APG Aus No 3 Pty Ltd v Quasar Resources Pty Ltd
[2022] WASC 123
•13 APRIL 2022
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: APG AUS NO 3 PTY LTD -v- QUASAR RESOURCES PTY LTD [2022] WASC 123
CORAM: TOTTLE J
HEARD: 25 - 28 OCTOBER 2021
DELIVERED : 13 APRIL 2022
PUBLISHED : 13 APRIL 2022
FILE NO/S: CIV 1955 of 2019
BETWEEN: APG AUS NO 3 PTY LTD
Plaintiff
AND
QUASAR RESOURCES PTY LTD
Defendant
Catchwords:
Contract - Interpretation - Agreement for the sale and purchase of mining tenements - Proper construction of net smelter royalty - Where Allocable Charges may be deducted prior to the calculation of the net smelter royalty - Meaning of the term 'refining' and whether costs and charges deducted are for refining and amount to Allocable Charges - Whether the term 'refining' in the context of the Australian Mining Industry in 2002 had a narrow or broad meaning
Contract - Interpretation - Reasonable charges, costs and penalties - Reasonableness of costs paid by the defendant to its related entity - Whether costs paid exceed the potential costs charged if the relevant operations had been carried out by independent third parties offering comparable services
Legislation:
Mining Act 1971 (SA)
Radiation Protection and Control Act 1982 (SA), s 5, s 24, s 27
Result:
Judgment for plaintiff
Declaration made
Category: B
Representation:
Counsel:
| Plaintiff | : | J P Moore SC & T N Owen |
| Defendant | : | A J Myers QC & J Taylor SC |
Solicitors:
| Plaintiff | : | Clayton Utz |
| Defendant | : | Allens |
Cases referred to in decision:
Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334
Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219
Blatch v Archer (1774) 1 Cowp 63; 98 ER 969
Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410
CCOM Pty Ltd v Jiejing Pty Ltd (1992) 36 FCR 524
Charter Reinsurance Co Ltd v Fagan [1997] AC 313
Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226
Crowe-Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414
Dahl v Nelson Donkin & Co (1881) 6 App Cas 38
Devonald v Rosser & Sons [1906] 2 KB 728
Drexel Burnham Lambert International NV v El Nasr [1986] 1 Lloyd's Rep 356
Hawksford v Hawksford [2005] NSWSC 463
Hearst v W J Lake & Co Inc 16 P 2d 627, 629 (1932)
Hodgson v Morella Pastoral Co Pty Ltd (1975) 13 SASR 51
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74
Maunsell v Olins [1975] AC 373
Nelson v Dahl (1879) 12 Ch D 568
Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64
Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541
Re Palmdale Insurance Ltd [1982] VR 921
Rosenhain v Commonwealth Bank of Australia [1922] HCA 41; (1922) 31 CLR 46
Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45
Sagar v H Ridehalgh and Son Ltd [1931] 1 Ch 310
Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80
Southern Resources Ltd v Technomin Australia NL (Unreported, WASCFC, Library No 8329C, 18 June 1990)
Technomin Australia NL v Southern Resources Ltd (Unreported, WASC, Library No 7940, 13 November 1989)
Tucker v Linger (1883) 8 App Cas 508
TOTTLE J:
Introduction
This action involves a dispute over the construction and application of a provision for the payment of a net smelter royalty in an agreement for the sale and purchase of mining tenements (the Agreement).
There are two issues:
(a)The first concerns the calculation of the amount on which the royalty is to be charged, specifically, what deductions the defendant is permitted to make from the gross amounts received by it from the sale of 'Mineral Products' (relevantly, uranium peroxide concentrate - 'yellowcake') before application of the royalty percentage. The Agreement provides that 'Allocable Charges' may be deducted. These include, 'charges, costs and penalties, if any, for ... refining'. The critical issue is the meaning of the term 'refining' and whether the costs and charges the defendant has claimed for 'refining' constitute Allocable Charges. The costs for refining deducted by the defendant from gross revenue are paid to a related company, Heathgate Resources Pty Ltd (Heathgate).
(b)The second issue arises only if the deducted costs are Allocable Charges, and it is whether the costs paid to Heathgate are reasonable and do not exceed the costs which would have been charged if the relevant operations had been carried out by independent third parties offering comparable services.
On the first issue - the construction issue - the difference between the parties is this: in the context of an agreement to pay a net smelter royalty the plaintiff contends that 'refining' means 'the final purification stage of a metal or mineral so as to produce its purest form required by an end user',[1] whereas the defendant contends that refining is the purification and upgrading of a commodity from an impure state and the term embraces processing operations which precede 'the final purification stage'.[2]
[1] Plaintiff's outline of opening submissions filed 8 October 2021 [7].
[2] Defendant's outline of opening submissions filed 15 October 2021 [2] - [3].
The plaintiff contends no refining of uranium ore takes place in Australia and that refining takes place at facilities overseas referred to as 'converter facilities' or refineries.
The difference between the parties on the construction issue has significant financial consequences. Relying on its construction the defendant has been claiming Allocable Charges of between approximately 60% and 120% of its gross revenue from the sale of yellowcake. The majority of these costs are claimed to be 'for refining'.
For its part, the plaintiff contends that the defendant incurs no costs in Australia in respect of refining.
The plaintiff challenges the reasonableness of two fees charged by Heathgate to the defendant, a utilisation fee charged at the fixed rate of '$7.50 per pound of yellowcake packed' for use of Heathgate's infrastructure, and a management fee charged at the rate of 15% of the operating costs borne by Heathgate and re-charged to the defendant.
The evidence - an overview
The lay evidence was confined. The plaintiff relied on the evidence of Mr Jason Gray, the plaintiff's Group Financial Controller, who gave uncontroversial evidence about the factual background. Mr Gray's witness statement was accepted into evidence and he was not required to attend for cross-examination.[3]
[3] Exhibit 302.
