 2017 then it might be plausible for the company to argue that, with Benga’s assumed benchmark price – $140 USD/tonne, it could deliver three times the royalties that Teck did in 2017.

Teck’s 2017 annual report deflates this possibility. That year, in part due to the damage Cyclone Debbie did to Australian coking coal production, coking coal prices were very volatile and very good. Teck reported its 2017 annual average realized price for steelmaking coal was 53% higher than it was in 2016. That realized price was US$176 per tonne, $36 per tonne higher than the benchmark price Benga asserts will be needed to generate $30 million per year in royalties.

After all of this I’m puzzled about how Benga can ask the Panel to accept, with any degree of confidence, that Grassy Mountain will deliver an average of $30 million per year in coal royalties to the provincial treasury. More information is needed to convince me that this forecast is reasonable. Gavin Fitch asked for as much on November 2nd. Then he pushed Houston on the royalties/taxes issue. He asked Benga to seek permission from Wood Mackenzie to release the consulting firm’s most recent report on benchmark coal prices and coal markets. Houston didn’t think that was necessary: “So I – I think that the information that’s on the record is sufficient to make the decision on the – on whether or not this project is in the Canadian public interest.”

If the information on the public record raises serious doubts about the reliability of Benga’s royalty estimates, I think the public interest demands more information that supports Benga’s claims. I hope the Joint Review Panel will agree.

– Ian Urquhart, Conservation Director

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