ALACER GOLD CORP AND HILL 51 PTY LTD (FORMERLY ALACER GOLD PTY LTD) and COMMISSIONER OF STATE REVENUE
[2016] WASAT 31
•6 APRIL 2016
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
ACT: DUTIES ACT 2008 (WA)
TAXATION ADMINISTRATION ACT 2003 (WA)
CITATION: ALACER GOLD CORP AND HILL 51 PTY LTD (FORMERLY ALACER GOLD PTY LTD) and COMMISSIONER OF STATE REVENUE [2016] WASAT 31
MEMBER: JUDGE T SHARP (DEPUTY PRESIDENT)
HEARD: 1721 AUGUST AND 34 DECEMBER 2015
DELIVERED : 6 APRIL 2016
FILE NO/S: CC 1151 of 2014
BETWEEN: ALACER GOLD CORP AND HILL 51 PTY LTD (FORMERLY ALACER GOLD PTY LTD)
Applicant
AND
COMMISSIONER OF STATE REVENUE
Respondent
Catchwords:
Duty Assessment Acquisition of shares in company Landholder Valuation of mining tenements Ordinary principles of valuation Valuation methodologies
Legislation:
Duties Act 2008 (WA), s 34, s 36, s 36(4)(b)(ii), s 150, s 155(2), s 179, s 186, s 187, s 188, s 189, Ch 3 Pt 2
Revenue Laws Amendment Act (No. 2) 2012 (WA)
Stamp Act 1929 (WA)
State Administrative Tribunal Act 2004 (WA), s 17, s 27, s 27(2), s 32(4)
Taxation Administration Act 2003 (WA), s 34, s 40Result:
Reassessment of duty ordered
Summary of Tribunal's decision:
On 8 September 2010, the boards of Avoca Resources Limited and Anatolia Minerals Development Limited announced that they had agreed to enter into a scheme of arrangement under which Anatolia would acquire all of the shares in Avoca. The scheme of arrangement was approved by Avoca shareholders on 1 February 2011 and by the Federal Court on 3 February 2011.
On 18 February 2011, Anatolia, through its subsidiary Alacer Gold Pty Ltd acquired all of the issued shares in Avoca. Anatolia issued shares in itself to the former Avoca shareholders as consideration and Anatolia then changed its name to Alacer Gold Corp.
Avoca was at the relevant date entitled to land and chattels comprising certain mining interests in Western Australia.
The Commissioner assessed the dutiable value of the land and chattels to be approximately $1.25 billion, to which Alacer objected. The Commissioner disallowed the objection and Alacer applied to the Tribunal for a review of that decision.
The issue between the parties, and the matter to be determined by the Tribunal, was, simply, the dutiable value of Avoca's land and chattels at the relevant date. Alacer argued that the dutiable value of the land and chattels was $382.4 million.
The Tribunal considered the ordinary principles of valuation and accepted that, where there are no abnormalities affecting a market, the price at which property changes hands in the ordinary course of business and the market is usually its true value.
There was no dispute between the parties that the amount paid by Anatolia for all of the issued shares in Avoca, including liabilities taken over, was $1,253,475,000. After excluding the value of Avoca's assets which were not land and chattels, the Tribunal concluded that the monetary value of the consideration given for Avoca's land and chattels was $1,139,365,000.
As a crosscheck, the Tribunal considered a number of other valuations put before it by the parties, those valuations adopting methodologies other than market value. With one exception, those valuations provided support for the valuation based on market. That one exception was a valuation considerably lower than all of the other valuations. The Tribunal disregarded that valuation for two reasons. First, it adopted a valuation methodology which included what was referred to as the 'restoration' approach which the Tribunal did not consider to be applicable under the relevant legislative scheme. Second, it also adopted gold production forecasts which the Tribunal considered to be too low.
Accordingly, the Tribunal ordered a reassessment of the duty payable on the basis that the dutiable value of the transaction was $1,139,365,000.
Category: A
Representation:
Counsel:
Applicant: Mr PW Collinson QC and Mr AC Willinge
Respondent: Mr AH Slater QC and Mr B Jones
Solicitors:
Applicant: Ernst & Young Law Pty Ltd
Respondent: State Solicitor's Office
Case(s) referred to in decision(s):
Abrahams v Federal Commissioner of Taxation (Cth) (1944) 70 CLR 23
Commissioner of State Revenue v Hazel Holdings Pty Ltd [2014] WASCA 203
Commissioner of State Taxation v Nischu Pty Ltd (1991) 4 WAR 437
Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co (SA) Ltd (1947) 74 CLR 358
Executors of the Estate of Crane v Federal Commissioner of Taxation (Cth) (1975) 49 ALJR 1
Inez Investments Pty Ltd v Dodd (1979) 26 The Valuer 501
Pancontinental Mining Limited v Commissioner of Stamp Duties [1989] 1Qd R 310
Perpetual Trustee Co Ltd v Commissioner of Federal Taxation (1942) 65 CLR 572
Spencer v Commonwealth of Australia (1907) 5 CLR 418
Western Australian Planning Commission v Kelly [2007] WASCA 160
REASONS FOR DECISION OF THE TRIBUNAL:
Background
1Other than matters going to valuation, the facts are agreed between the parties.
2Avoca Resources Limited (Avoca) was an Australian gold producer and explorer company listed on the Australian Stock Exchange. Before 2010, Avoca produced gold only from its Higginsville gold mining operation, located south of Kalgoorlie, between Kambalda and Norseman.
3In 2010, Avoca completed a takeover of another Australian gold producing company, Dioro Exploration NL (Dioro).
4Through the takeover of Dioro, Avoca acquired:
a)the South Kalgoorlie gold mining operation (SKO), located approximately 40 kilometres south of Kalgoorlie; and
b)a 49% joint venture interest in the Frog's Leg operation, located approximately 20 kilometres west of Kalgoorlie. The other 51% in the Frog's Leg gold mining operation was held by La Mancha Resources Pty Limited, a subsidiary of La Mancha Resources Inc, a company that was then listed on the Toronto stock exchange.
5On 8 September 2010, Avoca and Anatolia Minerals Development Limited (Anatolia), a Toronto stock exchange listed company, announced that they had entered into a Merger Implementation Deed to combine the two companies and create a new company. Under Australian law, this 'merger' was to be achieved by way of schemes of arrangement, under which Anatolia was to acquire all of the shares in Avoca, with Avoca shareholders to receive 0.4453 shares in Anatolia for each Avoca share held.