The defendant relied on the evidence of Mr Craig Bartels, the President of Heathgate Resources and Mr Joseph Gennaro, a director of the defendant and its company secretary. Mr Bartels explained the operations undertaken to mine and process uranium ore. Mr Gennaro explained how the net smelter royalty paid to the plaintiff had been calculated and in doing so referred to detailed accounting records. The evidence-in-chief of Mr Gennaro and Mr Bartels was constituted by witness statements made by them.[4]
[4] Mr Gennaro's witness statements were exhibits 304, 315 and 461 and Mr Bartels' witness statements were exhibits 303, 310, and 314.
A substantial amount of expert evidence was adduced. The plaintiff adduced expert evidence from Professor Allan Trench and Mr Brett Lawson and the defendant adduced evidence from Mr Grenvil Dunn. The evidence of these three witnesses was directed primarily to the construction issue. In my assessment, each of the expert witnesses sought to assist the court in a manner consistent with their obligations as expert witnesses. Some credit points were raised in respect of Mr Lawson and Mr Dunn and I address those when outlining their evidence in more detail later in these reasons.
On the issue of the reasonableness of the costs paid by the defendant to Heathgate the plaintiff adduced expert evidence from Mr Tigran Ter‑Martirosyan and the defendant adduced expert evidence from Professor Stephen Gray.
Four hundred and seventy-one documentary exhibits were accepted into evidence.
The primary facts
I will begin by setting out the primary facts established by evidence that was not controversial. I will then refer in some detail to the expert evidence adduced on the construction issue before setting out further findings made on the basis of that evidence in combination with inferences drawn from the primary facts.
The Agreement
The Agreement was made on 21 May 2002 between Goldstream Mining NL (Goldstream) and Alliance Energy Ltd (Alliance), a company listed on the Australian Stock Exchange (ASX), and its wholly owned subsidiary, Alliance Craton Explorer Pty Ltd (ACE).[5] Goldstream was the vendor and ACE the purchaser. The tenements sold by Goldstream were three exploration licences located in South Australia. Two of the exploration licences, EL2604 and EL2705, were located in the Gawler Craton and the third licence, EL2874 (the Arkaroola tenement) was located in the Curnamona Craton. The consideration was the issue of shares in the capital of Alliance and the payment of a net smelter royalty by ACE on the terms set out in the Agreement.
[5] Exhibit 5.
In announcing the acquisition of the tenements to the ASX on 1 May 2002, Alliance stated that it would concentrate its search for 'Olympic Dam style mineralisation on all three licences'.[6] It was apparent from the announcement that Olympic Dam style mineralisation was 'iron oxide copper-gold-uranium mineralisation'. The announcement referred also to a recent discovery of Olympic Dam style mineralisation in the area in which the Gawler Craton licences were located.
[6] Exhibit 27.
Alliance's announcement recorded that the Gawler Craton exploration licences adjoined licences that formed part of a recently announced joint venture to which Goldstream was a party. That 'recent announcement' was an announcement made by Goldstream to the ASX on 18 April 2002 of its joint venture to explore the licences adjoining the Gawler Craton tenements sold by it to ACE.[7] In its announcement Goldstream described the area in which its joint venture tenements were located as being within the Gawler Craton and as being prospective for 'iron-oxide, copper/gold deposits'.
[7] Exhibit 28.
As a result of a series of transactions the defendant assumed the obligation of ACE to pay the net smelter royalty and the plaintiff assumed the right to receive it.
Clause 7 of the Agreement provided for the payment of the net smelter royalty. Substituting 'the defendant' for 'ACE' and 'the plaintiff' for Goldstream, cl 7 is in the following terms:[8]
[8] Exhibit 5.
7NET SMELTER ROYALTY
7.1The defendant covenants and agrees with the plaintiff to pay the plaintiff a net smelter royalty equal to one percent (1 %) of the Net Smelter Returns in the manner and at the times hereinafter set out. The obligation to pay this royalty will endure for:
(a)the life of the Tenements and for the life of any replacement, renewal or substituted tenement or other form of authority that allows the recovery of Mineral Products from the Tenement Area; and
(b)so long as the defendant or any Affiliate of the defendant has an interest in the Tenements or in any replacement, renewal or substituted tenement or other form of authority that allows the recovery of Mineral Products from the Tenement Area.
7.2All royalty payments to the plaintiff must be paid in cash. Royalties will be paid:
(a)for Refined Precious Metals on or before the 45th day after the last day of the quarter in which the final settlement date for such Refined Precious Metals fall; and
(b)for Mineral Products that are not Refined Precious Metals on or before the 45th day after the last day of the calendar quarter in which the defendant actually receives payment for such Mineral Products.
7.3The defendant must provide the plaintiff at the time royalties are paid copies of all source documentation that verifies the amount of the royalty. The plaintiff will also be given access to any original documents, data, information and returns that form any part in the calculation of the royalty.
7.4Within 90 days after the end of each financial year during which a royalty payment has been made, the defendant will deliver to the plaintiff an unaudited statement of royalties paid to the plaintiff during the year and the calculation thereof. The plaintiff will be entitled at the plaintiff's expense to an annual independent audit of the statement by a certified public or chartered accountant within 12 months after presentation of the unaudited year-end statement.
7.5The defendant will have the right to co-mingle ores and minerals received from the Tenement Area with like resources from other properties. Before co-mingling, resources will be sampled, assayed, weighed and measured in accordance with sound industry practices. Before co-mingling the defendant will give notice to the plaintiff of its intention to co-mingle and the plaintiff shall be provided with the opportunity of attending any co-mingling or any sampling, assaying, weighing or measuring referred to in this clause. The defendant will maintain records of such measurements, which will be available for inspection by the plaintiff from time to time on reasonable notice.
