Since the Federal Government held its roundtable with nickel companies at the start of the year, a new term has been bandied around as a potential saviour for critical minerals producers doing it tough – a production tax credit (PTC).
The US and Canada both have a 10% production tax credit, which the Association of Mining and Exploration Companies (AMEC) seemed to be reason enough why Australia should have one when they ramped up the lobbying efforts (if they have one, why can’t we?).
The message must have got through with the Federal Government announcing a ‘Critical Minerals Production Tax Incentive’, an otherwise fancy name for a PTC.
Given the urgency of the lobbying calls, we look at whether the proposed PTC will have the desired effect, at least in the short term.
Before we get into that, a critical question needs to be answered first – what the hell is a PTC and how does it work?
A Production Tax Credit provides producers with a rebate of 10% of the costs of producing critical minerals. The rebate is then applied against tax payable to reduce tax owed to the Government. If the amount of tax payable reduces to zero, the remaining credit is rebated to the producer as cash.
For example, if a producer spends $10 million on costs associated with extracting the critical minerals, it will receive a tax credit of $1m. This will either reduce its tax bill by $1m or result in up to $1m being paid in cash to the producer.
However, with all of these things, the devil is in the detail.
Buried away on page 68 of Budget Paper No. 2 are a few short paragraphs about critical minerals and the Federal Government’s plans:
An estimated $7.1 billion over 11 years from 2023–24 (and an average of $1.5 billion per year from 2034–35 to 2040–41) to support refining and processing of critical minerals, including:
- A Critical Minerals Production Tax Incentive from 2027–28 to 2040–41 to support downstream refining and processing of Australia’s 31 critical minerals to improve supply chain resilience, at an estimated cost to the budget of $7.0 billion over 11 years from 2023–24 (and an average of $1.5 billion per year from 2034–35 to 2040–41).
- $10.2 million in 2024–25 for pre-feasibility studies for critical mineral common-user processing facilities in partnership with state and territory governments to enhance Australia’s capacity to process critical minerals, sovereign capability and economic resilience.
For the critical minerals sector as a whole, the PTC along with other funding support through ARENA and NAIF is a positive. The policy and funding is, for now, locked in for the next 17 years, providing certainty for companies, financiers and shareholders.
However, the PTC described in the Budget papers doesn’t start for another FOUR years, an eternity for mineral producers, particularly nickel. As the boffins at BHP crunch the numbers on keeping the NickelWest operations going (at a current projected loss of $200m per year), the PTC is going to do nothing for them.
The PTC is also being introduced ‘to support downstream refining and processing of Australia’s 31 critical minerals’. Therefore, the policy doesn’t help the majority of producers in Australia that produce a concentrate for sale. To be eligible for the PTC, producers need to value add into products such as nickel sulphate, lithium hydroxide or vanadium electrolyte.
AMEC commissioned a study in November 2023 ahead of its budget lobbying efforts, with comparisons made with the US and Canadian models. In the study, the authors recommend a model in line with the Advanced Manufacturing Production Tax Credit (2022) (AMPTC), part of the US’ Inflation Reduction Act.
The AMPTC provides for a 10 per cent production subsidy for critical minerals and active materials and covers production costs such as labour, utilities and other inputs. However, it excludes costs associated with raw minerals, depreciation, shipping and waste disposal.
The PTC proposed by AMEC would cover the same inputs as the US AMPTC, i.e., production costs such as utilities, labour, consumables and the processed inputs for active materials production. Materials costs include non-raw mineral feedstock, reagents consumables and utilities. Labour and overheads includes labour and maintenance costs.
So we potentially have a new Government tax credit that won’t kick in for four years and really only covers downstream processing costs. But don’t fear, there’s $10.2 million next year for Government departments to consider and investigate common user processing facilities.
After all the hoopla, its hard not to see nickel companies, in particular, being disappointed that these measures may not be enough to avoid further mine closures.
Most resources investors want to see a strong critical minerals industry in Australia. Let’s hope that the next generation of producers can bank on the longer term support to move their projects to fruition over the coming years.
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Photo by Vedrana Filipović
