FAQ about Mining Royalty in Nunavut and the Northwest Territories
NOTE: This summary is intended to assist readers in understanding the mineral royalty regime used in Nunavut and the Northwest Territories. For an exact statement of the royalty requirements please see the Nunavut Mining Regulations and the Northwest Territories Mining Regulations. In the case of conflict between this summary and the provisions of the regulations the regulations will apply.
Starting from April 1, 2014, land and resource management responsibilities in the Northwest Territories will be devolved to the Government of the Northwest Territories. The new territorial mining regulations are expected to substantially mirror the federal mining regulations. However, the federal Northwest Territories Mining Regulations will continue to apply to certain specific parcels of lands in the Northwest Territories. These lands are listed in Schedule 4 of the Northwest Territories Devolution Agreement.
What is a mining royalty?
A royalty is a payment to the owner of the subsurface mineral rights for the extraction of mineral ores by private parties. Here we discuss the royalty system used for Crown lands in Nunavut and the Northwest Territories.
What types of royalties are there?
The most common types of royalties are:
- ad valorem royalties, assessed as a percentage of the gross value of a mine's output;
- unit volume royalties, assessed on a set dollar per volume basis; and,
- profit-based royalties, assessed as a percentage of the mine's profits.
Profit-based royalties are the preferred method in Canada as they can most closely target the value of the resource in the ground.
On what basis is the royalty calculated?
The royalty is a percentage of the mine's annual profit. In the regulations the profit is called the value of the mine's output. The profit is measured at the mine mouth. At this point the royalty corresponds to a portion of the net value of the ore being extracted, and not a portion of any additional value created by the mine owner from further processing of the ore. The profit is calculated as the mine's total revenue less the cost of mining and processing and other deductions and allowances.
Mine revenue is the market value of a mine's sales plus the value of inventory changes. Mining and processing costs include items such as operating costs, allowances for the exploration and development costs of the mine, ore processing costs, reclamation. Another allowance deducted from mine revenue is a processing allowance. The royalty is directed at the value of the ore extracted and not at the value created when the ore is upgraded. The processing allowance ensures that the mine operator's profit, from further processing of the ore, is not included in the royalty calculation. As the royalty is targeted at the mine mouth net value of the ore, any extra value created by further processing must be deducted from the revenue received from the processed ore. The deduction of processing costs and the processing allowance ensures that the royalty payment does not capture part of any additional value created by the mine operator, but instead only captures the mine mouth value of the ore.
What are the royalty rates?
The royalty rate applied to the annual mine profit is the lesser of 13% of the total profit and the sum of the marginal royalty rates given in the table below.
|Bracket||π Value of the Mine's Output (Mine Profit)||Marginal Royalty Rate|
|2.||$10,000 < π ≤ $5 million||5%|
|3.||$5 million < π ≤ $10 million||6%|
|4.||$10 million < π ≤ $15 million||7%|
|5.||$15 million < π ≤ $20 million||8%|
|6.||$20 million < π ≤ $25 million||9%|
|7.||$25 million < π ≤ $30 million||10%|
|8.||$30 million < π ≤ $35 million||11%|
|9.||$35 million < π ≤ $40 million||12%|
|10.||$40 million < π ≤ $45 million||13%|
|11.||$45 million < π||14%|
For example, a mine with a profit (value of output) of $12 million would pay a royalty of:
0% x 10,000 + 5% x ($5,000,000-10,000) + 6% x (10,000,000-5,000,000) + 7% x (12,000,000-10,000,000) = $0 + $249,500 +$300,000 + $140,000 = $689,500.
|Bracket||Value of the Mine's Output (Mine Profit)||Marginal Royalty Rate||Royalty Payable|
|2.||$5 million – $10,000||5%||$249,500|
|3.||$10 million - $5 million||6%||$300,000|
|4.||$12 million - $10 million||7%||$140,000|
Since 13% of $12 million is $1,560,000 which is more than $689,500, the royalty payable is $689,500.
Figure 1 graphs the total royalty payable for profits up to $50 million. The solid blue line is the royalties collected. Royalties increase at an increasing rate due to the rising marginal royalty rate. The dashed line represents what the royalties would have been if an average royalty rate of 13% were charged. The sum of the marginal royalty rates converges towards the maximum average rate of 13%.
Figure 1 Royalties Due for Profits Up to $50 million
At a profit of $225,050,000, the sum of the marginal royalty rates equals a royalty of 13% of total profits. A mine with an annual profit greater than this amount would be subject to the average royalty rate of 13% of total profit. This is shown in Figure 2 by the solid red line.
Figure 2 Convergence of the Sum of the Marginal royalty Rates with the 13% Average Rate at a Profit of $225,050,000
Are there any royalty sharing agreements with First Nations?
Yes. In NWT, the three settled land claim agreements contain royalty revenue sharing for mining on Crown lands within the settlement area.
In Nunavut, where a single comprehensive land claim has been settled, the agreement also contains royalty revenue sharing for mining on Crown lands within the settlement area. Some of the lands selected by the Inuit include ownership of surface and subsurface rights. Where subsurface rights are owned, 100% of all royalties belong to the Inuit.
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