7.6The plaintiff may lodge a caveat over each of the Tenements to protect its interest in the Royalty and the defendant shall not take any steps to remove it.
7.7The defendant and the plaintiff acknowledge that the defendant may from time to time undertake forward sale and/or purchase contracts, spot-deferred contracts, and option contracts and/or other price hedging and price protection arrangements and mechanisms and speculative purchases and sales of forward, futures and option contracts, both on and off commodity exchanges (Trading Activities) in connection with some or all of the Refined Precious Metals and other Mineral Products. Such Trading Activities, and any profits and losses generated thereby, will not, in any manner, be taken into account in the calculation of royalties due to the plaintiff whether in connection with the determination of price, the date of sale, or the date any royalty payment is due. The plaintiff acknowledges that the defendant engaging in Trading Activities may result in the defendant realising from time to time fewer or more dollars for Refined Precious Metals or other Mineral Products than is utilised in the royalty calculation and the plaintiff hereby waives any claim for additional royalty should the defendant at any time realise more dollars per troy ounce or other units of sale for Refined Precious Metals or Mineral Products than is utilised in the royalty calculation. Similarly, the defendant waives and the plaintiff will not be obligated to share in any losses generated by any such Trading Activities with respect to Refined Precious Metals or other Mineral Products.
Clause 1.1 contains definitions of terms used in the Agreement. Relevantly:
(a)Clause 1.1(h) defines 'net smelter return' as follows:
"Net Smelter Returns" means:
(i)in the case of Refined Precious Metals, the number of troy ounces of Refined Precious Metals delivered or credited to the account of [the defendant] as evidenced by the metals return statements received from the refiner, subject in each case to final adjustments with the refiner, multiplied by the Deemed Sales Price, and reduced by the Allocable Charges; and
(ii)in the case of Mineral Products that are not Refined Precious Metals and which are sold and delivered by [the defendant] the gross amount actually received by [the defendant] from the purchaser for the Mineral Products so sold, and reduced by the Allocable Charges;
(b)Clause 1.1(g) defines 'Mineral Products' as follows:
'Mineral Products' means all ores, minerals, concentrates, dore bullion, and other products mined and removed from all or any part of the Tenement Area, whether or not subsequently beneficiated, processed or otherwise upgraded and includes Refined Precious Metals;
(c)Clause 1.1(j) defines 'Refined Precious Metals' as follows:
'Refined Precious Metals' means all gold derived from Mineral Products and refined by or for the account of [the defendant] to a purity of at least .995;
(d)Clause 1.1(c) defines 'Allocable Charges' as follows:
'Allocable Charges' means the following costs, but only to the extent actually incurred and borne by [the defendant]:
(i)Sales, use, gross receipts, severance, ad valorem, GST (but not if subject to an input tax credit, which is actually claimed and received) and other similar taxes, if any, however denominated, payable with respect to existence, severance, production, removal, sale or disposition of Mineral Products, but excluding any taxes on net income;
(ii)Charges, costs and penalties, if any, for smelting (which does not include crushing), refining and marketing. In the event smelting or refining are carried out in facilities owned or controlled, in whole or in part, by [the defendant] or its Affiliates, charges, costs and penalties with respect to such operations will mean reasonable charges, costs and penalties for such operations but not in excess of the amounts that [the defendant] would have incurred if such operations were carried out at facilities not owned or controlled by them offering comparable custom services;
(iii)Charges and costs, if any, for transportation to places where Ores and Minerals are smelted, refined and sold; and
(iv)Royalties, rentals, fees and charges payable to the Government of South Australia and under native title agreements with respect to the Mineral Products for which the royalty is being calculated;
The Four Mile Project
In about 2005 the defendant discovered uranium deposits on the Arkaroola tenement. In 2012 mineral lease 6402 (referred to as the 'Four Mile tenement' or 'Four Mile') was granted over the area on which those deposits were located. Mineral Lease 6402 was granted to the defendant and ACE in the proportions of 75% to the defendant and 25% to ACE. The defendant and Alliance, through ACE, were parties to a joint venture for the exploration and mining of the mineral lease of which the defendant was the manager.
The Four Mile tenement is adjacent to two tenements held by Heathgate, mineral lease 6321 (the Beverley tenement) and mineral lease 6387 (the Beverley North tenement). These tenements and processing facilities operated by Heathgate are referred to as the Beverley Mine though at present no uranium ore is mined from either of the Beverley tenements.
Heathgate and the defendant share the same parent company. Heathgate is an 'Affiliate' of the defendant for the purposes of the Agreement. The defendant has no employees. Heathgate has provided all the personnel and knowledge for the exploration and mining activities undertaken at Four Mile.
The Beverley Mine and processing plant commenced operation in 2001 processing uranium ore from the Beverley tenements. Heathgate's processing facilities comprised two satellite processing plants located at Beverley North, the Pannikan Plant and the Pepegoona Plant and a processing plant on the Beverley tenement, the Beverley Plant. The Pannikan and Pepegoona plants have been decommissioned. The description of the operations undertaken at the Beverley Plant applies to the operations formerly undertaken at the Pannikan and Pepegoona plants.
In September 2015 ACE sold its interest in the Four Mile Project to the defendant for $73.975m.[9]
Uranium mining and processing
[9] Exhibit 224.
Uranium is a heavy, silver-grey metal that is weakly radioactive. It is mined by open pit and underground mining methods and by a process known as in-situ leaching sometimes referred to as 'in situ recovery' or 'solution mining'. In situ leaching is the mining method employed at Four Mile. The process is explained in more detail below but essentially it involves the recovery by chemical leaching of uranium from porous orebodies without physical excavation.[10]
[10] Exhibit 418 (16 - 19); Standing Committee on Industry and Resources, Parliament of the Commonwealth of Australia, House of Representatives, Australia's uranium - Greenhouse friendly fuel for an energy hungry world (2006).