6Anatolia prior to the 'merger' had no relevant assets in Western Australia. Anatolia's assets comprised primarily a proposed mine called the Copler Gold Project (Copler project) in Turkey which was not in production but which was about to commence operations.
7On 1 February 2011, Avoca shareholders and optionholders voted in favour of the schemes of arrangement for Anatolia to acquire Avoca. On 3 February 2011, the Federal Court of Australia approved the schemes of arrangement.
8On 18 February 2011, the schemes of arrangement were implemented. Anatolia, through a wholly owned Australian subsidiary, the second applicant which was then named Alacer Gold Pty Ltd, acquired all issued shares and options of Avoca. Anatolia changed its name to Alacer Gold Corp (Alacer) and listed on the Toronto Stock Exchange and also on the Australian Stock Exchange. Alacer issued shares in itself to former shareholders of Avoca.
9The Commissioner of State Revenue (Commissioner) considered that Avoca was a 'landholder' and that this was a 'relevant acquisition', both within the meaning of the Duties Act 2008 (WA) (Duties Act). On 27 June 2013, the Commissioner issued an assessment of duty under the provisions of the Duties Act in relation to the acquisition of Avoca.
10The Commissioner assessed the dutiable value of Avoca's land and chattels in Western Australia to be $1,250,264,000 and the duty payable to be $64,382,511. The duty was paid on or around 27 July 2013.
11On 26 August 2013, the applicant objected to that assessment. The Commissioner on 10 June 2014 disallowed the objection and on 8 August 2014 the applicant applied to the Tribunal for a review of the Commissioner's decision upon the objection.
The statutory scheme
Duties Act 2008 (WA)
12The provisions from the Duties Act which follow are the provisions of the Duties Act which applied on 18 February 2011. These provisions include the amendments made by Revenue Laws Amendment Act (No. 2) 2012 (WA), to the extent that they were deemed to have come into effect on 1 July 2008.
13Chapter 3 Part 2 of the Duties Act imposes duty in respect of a relevant acquisition of an interest in a company that is a 'landholder'.
14Relevantly, a corporation is a landholder if immediately before the relevant acquisition it is entitled to land in Western Australia or an entity linked to the corporation is so entitled and the total value of all such entitlements is $2 million or more; s 155(2) of the Duties Act.
15Avoca was a landholder as at 18 February 2011 and this is not in dispute between the parties. Similarly, there is no dispute that the acquisition of the shares and options of Avoca was a relevant acquisition.
16Duty is imposed on the 'acquirer', that is, the person who acquired an interest in the landholder by a relevant acquisition; s 179 of the Duties Act.
17Section 188 of the Duties Act provides as follows:
188. Calculating duty payable
(1)To calculate the amount of duty payable in respect of a relevant acquisition an amount is first calculated by applying the appropriate rate of duty under section 184(1) to the value of the interest of the acquirer in the landholder immediately after the relevant acquisition and then, if applicable, a reduction is made under section 189.
(2)The resulting amount is the duty payable in respect of the relevant acquisition.
(3)The value of the interest referred to in subsection (1) is the same percentage of the value of the landholder as the percentage of the interest of the acquirer in the landholder after the relevant acquisition.
18No reduction under s 189 is applicable in this case.
19Section 186 of the Duties Act:
186. Value of landholder
(1)For the purposes of calculating duty in respect of a relevant acquisition the value of a landholder is taken to be the sum of
(a)the unencumbered value of the land and chattels in Western Australia to which the landholder is entitled; and
(b)the same percentage of the unencumbered value of the land and chattels in Western Australia to which any linked entity in respect of the landholder is entitled as the percentage of the landholder's interest in the linked entity taken into account under section 157.
(2)Except where section 187 applies, the entitlements referred to in subsection (1) are to be those that exist immediately after the relevant acquisition.
20Section 187 of the Duties Act does not apply in this case.
21Accordingly, the 'value of the landholder' upon which duty is imposed is therefore the sum of the unencumbered value of the land and chattels to which Avoca was entitled and the unencumbered value of the land and chattels to which each of the subsidiaries of Avoca was entitled, in each case immediately after the acquisition of Avoca on 18 February 2011.
22For the purpose of determining the value under s 186, s 36 of the Duties Act applies; s 150 of the Duties Act.
23Section 36 of the Duties Act:
36.Unencumbered value of property
(1)The unencumbered value of property is the value of the property determined without regard to
(a)any encumbrance to which the property is subject, whether contingently or otherwise; or
(b)any overriding power of revocation or reconveyance; or
(c)any scheme or arrangement
(i)that results in the reduction of the value of the property; and
(ii)for which a dominant purpose of any party to the scheme or arrangement was, in the opinion of the Commissioner, the reduction of the value of the property.
Note:Example for paragraph (c)
A owns land that B wishes to purchase. The land is valued at $1m. Before the purchase, A grants B a 50 year lease of the land. B is not required to pay any rent under the lease. A and B then enter into an agreement for the transfer of the land for $50 000, being the value of A’s interest in the land taking into account that it is subject to the lease to B.
The unencumbered value of the land is determined without regard to the grant of the lease if the Commissioner is of the opinion there is a scheme or arrangement under which A or B’s purpose in entering into it was to reduce the value of the land.
(2)Subsection (1)(c) does not apply to or in respect of a scheme or arrangement that was entered into before 27 December 1996.
(3)For the purposes of subsection (1)(c), the Commissioner may have regard to
(a)the duration of the scheme or arrangement before the dutiable transaction or the relevant transaction concerning the property; and
(b)whether the scheme or arrangement has been entered into with a related person within the meaning given in section 162; and
(c)whether there is any commercial efficacy to the making of the scheme or arrangement other than to reduce duty;
and
(d)any other matters the Commissioner considers relevant.
