Energy, Mines, and Resources

Subsection 102(4) Revenue – Hedging

Quartz Mining Act, Section 102 – Annual Royalty
Interpretation Bulletin: Subsection 102(4) Revenue – Hedging
January 26, 2007

Reference
Subsection 102(4) deals with the value of the mine’s output in order to calculate the annual profits of a mine so as to determine its royalties. Specifically it states:

In order to ascertain and fix the annual profits of a mine,

the gross receipts from the year’s output of the mine, or

in case the ore, mineral, or mineral-bearing substance, or any part of them, is not sold but is treated by or for the owner, holder, tenant, lessee, occupier or operator of the mine, on the premises or elsewhere, the actual market value of the output at the pit’s mouth, or

if there is no means of ascertaining the market value or if there is no established market price or value, its value as appraised by a person to be named by the Minister,

shall be ascertained, …and from the amount so ascertained the expenses, payments, allowances, or deductions described in subsection (5) …and no other shall be deducted and made.

Interpretation
Gains and losses from hedging transactions shall not be included in calculating the value of the output of a mine.

Discussion
The Quartz Mining Act  578 KB clearly specifies that the revenue for royalty purposes is to be based on the actual market value of the output of the mine. It does not specifically include hedging in its presentation of methodology for determination of revenue from a mine. As a result, gains and losses from hedging will not be included in the value of the mine’s output.

Hedging is defined to be a financial transaction, that while perhaps based on a mineral or metal commodity value, is not typically based on actual mine output. It may be undertaken by a mine operator to protect against negative impacts of commodity price and currency fluctuation, through the use of financial derivatives generally based on the value of an underlying asset, reference rate or index. Such hedging transactions may be settled in a number of different ways, including physical delivery of an underlying asset, cash settlement, or offsetting contract. Financial losses or gains may be realized from these transactions. 

The exclusion of hedging gains and losses from the revenue base for royalty does not extend to contracted 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 are considered commercial sales for royalty purposes to be included in the revenue methodologies for royalty purposes.