Extraction of sub-surface uranium occurs at wellfields located on Four Mile. Each wellfield consists of injector wells and extractor wells.
A solution comprising water, sulfuric acid, and one or more oxidants is injected into the injector wells. In hydrometallurgy this solution is referred to as a lixiviant. As injected through the injector wells it is referred to as the 'barren lixiviant'.
The lixiviant goes through the geological formation containing uranium and dissolves it into a solution of predominantly uranyl sulfate. This 'pregnant lixiviant' (sometimes referred to as 'leachate') is pumped to the surface via the extraction wells and then transported through a pipeline from Four Mile to an ion exchange (IX) facility within the Beverley Plant (all the solution extracted from Four Mile is processed at the Beverley Plant).
The IX Facility consists of tanks which contain resin beads approximately one millimetre in diameter. The pregnant lixiviant moves through the resin beads which capture the uranium. The remaining lixiviant (also referred to as barren lixiviant though it contains a relatively small amount of uranium) is pumped back to the wellfields to be re-used with fresh reagents added.
The loaded resin beads are transferred to tanks. In those tanks the uranium is eluted (stripped) from the resin beads using a concentrated solution of sodium chloride and sulfuric acid. The solution is known as an 'eluant'. The uranium on the resin is replaced by a combination of chloride and sulphate ions from the eluant solution. Some of the iron which attached to the resin beads during the IX phase is also removed.
The eluant is transferred into further tanks. Hydrogen peroxide followed by sodium hydroxide is added. These reagents are added at a speed and in amounts which allow large crystals of uranium oxide to precipitate out of the solution.
The uranium precipitate is transported to various settling tanks, known as 'thickeners'. During that process, flocculants (various chemicals) are often added to the tank and the uranium precipitate settles to the bottom of the tank.
The settled uranium solids are taken from the tanks and pumped to a dryer which evaporates water from the uranium precipitate.
The final product from these processes is yellowcake.[11]
[11] Yellowcake is the term often used to refer to uranium oxide U3O8 - in his evidence Mr Bartels explained that yellowcake produced at the Beverley plant exists in the form of UO4 - in these reasons unless it is necessary to distinguish between the two forms of yellowcake, references to yellowcake may be taken to be references to both forms.
Heathgate describes the processes outlined in the preceding paragraphs as involving:[12]
The management and optimisation of two distinct processes: (1) the wellfields to extract uranium from the deposit; and (2) the processing plant to recover this extracted uranium and produce a dried and packaged solid product for export.
[12] Exhibit 464.
Heathgate uses the term 'milling' to describe the '[p]rocess by which minerals are extracted from ore, usually at the mine site'.[13] This use of the term 'milling' is consistent with the use of that term by the Standing Committee on Industry and Resources of the House of Representatives of the Commonwealth Parliament in its paper Australia's uranium - Greenhouse friendly fuel for an energy hungry world (the Standing Committee report)[14] and with the definition of the term 'Mill' in the Industry Commission's report on Mining and Minerals Processing in Australia published on 25 February 1991 (the Industry Commission report).[15]
[13] Exhibit 465.
[14] Exhibit 418, the Standing Committee received submissions from over 80 individuals and organisations, including Heathgate, and two of Heathgate's executives gave evidence to the Committee.
[15] Exhibit 127 (192).
The Standing Committee report recorded:[16]
[16] Exhibit 418 (19).
2.18An increasing proportion of the world's uranium now comes from in situ leaching (ISL), where groundwater with added peroxide is circulated through a very porous orebody to dissolve the uranium and pump it to the surface. Depending on the nature of the host and enclosing rocks, ISL may use slightly acid or alkaline solutions to keep the uranium in solution. The uranium is then recovered from the solution in a conventional mill. (emphasis supplied)
The report continued by describing the next two stages in the processing of uranium as follows:[17]
[17] Exhibit 418 (19 - 20).
Uranium milling
2.20Milling, which is generally carried out close to a uranium mine, extracts the uranium from the ore. Most mining facilities include a mill, although where mines are close together, one mill may process the ore from several mines.
2.21In a mill, uranium is extracted from the crushed and ground-up ore by leaching, in which either a strong acid (usually sulphuric acid) or a strong alkaline solution is used to dissolve the uranium. The uranium is then removed from this solution and precipitated. The bright yellow powder produced by this process is referred to as 'yellowcake'. The yellowcake is then dried and usually heated to produce a fine black powder containing over 98 per cent U3O8, which is then packed in 205-litre drums and shipped as UOC. Typically, 70 to 90 per cent of the uranium metal in the original ore is recovered in the milling process. The original ore itself may contain as little as 0.1 per cent uranium. The UOC usually contains small quantities of impurities such as sulphur, silicon and zircon.
...
Conversion
2.24The product of a uranium mill is not directly usable as a fuel for a nuclear reactor. Additional processing, generally referred to as enrichment, is required for most types of reactors. This process requires uranium to be in gaseous form and this is achieved by converting the UOC into uranium hexafluoride (UF6), which is a gas at relatively low temperatures.
2.25At a conversion facility, uranium is first refined to uranium dioxide (UO2), which can be used as the fuel for those types of reactors that do not require enriched uranium.[18] Most uranium is then converted into UF6, ready for the enrichment plant. (emphasis supplied and footnote added)
[18] Exhibit 201, Appendix D (5): Refined UO2 is used as fuel in CANDU reactors, though the majority of nuclear reactors are powered by enriched UF6.