(4)When determining the unencumbered value of property
(a)the unencumbered value of an undivided share in the property, whether held jointly or in common, is to be ascertained by multiplying the total unencumbered value of the property by the share expressed as a fraction; and
(b)in applying the ordinary principles of valuation
(i)it is to be assumed that a hypothetical purchaser would, when negotiating the price of property, have knowledge of all existing information relating to the property; and
(ii)no account is to be taken of any amount that a hypothetical purchaser would have to expend to reproduce, or otherwise acquire a permanent right of access to and use of, existing information relating to property;
and
(c)that is land
(i)if the land is the subject of an agreement to transfer, any improvement made to the land at the expense of the purchaser or transferee before the date liability to duty arises on the agreement is to be taken not to have been made to the land;
and
(ii)if the land is the subject of a transfer, any improvement made to the land at the expense of the transferee before the land is transferred is to be taken not to have been made to the land; and
(iii)having regard to the use of the land that would best enhance its commercial value; and
(iv)having regard to commercial advantages (such as goodwill) that
(I)attach to the location or other aspects of the land; and
(II)would affect the price that a reasonable purchaser would be willing to pay for the land.
Taxation Administration Act 2003 (WA)
24Section 34 of the Taxation Administration Act 2003 (WA) (TA Act) allows a taxpayer the right to object to an assessment or other decision made by the Commissioner under, relevantly, the Duties Act that affects the taxpayer's liability to taxation.
25Under s 40 of the TA Act, a person dissatisfied with the Commissioner's decision on an objection may apply to the Tribunal for a review of that decision.
State Administrative Tribunal Act 2004 (WA)
26These proceedings fall within the Tribunal's review jurisdiction in accordance with s 17 of the State Administrative Tribunal Act 2004 (WA) (SAT Act).
27The Tribunal, in making its decision, has all the functions and discretions corresponding to those exercisable by the Commissioner in making the reviewable decision. The review is to be by way of a hearing de novo; s 27 of the SAT Act. It is not confined to matters that were before the Commissioner, but may involve the consideration of new material whether or not it existed at the time the Commissioner's decision was made.
28The Commissioner's reasons for the decision do not limit the Tribunal in conducting its review. The role of the Tribunal is to make the correct and preferable decision at the time of the decision under review; (s 27(2) of the SAT Act).
29Under s 32(4) of the SAT Act, the Tribunal may inform itself on any matter as it sees fit.
The application
30The first applicant is Alacer and the second applicant is the aforementioned Alacer Gold Pty Ltd, now named Hill 51 Pty Ltd (together the applicant). The respondent is the Commissioner.
31The decisions sought by the applicant are set out in the application as follows:
1)to set aside the Commissioner's assessment of duty based on the Commissioner's determination of dutiable value that is the subject of these review proceedings;
2)to direct the Commissioner to issue a reassessment of duty based on the dutiable value submitted in the applicant's objection or on such other amount less than the dutiable value determined by the Commissioner that the Tribunal determines to be the dutiable value; and
3)to direct the Commissioner to refund the duty that has been paid by the applicant to the extent it exceeds the above reassessed amount of duty, together with interest on that refunded amount.
32I will set out later in these reasons the applicant's grounds for its application. At this stage, however, it is sufficient to say that the applicant's position is that the Commissioner should accept the valuation of Avoca's land and chattels in Western Australia prepared by Mr Jason Hughes of KPMG because it 'most closely meets the requirements of the Duties Act and is supported by case authority'; objection letter from Ernst & Young to the Commissioner dated 26 August 2013 at page 17 (attached to the applicant's application).
The proceedings in the Tribunal
33The applicant filed its application with the Tribunal on 8 August 2014.
34The respondent's statement of issues, facts and contentions is dated and was filed with the Tribunal on 2 October 2014. The applicant's statement of issues, facts and contentions is dated and was filed with the Tribunal on 5 November 2014.
35The applicant's submissions are dated 30 September 2015 and were filed with the Tribunal on 1 October 2015. The respondent's submissions are dated and were filed with the Tribunal on 4 November 2015.
36The applicant's responsive submissions are dated 25 November 2015 and were filed with the Tribunal on 27 November 2015.
37The hearing of the matter took place over 7 days, on 17 to 21 August 2015 inclusive and 3 to 4 December 2015 inclusive.
38At the hearing, the applicant tendered witness statements from:
a)Mr Laurie Gillett (AMC Consultants Pty Ltd);
b)Mr David Varcoe (also AMC);
c)Mr Jason Hughes (KPMG);
d)Mr Jeffrey Hall (Sumner Hall & Associates);
e)Mr Mark Bryant (KordaMentha);
f)Mr Peter Cunningham (AMC);
g)Mr Andrew Proudman (AMC);
h)Mr Richard King (AMC);
i)Dr Chris John (AMC); and
j)Ms Lorraine Meldrum (Swann Global).
39The Commissioner tendered witness statements from:
a)Mr Paul Mazzoni (Coffey Mining Pty Ltd);
b)Mr Wayne Lonergan (Lonergan Edwards &Associates);
c)Dr Victor Ruddeno (Revaluate Pty Ltd); and
d)Mr Reginald Stephen Cooper (Grant Samuel and Associates Pty Ltd).
40All of these witnesses gave oral evidence at the hearing. In addition, Mr Charles Hastie (of Coffey at the relevant time) attended the hearing and gave evidence under a summons issued by the Tribunal at the request of the respondent.
41A number of documents were also tendered, including:
a)the document which became known as the Duff & Phelps report (Exhibit 24);
b)a paper copy of a financial model which became known as the S Kal Model (Exhibit 7);
c)the applicant's bundle of documents; and
d)the respondent's bundle of documents.
42I refer to both the Duff &Phelps report and the S Kal Model throughout these reasons and I will include later in these reasons a description both of these documents.
The parties' respective positions
The applicant's position
43The applicant submits that the matter to be determined by the Tribunal is the unencumbered value of the land and chattels in Western Australia to which Avoca and its linked entities were entitled as at 18 February 2011.
44The applicant says that this raises the following subissues:
a)What is the correct methodology to value Avoca's land and chattels? The primary choice, the applicant says, lies between a share price methodology as put forward by Dr Ruddeno and a discounted cash flow (DCF) methodology as put forward by Messrs Hughes, Bryant and Lonergan.
b)Is the market value to be determined by reference to the Duff & Phelps report?
c)What are the correct gold production and costs forecasts for the purpose of a DCF calculation?
d)What is the relevance to a DCF valuation of crosschecks to Avoca's share price?
e)Is it appropriate to take into account that a hypothetical purchaser of the land and chattels would incur costs and delayed receipt of revenue in restoring an operating business (the 'restoration methodology')?
f)Whose evidence should be preferred in relation to the application of the restoration methodology, AMC, Mr Lonergan or Dr Ruddeno?
g)For the DCF valuation, what are the preferred US dollar gold price and exchange rate forecasts?
h)For a DCF valuation, what are the preferred discount rates?
