Energy, Mines, and Resources

Determination of Revenue

The determination of revenue is focused on establishing the market value of mine output, in descending priority from receipted sales, from market value determination, or appraisal (Ref: 102(4)): 

  • when there are sales of the output of the mine, the value of the annual output from mining subject to royalty is determined by gross receipts; 
  • where mine output is subject to processing or treatment by or for the owner or operator, the actual market value of the output at the pit’s mount has to be determined; or 
  • if there is no means of determining the market value or there is no established market price, the value is to be appraised by a person named by the Minister. 

The basis of establishing revenue or market value for mine output begins with the requirement to record and report the quantity, weight, other particulars, and value or other returns of the amounts derived from sale of ore, mineral or mineral-bearing substance removed from the mine (Ref: 102(14) & 102(13(a))).

8.1 Value of Mine Output - Gross receipts

The primary method specified for determining the value of output of a mine is gross receipts from sales. In today’s economy, however, there is very little market for direct sales of (unprocessed) mined ores. Virtually all ore mined today must be treated or processed to at least a mineral concentrate to be rendered marketable*. The royalty requires that, where there is treatment of the mine output by or for the owner or operator, the actual market value of the mine output be determined as at the pit mouth. 

The gross receipts from sale of concentrates, or finished metal or mineral product, do not usually directly provide the required pit mouth valuation, but do provide a starting point for working back to a pit mouth valuation by providing a base from which appropriate treatment and transportation charges may be deducted.

* The value in mine output is usually limited to a portion of the output comprising valuable metals or minerals. Most of the output volume is waste that must be separated from the valuable constituents. The value in the contained valuable metals or minerals is usually only obtainable after treatment to remove the waste, which treatment usually includes on-site mineral processing and off-site further processing, such as smelting and refining. While mine operators usually process mined ores to a concentrate on-site, further processing such as smelting and refining is usually done elsewhere by unrelated companies.

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8.2 Valuation of Mine Output at the Pit Mouth – Treatment Charges

Virtually all ore mined must be treated or processed to at least a mineral concentrate to be rendered marketable. Valuation of mine output at the pit mouth for the royalty requires factoring out from the concentrate, metal or mineral sales proceeds, relevant post-mining treatment charges for processing the ores into saleable form and transportation charges from the mine to the place of treatment.

The earliest stage at which mine output is typically sold is after processing into mineral concentrate. Sales of concentrate are typically made on the basis of recoverable valuable metal or mineral content, less transportation and treatment charges. The sale value is typically established with reference to a market value related to the end product metal or mineral (to a defined purity), from which transportation and treatment (processing, smelting and/or refining) charges are deducted. Thus, concentrate sales proceeds will usually be net of further treatment as in smelting and refining charges, and may also be net of concentrate transportation costs from the point of sale to the smelter, although there can remain ore or concentrate transportation costs between the mine and the point of sale. 

Concentrate sales proceeds, however, do not account for the costs of extracting concentrates from mined ore. The pit mouth valuation of mine output can be determined using an extension of the concentrate valuation methodology, by including a treatment charge for processing ores into concentrates. 

In cases where the processing to concentrate is done on a commercial basis by an unrelated party operating at arm’s length, the processing charges could be deducted, similar to smelting and refining charges, from proceeds of concentrate sales to arrive at the pit mouth valuation.  

At most mines, mined ore is processed into concentrate on-site by the mine owner or operator. To determine the pit mouth valuation of mine output in such cases, there is need to calculate a processing charge for deduction from gross proceeds. The processing charge should include appropriate operating costs of the processing and amortization of the capital cost of the processing assets over the projected mine life. The capital cost base for the processing assets for this calculation should include the initial capital investment in the assets, plus sustaining capital invested to maintain or enhance the plant productivity. 

The costs of any common facilities and infrastructure serving both the mine and the processing plant should be allocated proportionally on the basis of usage of the common facilities and infrastructure between the mine (as deductions from revenue) and the processing plant (as operating costs or amortization within the processing charge). (See: Interpretation Bulletin – Subsection 102(4) Revenue – Treatment Charges).

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8.3 Valuation of Mine Output - Inventories

The required valuation of mine output at the pit’s mouth has a time element as well as spatial. Mine output becomes royaltiable when it leaves the pit mouth, even if it remains in inventory or stockpile. This requires inventorying of stockpile quantities and assay grades at year end to ensure that the full year’s output of the mine is quantified and valued for royalty purposes. 

Most mines will have ore and concentrate inventory or stockpiles at the minesite, and may have concentrate stockpiles at the shipping port. Inventories may include: 

  • an ore stockpile at the minesite, initially to hold mine production before start-up of the mill and later as a surge buffer between mine and mill production cycles;
  • ore in transit through the mill;
  • concentrate stockpiles at the minesite, for balancing of mill production and offsite transportation, including additional onsite stockpiles accumulated while product transportation is shut down;
  • concentrate in transit to the shipping or transportation port or hub; and
  • concentrate stockpiles at the shipping or transportation port or hub, while amounts sufficient for shipping are accumulated.

It is expected that revenues from mine output shipped during the year and any stockpiled mine output at year end will be largely received or known in time for preparation of the royalty return by April 1 (which is 90 days after year end), and fully received before payment of the royalty owing by October 1. If actual sales revenue and treatment charges differ from those projected in the royalty return, an amended royalty return, incorporating the actual values and indicating the changes from the previously filed return, shall be submitted with the required payment. (See: Interpretation Bulletin – Subsection 102(4) Revenue – Inventories).

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8.4 Actual Market Value of Mine Output - Hedging Excluded

Minerals and metals are commonly sold at prices established with reference to international commodity exchanges, usually in currencies other than Canadian dollars, and often the final settlement price for a sale is known only after smelting and refining are complete. These common market practices introduce risk into the pricing of product. Some mining companies undertake financial market transactions, or hedging, to manage the impacts of swings in commodity prices and currency exchange rates. Hedging can include forward buying and selling of metal commodities and of currencies.  

The basis of valuation of output for royalty is a correlation of actual market value to actual output of a mine. This basis does not extend to derivative or subsidiary market activities such as hedging, which, although perhaps derived from a valuation of the output of a mine, are financial market transactions not dependent on actual output of the mine. (See: Interpretation Bulletin – Subsection 102(4) Revenue – Hedging).

This exclusion of hedging gains and losses from the revenue base for royalty does not extend to contracted (future) sales of the output of a mine, made at arm’s length, for supply of minerals or metals, and for which prices may be set out into the future. Such contracted sales differ from hedging activity because:

  1. the contract will be for actual supply of product at pre-determined schedule and price;
  2. there will be payment on delivery, usually for set volumes or at least volume ranges per period; and
  3. the contract usually requires specific set aside of ore reserves to service the contract to completion (i.e., restricts other sales).

If a producer was to enter into a supply contract for forward sales, with production delivery quantities and prices set for some period of time, payment on delivery, and requirement to set aside reserves to cover the forward sales volume, such arrangements could be considered a 'normal' commercial sale for royalty purposes, and not a hedging transaction.

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