In the Industry Commission's report 'Mill' was defined as follows:[19]
A plant, usually at the mine site, which concentrates ore or treats it so that minerals are separated and prepared for ultimate recovery in pure form. A mill's output of concentrates will be in less bulky form than mined ore. (Also a shortened term for a ball or rod mill.)
[19] Exhibit 127 (192).
Similar terminology was used in the 'Final Report: Quantitative Analyses and Business Case for the Development of Uranium Conversion, Enrichment and Fuel Fabrication Facilities in South Australia' prepared for the Nuclear Fuel Cycle Royal Commission and published on 12 November 2015 (the SA Royal Commission Report).[20] This report refers to the processing operations that take place in Australia to produce yellowcake in the following terms:[21]
Currently, Australia is participating in the first stage of the nuclear fuel cycle market through active uranium mining and milling. However, Australia is not participating in any of the subsequent nuclear fuel cycle markets (i.e., conversion, enrichment and fabrication) as all uranium concentrates produced are shipped overseas for further processing. (emphasis supplied)
[20] Exhibit 201.
[21] Exhibit 201 (8).
Once produced, yellowcake is then packed into drums for transportation to converter facilities in North America. There are two facilities to which the yellowcake is sent, a facility operated by a firm known as Converdyn in the United States and a facility, the Blind River Refinery, operated by a firm known as Cameco in Canada. The following summary of the processes undertaken at the conversion facilities is contained within the SA Royal Commission Report:[22]
Conversion
…
When yellowcake arrives at conversion facilities it may contain various impurities such as Pb, Ni, Cd, Fe, Zn, Mn and Cu. The conversion process refines the uranium compound and prepares it for the next stage. Most nuclear reactors require uranium that is enriched in the isotope U-235. The enrichment process typically requires uranium to be in a gaseous form. To meet this need, U3O8 is converted into UF6, which sublimes - i.e. converts directly from solid to gas - at a temperature (at atmospheric pressure) of approximately 56.5°C. The UF6 is then loaded into large cylinders and shipped to an enrichment facility. There are several different processes for converting U3O8 to UF6.
The two most commonly used processes are known as the 'wet process' and 'dry process.' Both processes have three essential steps: reduction, hydrofluorination, and fluorination. The main difference between the wet process and dry process is in how they remove impurities. In the wet process, used in facilities in France and Canada, yellowcake is treated with nitric acid, concentrated, and dried into UO3 powder prior to reduction. In the dry process, used at the Metropolis Works facility in Illinois, purification takes place at the very end of the process through distillation of UF6.
Cameco's wet conversion facility in Canada also produces natural UO2, which is the desired oxide form to produce fuel pellets for PHWR [Pressurized Heavy Water Reactor] fuel. The facility converts U3O8 to UO3 and then subsequently to UO2.
Enrichment
Natural uranium is comprised of a mixture of different uranium isotopes. The two most abundant isotopes are U-235 and U-238. The relative concentration of the various isotopes of uranium in a given amount is referred to as the isotopic concentration or 'assay'. Uranium as found in nature consists of approximately 0.711% U-235 and 99.283% U-238 by weight with trace amounts of U234. Uranium that exhibits the naturally occurring isotopic concentration is called 'natural uranium'.
The majority of nuclear reactors in the world require uranium that is enriched in the isotope U-235, meaning that it has a higher concentration of U-235 compared to natural uranium. Commercial LWRs [Light Water Reactors], which are the most common type of nuclear reactor, typically require an assay of 3% to 5% U-235 in order to sustain a nuclear chain reaction. Uranium enriched in the isotope U‑235 is referred to as LEU [Low-Enriched Uranium] if the assay is less than 20% but above 0.711%, and HEU [Highly-Enriched Uranium] if the assay is greater than 20%.
[22] Exhibit 201 (6).
The terminology of mining and milling is adopted in the Radiation Protection and Control Act 1982 (SA). This Act provides for the control of activities related to radioactive substances and radiation apparatus. Section 24 provides that a person shall not carry out operations for the mining or milling of radioactive ores unless the operations are authorised by a licence. The definitions of mining and milling are as follows:[23]
[23] Exhibit 468.
'milling', in relation to radioactive ores, means operations for the concentration or processing of such ores, and includes incidental operations for the management and disposal of waste, but does not include in situ leaching carried on in the course of mining radioactive ores;
…
'mining', in relation to radioactive ores, means operations (including exploratory operations) for the extraction of such ores, and includes -
(a)incidental operations for the removal and storage of such ores; and
(b)incidental operations for the management and disposal of waste; and
(c)in situ leaching,
but does not include surface excavating that does not intersect radioactive ores, surface drilling or geophysical prospecting;
Section 27 of the Radiation Protection and Control Act 1982 prohibits the carrying on of any operation for the conversion or enrichment of uranium. Conversion and enrichment are defined as follows:[24]
conversion in relation to uranium means conversion of uranium oxides to uranium hexafluoride;
enrichment in relation to uranium means alteration of the isotopic composition of uranium;
[24] Radiation Protection and Control Act 1982 (SA) s 5.
The Act does not contain any reference to refining radioactive ores or indeed any reference to refining.
In The Extractive Metallurgy of Uranium,[25] a distinction is drawn between the operations leading to the production of yellowcake and 'Refining Operations'. The wet and dry conversion processes to which yellowcake is subjected at conversion facilities are referred to as forming part of the 'Conventional refining processes used in the United States'.[26]
[25] Exhibit 170 - Merritt RC, The Extractive Metallurgy of Uranium (1971).
[26] Exhibit 170 (32).
As explained later in these reasons Heathgate delivers yellowcake from the Beverley plant to the Blind River Refinery operated by Cameco Corporation. The documentary exhibits included an agreement between Heathgate and Cameco Corporation entitled 'Agreement for the weighing, sampling, analysis and storage of peroxide concentrates' made on 29 November 2002.[27] In this agreement uranium ore concentrate was defined as:[28]
[T]he dry product from a milling operation. The source of uranium may be from a mining operation or produced as a byproduct from processing another material, such as phosphate rock. (emphasis supplied)
[27] Exhibit 327.