(applicant's submissions, paragraph 1)
45The applicant says that the Commissioner's assessment of the dutiable value of the land and chattels originally rested upon two reports from Dr Ruddeno dated respectively 16 May 2013 and 19 June 2013.
46Dr Ruddeno adopted what the applicant refers to as a 'share price methodology' to determine the market value of Avoca's land and chattels; applicant's submissions, paragraph 5.
47The applicant describes what it understands Dr Ruddeno's share price methodology to be in the following way:
a)First, Dr Ruddeno ascertained a noncontrol share price for Avoca of $3.20 by reference to the volume weighted average share price of Avoca from 4 January 2011 to 4 February 2011.
b)He then added a takeover premium of 30% to the noncontrol share price of $3.20 to produce an assumed share price of $4.16.
c)He arrived at a control capitalisation for Avoca of $1,474,000 by multiplying the assumed share price of $4.16 by the total number of shares (303,301,781) and options (55,016,845) as at 18 February 2011.
d)Finally, he deducted cash, metal inventories and other assets from the enterprise value of Avoca by a 'topdown' approach to achieve a preferred value of $1,429.9 million.
48The applicant says that although Dr Ruddeno, in response to certain criticisms made by Mr Hughes, subsequently amended his valuation of Avoca's land and chattels to a range of between $1,201.6 million and $1,301.4 million and a preferred value of $1,251.5 million, he nonetheless adhered to his methodological approach.
49The applicant notes that only Dr Ruddeno argued in favour of a share price methodology to value Avoca's land and chattels. The other valuers, including Mr Hughes, adopted a DCF methodology which the applicant considers to be the correct valuation approach. The applicant submits that assessing the value of the underlying assets of a company in a merger by simply having regard to the market capitalisation of the target company immediately prior to the announcement of the underlying transaction is unlikely to provide an accurate assessment of the market value of the target company's underlying assets.
50The applicant then goes on to say that, while it considers that Dr Ruddeno's methodology is flawed, it 'need not be dwelt upon at great length because of a remarkable development that occurred during the opening of the Commissioner's case'. The applicant says that the Commissioner during opening abandoned Dr Ruddeno's valuation and substituted a valuation prepared by Duff & Phelps; applicant's submissions, paragraphs 10 to 12. Duff & Phelps valued Avoca's land and chattels in Western Australia at the relevant date at around $1 billion.
51The applicant, however, considers that Duff & Phelps' assessment of the 'fair value' of the total assets acquired also has no credibility and should not be accepted. That assessment, the applicant points out, was prepared for accounting purposes and not from the perspective of an independent valuation for the purpose of an assessment of duty. Duff & Phelps' approach was simply to 'start with the purchase price and then … allocate that purchase price amongst the assets'; applicant's submissions, paragraph 37.
52The Duff & Phelps report is in any event flawed, the applicant says, because of its reliance on the 'out workings' of the so called S Kal Model.
53The applicant says that the S Kal Model does not provide a proper foundation for gold production and operating cost estimates and that Duff & Phelps lacked the expertise to critically assess those technical aspects of the S Kal Model.
54However, despite the applicant's concerns about the Duff & Phelps report, the applicant considers that the the Commissioner's 'change of case' does in fact open the way for a simple resolution of the matter. Because Dr Ruddeno's valuation is no longer relied upon by the Commissioner and the Commissioner is not relying on the valuation of Mr Lonergan (which the applicant says must in any event be rejected because 'it is founded upon unrealistic gold production and operating cost estimates'; applicant's submissions, paragraph 14) then it follows that the Tribunal should simply adopt the valuation conducted by Mr Hughes. The applicant presses that valuation 'because it is the only valuation opinion which rests upon expert gold production and operating cost forecasts, being those founded in the AMC production report'; applicant's submissions, paragraph 15.
55The applicant explains the valuation approach that Mr Hughes took, based on adjusted DCF forecasts as outlined, as follows:
1)He calculated the value of each mine as at 18 February 2011, based on the net present value (NPV) of each project's cash flow forecast, adopting the key mining, processing, operating and capital costs profiles included in the AMC models and overlaying his own taxation, macroeconomic and discount rate assumptions.
2)He then adopted the estimated time period and cash outlays (other than cash outlays in respect of mining information) required to re-establish mining operations at each location as set out in AMC's restoration report.
3)He next adjusted the annual production, operating and capital cost profiles adopted in step (1) above to reflect the time delays factors determined at step (2) above.
4)He then calculated the unencumbered value of land and chattels associated with mining operations based on the NPV of each project's adjusted cash flow forecasts.
5)He adopted asset values in respect of mineral interests not captured in the project cash flows as set out in the AMC production report and Mr Hughes' letter of instruction as appropriate.
6)Finally, he calculated the total unencumbered value of the land and chattels.
56His resulting valuations are $370.8 million (low), $393.9 million (high) and $382.4 million (mid).
57The applicant reminds the Tribunal that, for the purpose of a DCF valuation, the critical inputs are the gold production and operating costs forecasts. The applicant says that it has provided the Tribunal with a comprehensive report from reputable mining engineers, Messrs Gillett and Varcoe of AMC, which sets out their expert opinion as to what were the appropriate forecasts to make as at 18 February 2011 of future gold production and future costs for each of Avoca's mines. These inputs were utilised by Mr Hughes to produce a reliable DCF valuation of Avoca's land and chattels.
58The applicant notes that the Commissioner failed to place before the Tribunal a rival report against which the opinions of AMC could be tested.
59The applicant says that a DCF valuation should be preferred over a value 'inferred from … the consideration issued by Anatolia'; applicant's submissions, paragraph 182. The Tribunal should also accept the starting point provided by the AMC production report and the restoration approach which leads it to adopting Mr Hughes' valuation; applicant's submissions, paragraph 168.
