'Bill may hit gold output'

In a submission to parliament it warned the payment formula in the latest draft of the Mineral and Petroleum Resources Royalty Bill would result in payments of up to three times higher than in previous drafts.

"The impact on the gold sector will mean the sector will pay royalties up to some three times higher than the 1.5% fixed rate from the second draft," the Chamber, which represents big mining companies in South Africa, said.

The large jump in royalty amounts would cut into cash for investments, resulting in reduced production in one of the world's top producers of gold. South Africa is also the biggest producer of platinum.

"This combined with the existing electricity supply crisis, which could result in a permanent reduction in electricity supply of 10% (and cause) a disproportionate 20% decline in gold production, may accelerate the decline in gold production in South Africa, to the detriment of the country and the economy."

Gold production has been steadily falling in South Africa, once the world's dominant producer of the precious metal.

South Africa's national treasury released the third draft of the bill in December, which cut tax for gold and platinum and gave incentives for local processing of minerals.

Unlike previous drafts, the new proposals would allow mining companies to exclude smelting, refining, transport, and other costs before the royalty is calculated according to a formula that factors in the commodity cycle and marginal mines.

Operating below peak

The new average rate for royalties on gold is 2.1% versus the previous average of 2.25%, while that for platinum group metals falls to 2.7% from 4.5%.

However, the chamber said on Tuesday it had projected that by 2011 companies could be incurring "significantly" higher royalty rates when compared to the national treasury's 2006 fixed rate proposals.

"These higher rates would make the industry relatively less competitive than competitor countries."

The proposed bill did away with the idea of charging royalty on sales rather than profit, which the CoM had initially criticised, but retained a dual tax regime.

This would see mining companies continue to pay royalties to traditional communities where they operate while also paying royalties to the state.

The mining sector is currently operating below peak. Mines were forced to shut down operations for a week in January, because of severe power shortages in Africa's economic powerhouse.

The power crisis has pushed metals prices to record highs, partly due to expected lower output from the country's mines.