[28] Exhibit 327 (32).
The specifications for yellowcake used in the nuclear fuel industry are stringent - they are dictated by nuclear engineering considerations and by the process requirements for uranium hexafluoride.[29] There is an industry standard that defines the quality of yellowcake required for conversion to uranium hexafluoride (ASTM C967 - 20 Standard Specification for Uranium Ore Concentrate). This standard permits impurities of up to 5.1%. There is also an industry standard that defines the quality of uranium hexafluoride suitable for enrichment and nuclear fuel fabrication (ASTM C787 - 20) which permits impurities of less than 0.03%.[30]
Commencement of yellowcake production and royalty payments
[29] Exhibit 197 (235).
[30] Exhibit 306 [26] and [169].
Mining and the production of yellowcake from the Four Mile Project commenced in April 2014.[31] All of the uranium ore extracted from Four Mile was treated at the Beverley plant. The decision to process the uranium ore at the Beverley Plant was taken over objection from Alliance and ACE who considered that the parties should construct a stand-alone plant at Four Mile in order to reduce operating costs.[32]
[31] Exhibit 314.
[32] Exhibit 217.
The defendant has delivered yellowcake produced at Four Mile to both Cameco's converter facility in Canada, the Blind River Refinery and to Converdyn's converter facility in the United States. Yellowcake delivered to Converdyn and Cameco is sampled for impurities. Mr Bartels' evidence in this respect,[33] which I accept, was to the following effect. When yellowcake is sent to a converter, Heathgate informs the converter, on behalf of the defendant, of the weight, uranium concentration and the amount of contaminants in the yellowcake. The converter will also measure the weight, uranium concentration and amount of contaminants, and if there is a discrepancy the converter will adjust the price. The converter may also charge a penalty if there is too much contamination in the yellowcake, such as iron or calcium. This is because there would be an increase in cost incurred by the converter to handle these contaminants.
[33] Exhibit 303 [52].
The first yellowcake from Four Mile was sold on the defendant's behalf in the last quarter of 2015. In February 2016 the defendant issued its first statement in respect of the royalty.[34] It was entitled 'Net Smelter Royalty Calculation - Four Mile Uranium Mine' and it was in the following format:[35]
[34] Exhibit 7.
[35] Redacted for reasons of commercial confidentiality.
A separate section of the Royalty Statement included details of the amount of yellowcake (expressed by reference to weight in pounds) sold, and Allocable Charges incurred, from 14 April 2014. That section was as follows:
In the February 2016 statement the amount recorded for uranium extraction and processing amounted to 52% of the gross sales receipts and the total Allocable Charges amounted to 59% of gross sales receipts. The amount recorded for 'uranium wellfield extraction' amounted to 12.6% of the Allocable Charges from 14 April 2014. Subsequent royalty statements recorded that Allocable Charges as a percentage of revenue varied between approximately 56% and 120%.
Mr Gennaro explained the book-keeping processes used to record costs incurred by the defendant which were included in its calculation of Allocable Charges.[36] Those processes were as follows. Costs recorded in the defendant's monthly management accounts were transferred into an Excel spreadsheet referred to as the Model.[37] The Model was and is a 'running spreadsheet which sets out the total costs that have been incurred by [the defendant] since about 2014'[38] that contained 'in-built' rules that determined which of the costs imported into it were allocable and which were not. Mr Gennaro attached to his witness statement a list of the Allocable Charges (annexure A) taken from the Model. The Allocable Charges were categorised by reference to 'Costs Centres' used in the defendant's management accounts.
[36] Exhibit 304.
[37] Exhibit 393.
[38] Exhibit 393 [16].
The defendant's operations are managed by Heathgate's senior management team comprising its Chief Financial Officer, Chief Human Resources Officer, Operations Manager, Geology Manager and 'Manager HSSE [Health Safety Security and Environment], Regulatory & Compliance, Aboriginal and Government Affairs'. The Heathgate management team provides a variety of management services to the defendant for which Heathgate charges a 15% management fee on the value of 'Operating Costs'.[39]
[39] Exhibit 315 [4] - [17].
Until late 2020 the 'Operating Costs' on which the 15% management fee was charged included costs incurred by Heathgate described as 'geology' and 'drilling'. The defendant accepted that geology and drilling costs were not Allocable Charges and that the management fee levied on these costs should not have been treated as Allocable Charges. To remedy this error an additional royalty payment of $44,392.02 was made by the defendant to the plaintiff.[40]
[40] Exhibit 315 [17] - [21].
Heathgate provides other services to the defendant for which it is reimbursed. These expenses are categorised by reference to the 'cost centre' for particular operations for which the services are provided and are recorded as Allocable Charges.
In addition, and as noted earlier, Heathgate charges the defendant a fixed rate 'utilisation fee' on each pound of yellowcake packed at the Beverley plant.
Mr Gennaro was unable to say what process determined whether the costs were allocable.[41] In cross-examination he said, 'all I know is the numbers that come through the model'.[42] He believed however that the defendant treated everything it did after extracting uranium from the wellfield as giving rise to Allocable Charges.[43] As is evident from annexure A to Mr Gennaro's statement, however, the defendant has recovered as an Allocable Charge the cost of reagents used in wellfield extraction. Ultimately, it was not controversial that the defendant has been including the cost of reagents used in extraction as an Allocable Charge. In closing submissions senior counsel for the defendant contended that the cost of the reagents used in the extraction wells constituted an Allocable Charge because the reagents were 'involved in the refining process'.[44] Subject to the qualification that the defendant also includes the cost of reagents used in the extraction process as an Allocable Charge, I accept Mr Gennaro's evidence to the effect that the defendant categorises the cost of all operations at the Beverley plant as Allocable Charges and I make a finding to that effect.