60The applicant concedes that there is a considerable difference between the implied consideration paid to Avoca shareholders under the share acquisition and Mr Hughes' valuation of Avoca's land and chattels, but says that there is 'the simple possibility that the implied price paid by the purchaser was too high'; applicant's submissions, paragraph 184. The applicant notes that this is exactly the conclusion drawn by Mr Hughes after he analysed the market evidence. The applicant says that the ordinary principles of valuation (discussed later in these reasons) direct attention to a hypothetical bargain between hypothetical parties, not the actual bargain which gives rise to the dutiable assessment. The applicant says that the 'overpayment' by Anatolia emerges objectively from the conclusions in the AMC production report because it is to be assumed that their conclusions would have been available to a hypothetical purchaser. The applicant says that what is relevant for duty purposes is the value of the land and chattels of Avoca under a hypothetical sale to a hypothetical purchaser of them. 'The actual merger transaction was something quite different it was an agreement for Avoca and Anatolia to combine all of their assets and business enterprises worldwide into one group'; applicant's submissions, paragraph 186.
The Commissioner's position
61The Commissioner agrees that the task of the Tribunal in this proceeding is to determine the unencumbered value of the land and chattels in Western Australia to which Avoca was entitled at 18 February 2011, the acquisition date.
62The Commissioner submits that the best evidence of the value of the land and chattels to which Avoca and its subsidiaries were entitled is the price paid by Alacer to acquire ownership of them. The Commissioner therefore relies on the open market, arm's length price paid in the transaction giving rise to the liability to duty, for indirect ownership of the land and chattels in issue.
63The Commissioner says that the consideration paid to acquire the ownership of the land and chattels of Avoca was:
Consideration for Avoca equity $1,146,335,000.
Add liabilities of Avoca $107,140,000.
Deduct excluded assets $114,110,000.
Consideration for land and chattels $1,139,365,000.
64The Commissioner thus accepts that the applicant's objection should be allowed to the extent of a reduction to the amount of duty payable based on the value so ascertained.
65The Commissioner says that the applicant's submission that the Tribunal should adopt Mr Hughes' valuation should be rejected. The Commissioner says that the valuation made by Mr Hughes is not the best evidence of the value of the assets and the applicant has made no attempt to address the best evidence (the actual transaction). Further, the Commissioner says that the conclusions in each of the AMC reports are incorrect and therefore Mr Hughes' valuation, which relies on the AMC reports, is also incorrect.
66The Commissioner says that in any event the evidence of the expert witnesses is relevant only to the contention advanced by the applicant. The Commissioner says that if the Tribunal accepts that the best evidence of the value of Avoca's land and chattels at the acquisition date is to be found in the actual arm's length dealing by which the dutiable 'relevant acquisition' occurred, it is not necessary to have regard to complex expert calculations and opinions concerning an expected proxy for that value; respondent's submissions, paragraph 58.
67The Commissioner points out that contemporaneous expert reports were commissioned by the applicant and provided to shareholders before and for the purpose of the acquisition. The Commissioner says that the applicant then endeavours to discredit the 'very opinions which they have proffered to investors before the transaction was adopted'; respondent's submissions, paragraph 60.
68The Commissioner accepts the need for crosschecks and says that in the present case the value arrived at by reference to the actual transaction between actual willing but not anxious arm's length and knowledgeable parties in the assets in issue is entirely consistent with the values indicated by reference to the DCF valuations, other than that of Mr Hughes.
69The Commissioner also says that the dispute concerning the availability and applicability of the 'restoration methodology' arises only under the applicant's submission and that if the Tribunal accepts that the best evidence of the market value of Avoca's land and chattels is the price actually paid, then the 'intricacies of the variation to a DCF calculation involved in the restoration methodology need not be explored'; respondent's submissions, paragraph 177.
70The Commissioner says that the Duff & Phelps report is not relied upon as the basis upon which the Tribunal should fix the dutiable value, but only as evidence of the value at the acquisition date of the assets of Avoca which are not land and chattels. Further, the Commissioner says that the Commissioner did not 'abandon' Dr Ruddeno as a witness but rather says that the Commissioner relies on Dr Ruddeno's valuation as a crosscheck for reasonableness.
71Finally, the Commissioner says that the applicant's submissions confuse the value of the consideration given by Anatolia (being shares in Alacer) with a valuation of Avoca's assets based on the value of shares in Avoca (the market capitalisation method adopted by Dr Ruddeno).
The evidence of the witnesses
72I will deal first with the testimony of the witnesses who gave evidence as experts in valuation matters.
Mr Reginald Stephen Cooper
73Mr Cooper's witness statement for the purposes of these proceedings is dated 26 May 2015 and marked Exhibit 20. Annexed to his statement is a copy of his report dated 17 December 2010 and marked RSC-1.
74Mr Cooper is a director of Grant Samuel & Associates Pty Ltd (Grant Samuel), an investment banking firm established in late 1988 and specialising in mergers and acquisitions.
75He is a graduate of the University of Cape Town and holds an honours degree in Commerce from that University. He is an associate member of the Australian Society of Chartered Accountants.
76Mr Cooper joined Grant Samuel in 1994 after working for KPMG and its predecessor firms in consulting and corporate recovery. He has been responsible for numerous corporate advisory assignments including public company takeovers, mergers, business sales and acquisitions, schemes of arrangement, capital raisings and business valuations. In particular, he has experience in the resources sector, including acting for a number of major gold mining companies.
77Grant Samuel was engaged by Avoca to prepare the independent expert's report in relation to what was then the proposed merger between Avoca and Anatolia. The purpose of the report (RSC1) was to set out whether, in the opinion of Grant Samuel, the proposed merger was in the best interests of Avoca shareholders, and to state reasons for that opinion.
78It is apparent from his report that Mr Cooper is clear that in his view the terms of the merger were fair: Avoca shareholders would collectively hold a share of the merged company that is broadly consistent with their contribution to that merged company.
79Mr Cooper's report contains his valuation of Avoca's key assets, including the Higginsville, Frog's Leg and South Kalgoorlie projects. His valuation of those assets are summarised in the below table:
Avoca- Valuation Summary Valuation- (US$ million) Valuation (A$ million) Low High Low High Higginsville 550 600 561 612 South Kalgoorlie 300 350 306 357 Frog's Leg (49%) 250 300 255 306 Exploration Interests 39 59 40 60 Corporate Costs (40) (30) (41) (31) Enterprise Value 1,099 1,279 1,122 1,305 Adjusted net cash 3 3 4 4 Cash from the exercise of options 15 15 15 15 Equity Value 1,118 1,297 1,140 1,324 80The valuation is derived from the application of a gold futures methodology, a discounted cash flow analysis, a comparable company analysis and valuation benchmarks commonly used in the gold sector.
