South Africa had been set to impose mining royalties (under the Mineral and Petroleum Resources Royalty Act) in May 2009. Yesterday, following discussions with labour and industry, South African Finance Minister Trevor Manuel (one of the smartest men in financial government anywhere in the world today in IM’s opinion) proposed a delay in implementing the royalty charges until March 2010 (part of the budget speech).

RBC Capital Markets (RBCCM) reports that he estimated this deferral would save the hard-pressed mining industry around R1.8 billion. The hope of the South African government is that this move will help prevent large-scale job retrenchments, which would have been potentially disastrous for the ruling party in an election year. Voting is in late April.Royalty rates are determined by EBIT margin (effectively allowing capital expenditure as a deduction) with the rate now pinned at 5% of the EBIT margin. Royalties would have been payable regardless of profitability, with a minimum royalty rate of 0.5% and maximum of 5% (from May 2009).  If the finance minister’s proposal is accepted, it would be very helpful in the PGM space where many companies would pay a royalty even though the bottom line is negative. Still, RBCCM “likes it even more as it would increase the current wide margins for the South African gold companies – now even better gearing to gold price upside.”