[41] Exhibit 304 [15] - [16].
[42] ts 83.2.
[43] ts 82 - 83.
[44] ts 310 - 311.
This finding is supported by the descriptions of the Cost Centres included in annexure A to Mr Gennaro's statement and the extensive nature of the costs covered by those descriptions. Without being exhaustive the Cost Centres include: extraction and processing operations, service and utilities (including information technology), health safety security and environment. The costs include expenses as diverse as: charter flights and aircraft expenditure, the cost of repairing and maintaining infrastructure (roads, airstrips, power and water supply), the cost of maintaining the camp and camp facilities including meals and accommodation and fuel costs. Additionally, there are 'catch all' 'Cost Centres' in respect of 'other costs incurred … not captured by other expense categories'. Other than geology and drilling expenses to which I have referred it is not possible to identify any operational costs that the defendant has not sought to recover as Allocable Charges.
There was a period after April 2014 during which the Beverley plant processed yellowcake from Four Mile and yellowcake mined by Heathgate from the Beverley tenement.[45] The evidence does not permit an exact finding of when mining of the Beverley tenement ceased but, on the basis that Heathgate was selling yellowcake produced from the Beverley tenement in June 2017 (albeit that the date of sale does not necessarily indicate the date of production) it is reasonable to infer that production of yellowcake from the Beverley tenement ceased sometime in 2016 or 2017.
State Government Royalty
[45] ts 153, 156 - 157 and exhibit 463.
The defendant pays a royalty to the State of South Australia pursuant to the Mining Act 1971 (SA). The defendant pays a royalty at the rate of 5% on the revenue it receives from selling yellowcake.[46] Different royalty rates apply to different types of mineral products and 5% is the rate applicable to mineral ores and concentrates. Revenues from 'Refined mineral products' attract a royalty rate of 3.5% of the value of the mineral.[47]
Dictionary definitions of refining
[46] ts 158.
[47] Exhibit 209.
Dictionary definitions include the following:
(a)refine: 'to free (something, such as metal, sugar, or oil) from impurities or unwanted material;[48]
(b)refining: 'the process of reducing the impurities in a substance';[49]
(c)refine: 'to bring to a fine or a pure state; free from impurities: to refine metal; to refine sugar; to refine petroleum';[50] and
(d)refine: '[m]etallurgy - [t]o purify or separate (metals) from dross, alloy, or other extraneous matter by removing oxides, carbon, and dissolved gases, generally at high temperature; [specifically] to convert grey pig iron into white metal, or to purify or otherwise improve steel in the ladle after steel-making. Also: to separate metals from (ore, dross, etc)'.[51]
Definitions of refining in industry publications
[48] Exhibit 425 (Merriam-Webster online dictionary).
[49] Exhibit 430 (Vocabulary.com online dictionary).
[50] Exhibit 431 (Macquarie online dictionary).
[51] Exhibit 471 (Oxford English online dictionary).
Each party referred to publications containing uses of the words 'refine' and 'refining' which they contended supported their construction. The contents of the publications themselves were not controversial but the conclusions that might be drawn from the publications were controversial. In the following paragraphs I will refer to the definitions in publications on which the parties placed particular reliance, that is, those publications to which express reference was made in written or oral submissions.
Each party relied on passages taken from The Mining Valuation Handbook.[52]
[52] Exhibit 456 - Rudenno V, The Mining Valuation Handbook (4th ed, 2012).
(a)The defendant relied on a reference to 'smelting and refining' as follows:[53]
[53] Exhibit 456 (68).
The process for recovery of the metalliferous commodities from the mineral concentrate produced at the mine. The most common form is smelting of sulphidic ores, followed by a refining process to produce a marketable product. Alternatively, an increasing number of hydrometallurgical processes are being employed on the mine site to produce a finished product directly.
(b)The plaintiff relied on a distinction drawn between the metallurgical processes employed to produce yellowcake (being the processes described earlier in these reasons) and:[54]
[54] Exhibit 456 (489).
The steps that are undertaken to produce fuel rods (not in Australia) include:
»refining the yellowcake to nuclear grade uranium trioxide (UO3)
»converting uranium trioxide to uranium hexafluoride (UF6)
»enriching uranium hexafluoride from a natural level of about 0.7 per cent U 235 to 3 to 4 per cent uranium 235. (emphasis added)
(c)The plaintiff relied also on the following definition of 'refining' contained in the Glossary:[55]
[T]he final stage of metal production in which impurities are removed from the molten metal by introducing air and fluxes. The impurities are removed as gases or slag.
[55] Exhibit 456 (583).
Although not referred to by either party it is convenient to note two other relevant aspects of the mining industry addressed in The Mining Valuation Handbook.
(a)the first matter to be noted is a description of the resources industry that contains a breakdown of the steps that resource companies generally undertake in the development of a new resource. The reference to 'Extraction' is included for context but it is the distinction between the 'Processing' and 'Refining' steps that is to be noted:[56]
Extraction. The mineralised orebody or hydrocarbons must be removed from the surrounding (waste) rock. For open cut mines, where the orebody is close to the surface, large volumes of waste rock may have to be removed to expose the orebody. For underground mines, where the orebody is too deep to be exploited by open cut mining methods, a shaft or decline, or both, will be constructed to gain direct access to the orebody. For oil and gas fields a sufficient number of production wells will have to be drilled to adequately recover the hydrocarbons.