81Grant Samuel appointed Coffey Mining Pty Ltd (Coffey) as technical specialists to review the gold assets of Avoca and Anatolia. Coffey's role included a review of reserves and resources, development plans, production schedules, operating costs, capital costs and exploration potential. Coffey also prepared valuations of the exploration interests of Anatolia and Avoca.
82Grant Samuel's financial analysis was based on valuation scenarios prepared in conjunction with Coffey, reflecting Coffey's judgments regarding the range of assumptions as to ultimate mining inventory, mine life, production volumes, capital costs and operating costs that could reasonably be adopted for valuation purposes. The valuation adopted a gold price assumption in the range of US$1,350 - $US1,390 per ounce and a spot A$:US$ exchange rate of A$1.00 = $US$0.98.
83The valuation is based on a number of important assumptions, including assumptions regarding gold prices and exchange rates. Mr Cooper says that the valuations reflect the technical judgments of Coffey regarding the prospects for each of the operations of Avoca and Anatolia. He points out that gold prices, exchange rates and expectations regarding future operating performance can change significantly over short periods of time and that such changes can have significant impacts on underlying value.
84Mr Cooper says that the valuations of Avoca and Anatolia represent Grant Samuel's assessment of the full underlying value of each company at the relevant date. They have been prepared principally to allow a comparison of the relative values to be contributed by each company to the merged company. He says that they did not represent Grant Samuel's view of the likely share market value of the companies, individually or on a merged basis. Mr Cooper comments that shares in listed companies typically trade at a discount to full underlying value. Accordingly, he says, while the values estimated are believed to be appropriate for the purpose of assessing the merger, they may not be appropriate for other purposes or in the context of changed economic circumstances or different operational prospects for the mining assets of Avoca and Anatolia.
85Grant Samuel drew some conclusions which can be summarised as follows:
•The merger was a genuine merger of equals.
•Analysis of other valuation parameters (such as the relative contributions to gold reserves and resources) suggest that the terms of the merger were fair.
•Based on share market values at the date of announcement of the merger, the merger terms would have delivered a modest premium to Avoca shareholders. As a result of subsequent market movements it was likely that this premium had largely been eroded.
•Judgments regarding Anatolia's Copler project were key to assessing the proposed merger.
•Other benefits and disadvantages of the proposal were unlikely to be material.
•On balance, Avoca shareholders were likely to be better off if the merger were to proceed.
Mr Jason Hughes
86Mr Hughes' witness statement is dated 20 March 2015 and marked Exhibit 13 in these proceedings. Attached to Exhibit 13 is a copy of a report entitled 'Valuation of Assets of Avoca Resources Limited for Landholder Duty' dated 20 March 2015 and marked JH1.
87Mr Hughes also provided a joint statement with Mr Wayne Lonergan which is Exhibit 21. This statement sets out the key reasons for the differences in their valuation conclusions. I will refer to this again when dealing with Mr Lonergan's evidence.
88Mr Hughes holds a Bachelor of Commerce from the University of Western Australia, as well as Graduate Diploma in Applied Finance and Investments from the Financial Services Institute of Australasia. He is a chartered accountant and is a fellow of a number of industry groups. He has worked as a lecturer in applied valuations at the Securities Institute of Australia. He is a partner of KPMG.
89Mr Hughes has over 18 years' advisory experience providing specialist corporate finance advice, focusing on valuation assignments, completing both private valuations and public reports to corporations operating in a wide range of industries. Mr Hughes has also had over eight years' experience in providing corporate recovery and assurance services. He has been involved in and is a signatory to numerous public and private valuation reports issued by KPMG Corporate Finance.
90Mr Hughes was instructed by the applicant through Ernst & Young in a letter dated 20 March 2015 (the same date as JH1) to prepare a report setting out his opinion in relation to the unencumbered value of Avoca's interest in the land and chattels at each of Higginsville, South Kalgoorlie and Frog's Leg immediately after completion of the merger.
91Mr Hughes says that his report has been prepared in accordance with those written instructions from Ernst & Young for 'Duty purposes' (JH1 page 6) and relies on the information contained in a number of documents, including:
a)A report entitled 'Alacer Production and Costs Schedules - Alacer Gold Corp' dated 20 March 2015 and prepared by AMC Consultants Pty Ltd (AMC). That report includes AMC's opinion in relation to the appropriate life of mine forecast for each mine, and the value of additional potential mineral resources at South Kalgoorlie not included in production forecasts.
b)A report entitled 'Re-establishment of Mining Operations - Alacer Gold Corp' dated 20 March 2015 (referred to later in these reasons). That report was also prepared by AMC and contains AMC's opinion in relation to the costs and time delay associated with reestablishing mining operations at each of the Higginsville, South Kalgoorlie and Frog's Leg mines.
92In determining the unencumbered value of land and chattels, Mr Hughes says he adopted the following definition for market value:
The value that should be agreed in a hypothetical transaction between a knowledgeable, willing, but not anxious buyer and a knowledgeable, willing, but not anxious seller, acting at arm's length. (JH1 page 8)
93Mr Hughes considers that market value excludes 'special value' which he defines as being the value over and above market value that a particular buyer, who can achieve synergistic or other benefits from the acquisition over and above those available to a general market participant, may be prepared to pay.
94Mr Hughes' assessment of the unencumbered value of Avoca's land and chattels is determined by aggregating the value of Avoca's interest in:
•mining operations at each of Higginsville, South Kalgoorlie and Frog's Leg; and
•mineral interests and exploration potential not captured in the relevant project cash flows,
after taking into account the impact of 'restoration costs', namely:
•the cash outlays in re-establishing the other assets and attributes of the operations carried on, other than in respect of mining information; and
•the time delay of restoring the other assets and attributes of the operations carried on, including in respect of mining information.
95Mr Hughes' valuation primarily utilises the discounted cash flow or DCF valuation methodology, based on AMC's forecast production and real operating and capital cost profiles and AMC's cash outlays and time delay profiles, and also his own assessment as to the relevant macroeconomic, discount rate and taxation assumptions.
96Mr Hughes' final valuation of the land and chattels acquired by Alacer as a result of the merger is in the range of $370.8 million and $393.9 million. This is the valuation upon which the applicant principally relies.
97This valuation is in contrast to Mr Hughes' initial valuation report dated 11 March 2013 (Exhibit 23). This report contains the statement that it was prepared on the instructions of the applicant 'to assist in the Company's submission to the Office of State Revenue for the assessment of stamp [sic] duty applicable to the acquisition.' In this earlier report, which does not adopt the 'restoration approach', Mr Hughes concluded that the total value of the unencumbered land and chattels was between $827.9 million and $872.8 million with $850.4 million adopted as the midpoint.
98Mr Hughes' final valuation is set out in his report in tabular form as follows:
Low $M High $M Mid $M Land and chattels- mining operations Higginsville 164.3 169.2 166.8 South Kalgoorlie 43.1 44.5 43.8 Frog's Leg 100.6 104.4 102.5 Resources outside of production cases South Kalgoorlie 11.0 24.0 17.5 Exploration 51.8 51.8 51.8 Total 370.8 393.9 382.4 Notes:
1. The utilisation and ultimate realisation of chattels associated with the exploitation of the relevant mineral rights has been included in the AMC Models. As such, the value of these assets is inherently captures in the DCF forecasts and it is not necessary to separately seek to break these values out.
2. This table reflects the value of Avoca's 49% interest in Frog's Leg.
3. $M means millions of dollars.
4 May not calculate exactly due to rounding.
99Mr Hughes considers that, based on the basis of the production profiles provided to him, he has correctly excluded from his valuation the right to receive or obligation to settle cash flows outside of future business operations.
100He also considers that the range of values set out in the table above represents the maximum unencumbered value which can be attributed to the land and chattels. He says that this is because 'the income generating capacity of the business being carried on by Avoca is dependent upon all of the otherwise disparate operational assets of the business, both tangible and intangible, working in concert in an integrated manner following reestablishment, not just the land and chattels'; JH1 page 4.
101Mr Hughes states that he has also assumed that, following the time delay of restoring the other assets and attributes of the business, mining and production operations are able to be commenced immediately at the original full 'business as usual' rates included in the AMC models. In reality, Mr Hughes says, it is likely that any production activities would require a 'ramp up' period at the plant prior to reestablishment of full production rates, staff would not be operating at full productivity levels, additional training costs would be incurred and a purchaser may require a discount to reflect the increased risk attaching to the forecast cash flows emerging as projected at the conclusion of the restoration period. Accordingly, Mr Hughes says that the assumptions he has adopted mean that it is likely that he has in fact overstated the range of values for land and chattels.
102Mr Hughes says he has considered various crosschecks to the values of the mining operations as at the relevant date at each of the Higginsville, South Kalgoorlie and Frog's Leg mines that were the starting point for his calculation of the unencumbered value of the land and chattels. Mr Hughes says that while various of those measures provide broad support for the range of values he has adopted, in his view various factors limit the utility of those crosschecks. These factors include the length of time between the announcement of the merger and its completion date approximately five months later, the fact that some of the information relied upon was prepared for different purposes and differences in opinion as to the extent of recoverable reserves and resources, such that those crosschecks in his view should be viewed with caution.
Dr Victor Ruddeno
103Dr Victor Ruddeno prepared a total of six expert reports and a summary document for the assistance of the Tribunal. Those documents are collectively marked as Exhibit 19 in these proceedings.
104As well as valuing the relevant mining operations, Dr Ruddeno was also asked to comment on the valuations of other experts.
105Dr Ruddeno's given background states that he has been employed in the broking and investment banking industry for the last 30 years during which time he has carried out work as a mining analyst and corporate advisor. In the course of those roles he has been involved both directly and indirectly in feasibility studies and valuations of a number of resource and non-resource assets and in providing advice in the raising of equity and debt for resource projects.
106He is the nonexecutive Chairman of Samson Oil and Gas Limited and was previously a non-executive director of Pilbara Minerals. He has been involved in the assessment of assets through feasibility studies and in capital and debt raisings.
107He currently works as a consultant through Revaluate Pty Ltd (Revaluate) which provides resource valuation services to the mining industry and government. During the six years prior to this proceeding he has completed some 50 valuations of mining projects of numerous commodities including gold. Dr Ruddeno is also a part owner of and consultant to Horizon Advisory Services.
108Dr Ruddeno holds the qualifications of Bachelor of Mining Engineering, Master of Commerce and Doctor of Philosophy. He is the principal lecturer for Kaplan's Mining Investment Analysis course. He is also a fellow of a number of professional bodies.
109In summary, the background to and content of the documents that make up Exhibit 19 are as follows:
a)Initial Valuation Report dated 16 May 2013
Revaluate was requested by the Office of State Revenue to provide an independent valuation for certain mineral assets of Avoca.
b)Reply to KPMG letter of 13 June 2013, dated 19 June 2013
KPMG wrote a letter in response to Revaluate's initial valuation report and this document is a response to that letter. It deals with a number of issues, including whether Revaluate's calculation of value is unreliable and whether adjustments suggested by Revaluate to values provided by Grant Samuel are appropriate. Revaluate revised its conclusion in the initial valuation report.
c)Response to KPMG letter dated 15 July 2013, dated 20 August 2013
This is a further response to correspondence from KPMG. Revaluate again addresses perceived errors in Revaluate's initial report and also perceived inconsistencies between its different estimates.
d)A document referred to as 'Letter re 30% uplift' dated 5 March 2014
Revaluate was asked to provide an explanation for the 30% uplift value which was applied in its adjusted determination of the fair market value for certain mineral assets of Avoca as at 18 February 2011.
e)Dr Ruddeno's Alacer Valuation dated 29 May 2014
This was a valuation undertaken for comparison purposes, to put the 'Alacer Asset valuations' of Revaluate and KPMG on the same footing.
f)Letter dated 25 May 2015
In this, Dr Ruddeno provides a critique of the KPMG March 2015 Valuation (Exhibit 13 in these proceedings).
g)Letter to the State Solicitor's Office dated 18 August 2015
This letter includes a summary of Dr Ruddeno's evidence and of the significant valuation issues raised in his previous reports.
110In Dr Ruddeno's initial valuation he considered a number of alternate valuation methodologies. Because a market value was available through the listed share price for Avoca, he concluded that an implied control valuation was the most appropriate valuation methodology.
111Dr Ruddeno describes this approach as follows:
One approach to valuing Avoca is to determine the implied price paid by Anatolia, although as a Scheme it was a merger of two companies and … there appears to be no control premium offered. However to determine the [fair market value] a control premium to the market share price has to be considered as the shareholders of Avoca didn't individually have control of the company or its cash flows and in a hypothetical market a willing buyer would have to pay a premium above the market share price to have full control of the assets.
112Dr Ruddeno notes that three expert valuations were available to Revaluate, each of which used the Net Present Value (NPV) of project cash flows as their primary valuation method. Dr Ruddeno says that in each case there were underlying issues that 'mitigated' their use as the primary method, but they did provide a cross-check for Revaluate's valuation. Dr Ruddeno summarises the three reports he was provided with as follows:
•Grant Samuel provided an independent expert's report containing a valuation of Avoca's mineral assets of between $1,092 million to $1,257 million. With the inclusion of a tax reset, the preferred valuation was estimated to increase from $1,215 million to $1,434 million with a potential maximum value in excess of $2,000 million.
•Duff & Phelps provided a valuation of the mining resources, property, plant and equipment and exploration assets of $1,033 million. That value did not include any control premium or tax reset value and equated to the enterprise value based on their estimate of the acquisition price, which in Dr Ruddeno's view undermined the validity of Duff & Phelp's valuation of Avoca's assets. The valuation of the mining assets was based on an average discount rate of approximately 9.6% with, in Dr Ruddeno's view, no consideration of any 'gold premium'. He says that Duff & Phelp's methodology should have included a control premium, but he adds that it is unclear how they would have incorporated the additional value into their determination of the component parts.
•KPMG used the NPV method to determine a value for Avoca's three operating assets. KPMG then incorporated a delay in the NPV cash flows to account for the time it would take to replace all data. In Dr Ruddeno's opinion this opportunity cost was grossly over valued. He says that appropriate correction and adjustment of KPMG values would provide a valuation in excess of $1,900 million.
113Dr Ruddeno is of the opinion that, to determine the fair market value, it is necessary to consider what price a willing buyer and most importantly a willing seller would agree upon. To acquire 100% of Avoca for cash would require a bid well in excess of the market capitalisation and hence the enterprise value would be higher than the one assumed by Duff & Phelps.
114Each of the valuations of the other experts, in Dr Ruddeno's view, shows that the valuation derived by Revaluate is not unreasonable.
115Taking into account the relative merits of his analysis, Dr Ruddeno concluded that a 'not unreasonable valuation range' for Avoca's enterprise value was from $1,368 million to $1,481.4 million with a preferred value of $1,424.7 million as at the relevant date.
116Revaluate's initial valuation was summarised in a table reproduced below:
Project Project Technical Valuations ($m) Low High Preferred Cash (including options) 98.106 98.106 98.106 Metal Inventories 12.747 12.747 12.747 Other assets 13.122 13.122 13.122 Property, plant and equipment 118.160 118.160 118.160 Exploration tenements 51.760 51.760 51.760 JORC tenements 1203.328 1316.710 1260.019 less Debt 48.816 48.816 48.816 Other liabilities 80.422 80.422 80.422 Enterprise value 1367.985 1481.367 1424.676 117On 19 June 2013, Revaluate provided some revisions to its initial valuation. This was on the basis of what was contained in a letter from KPMG dated 13 June 2013. Revaluate agreed with KPMG that a number of errors had been made in its initial valuation. Revaluate's new range was from $1,201.6 million to $1,301.4 million with a preferred value of $1,251.5 million.
118Revaluate's further report on 20 August 2013 was in response to a letter from KPMG dated 15 July 2013. However, no further concessions or adjustments to the valuation were made in this report.
119Revaluate produced another report dated 5 March 2014. For this report, Revaluate was requested to provide an explanation for the 30% uplift factor that was applied in its determination of its adjusted valuation dated 19 June 2013. In this regard, Revaluate states that it is generally accepted that for a 'control transaction' of a listed public company, the bidder will pay a control premium to compensate the shareholders of the target company, primarily for their lack of control of the company's cash flow. Avoca was an established and profitable gold producer. In February 2010 Avoca had acquired control of Dioro which held the 49% interest in Frog's Leg and 100% of the South Kalgoorlie project through a revised cash and shares offer which valued it at a premium of between 116.5% and 137.4%. Therefore, in Revaluate's opinion, a premium of 25% to 35% for a larger and more diversified Avoca was not unreasonable.
120Revaluate's report of 29 May 2014 was for comparison purposes, to put its valuation and that of KPMG on the same footing (by estimating KPMG's valuation but without the restoration period). Revaluate again arrived at the conclusion that its equity market determined approach for the value of Alacer's tenements was reasonable. The valuations derived by Grant Samuel, Duff & Phelps and KPMG, excluding the restoration period, were consistent with Revaluate's revised valuation and provided the necessary crosscheck.
121On 25 May 2015 Revaluate prepared a further report intended for use in these proceedings. That report relevantly included a critique of the KPMG valuation as well as other previous valuations. In summary, Dr Ruddeno stated that the KPMG report had determined the valuation of Alacer using the NPV of future discretionary cash flows from its three gold mining projects. KPMG had relied on AMC's estimates of the life of mine production schedules, based on a modest conversion rate of gold resources plus some additional exploration potential. KPMG had determined a valuation for mines and chattels and then applied a delay in startup production for the time it would take to replace mining information.
122Dr Ruddeno opines that KPMG made two material mistakes in their crosscheck comparisons. Firstly, no control premium was added to the enterprise value of the comparative stocks while the estimated value for Avoca was based on NPV values, which included a control premium. Secondly, KPMG incorrectly determined Avoca's enterprise value resource multiple based on life of mine plans plus yet to be discovered gold for a total of 1,794 koz .
296Mr Hughes' March 2015 valuation must be excluded as a relevant crosscheck of the value of Avoca's land and chattels derived from its acquisition price.
297The valuations, other than that of Mr Hughes, support my conclusion that the unencumbered value of the land and chattels in Western Australia to which Avoca and its linked entities were entitled as at 18 February 2011 was $1,139,365,000.
Orders
1.The respondent's decision of 10 June 2014 to disallow the applicant's objection to assessment of duty is set aside.
2.The respondent is directed to issue a reassessment of duty on the basis that the dutiable value of the transaction is $1,139,365,000.
I certify that this and the preceding [297] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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JUDGE T SHARP, DEPUTY PRESIDENT
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