Processing. Most minerals will require some initial on-site processing. For bulk commodities, such as coal, some upgrade may be needed to meet the quality requirements of the purchaser. For low-grade ores, concentration will be undertaken to reduce the amount of waste material within the ore, which would otherwise be transported to another location for further recovery of the economic element. An increasing number of mines are introducing technology that allows for the recovery of the economic element, such as copper, at the mine site itself.
Refining. Concentrate sent from the mine site may undergo further processing, either by hydrometallurgical (liquid) or pyrometallurgical (heat) processes, or by a combination of both, to recover the saleable commodity. In the case of petroleum the oil will be refined to produce various products, such as diesel or petrol.
(b)the second matter to be noted is the definition of the term 'beneficiation' in the Glossary - the definition is: 'the upgrading of a mineral by concentration processes'.[57]
[56] Exhibit 456 (3 - 4).
[57] Exhibit 456 (558). In the Industry Commission report (exhibit 127), beneficiate is defined as follows: 'To treat ore so that the resulting product is richer or more concentrated with mineral. The term chiefly is applied to a preliminary mill treatment of bauxite and iron ore'.
Each party relied on publications of the International Atomic Energy Agency (IAEA).
(a)The defendant placed particular reliance on a reference to uranium mining and processing plants in a publication entitled 'IAEA Safeguards Glossary 2001 Edition - International Nuclear Verification Series No 3' (the IAEA Safeguards Glossary).[58] The reference was contained in an entry dealing with uranium mining and concentration which was in the following terms:
[58] Exhibit 403 (2).
5.16. Uranium mine and concentration (ore processing) plant - installations, respectively, for mining uranium ore and for refining it to produce uranium ore concentrate, most commonly into concentrated crude oxide, U3O8 (often called yellow cake). According to paras 34(a) and 34(b) of [153], uranium mining and ore processing are activities which are not required to be declared, although certain imports and exports of ore concentrate are required to be reported to the IAEA. However, according to Article 2.a.(v) of [540], the State shall provide the IAEA with information specifying the location, the operational status and the estimated annual production capacity of uranium mines and concentration plants and thorium concentration plants, and the current annual production of such mines and concentration plants for the State as a whole. Further, the State shall provide, upon request by the IAEA, the current annual production of an individual mine or concentration plant. The provision of this information does not require detailed nuclear material accountancy. (emphasis supplied)
(b)The plaintiff relied on a technical document published by the IAEA entitled 'Management of Wastes from the Refining and Conversion of Uranium Ore Concentrate to Uranium Hexafluoride'.[59] The foreword stated:[60]
[59] Exhibit 195.
[60] Exhibit 195 (3).
This report is the outcome of an IAEA Advisory Group Meeting on 'Waste Management Aspects in Relation to the Refining of Uranium Ore Concentrates and their Conversion to Uranium Hexafluoride', which was held in Vienna from 17 to 21 December 1979. The report summarizes the main topics discussed at the meeting and gives an overview of uranium refining processes, being used in nuclear industry.
The 'Introduction' contained the following statement:[61]
[61] Exhibit 195 (7) and (14).
Commercial production of uranium hexafluoride (UF6) began in the mid-1950's. As of 1980 there are about ten uranium refineries in nine of the industrialised nations, converting uranium concentrates containing 60-80% uranium to uranium hexafluoride. With the expanding use of nuclear power the need for additional uranium refining capacity is recognized. There are several developing nations that have a significant number of identified uranium ore deposits which will eventually be mined and processed. Since most of these deposits are quite remote from the existing uranium refineries, it could be advantageous to refine the concentrate closer to the mines and concentrate mills.
...
Standard practice for the production of uranium ore concentrate employs milling and leaching of uranium bearing rocks or shales followed by separation of the uranium using either solvent extraction or ion exchange techniques with final precipitation as an ammonium, alkali or alkaline earth diuranate. During this process the uranium is separated from the majority of associated radionuclides and other impurities. The diuranate is then dried and/or calcined prior to drumming for shipment. Flow sheets of the typical refining processes are shown in the Appendix 1.[62] (emphasis supplied)
[62] The flow sheets shown in Appendix 1 describe the wet and dry processes undertaken at a converter facility not the processes undertaken to produce yellowcake - Exhibit 195 (38 - 40).
The report contained a section setting out the definition of terms used in it and included the following definition of refining:[63]
Uranium refining and conversion. All of the steps required to process ore concentrate, usually 60-80% uranium, into uranium hexafluoride (UF6).
(c)The plaintiff relied on a technical document published by the IAEA entitled 'Advances in Uranium Refining and Conversion (Proceedings of a Technical Committee Meeting on Advances In Uranium Refining And Conversion, Organized by the International Atomic Energy Agency and held in Vienna, 7-10 April 1986)'.[64] The introductory paragraph of the foreword referred to the processes to which yellowcake is subjected as follows:[65]
One of the most important steps in the Nuclear Fuel Cycle is the Uranium Refining and conversion which goes from the yellow‑cake to three different products: uranium dioxide (UO₂), natural metallic uranium (U) and uranium hexafluoride (UF₆). (emphasis supplied)
The document comprised a number of papers given at a Technical Committee meeting. The subject matter of the papers was the processes to which yellowcake was subjected to convert it into nuclear fuel and not the processes by which yellowcake itself was produced. The papers included a paper describing the processes undertaken at the Blind River facility. The abstract of this paper contained the following statement:[66]
In Canada, uranium yellowcake is now refined at Blind River and the uranium trioxide produced is shipped 500 km south to Port Hope where it is converted to uranium dioxide and hexafluoride fuels. (emphasis added)
(d)The plaintiff relied on a technical document published by the IAEA entitled 'Uranium Extraction Technology' in 1993.[67] The document described the various operations in the processing of uranium ore. In this document the terms 'refine' and 'refining' refer to operations at converter facilities that occur after yellowcake has been produced.[68]
[63] Exhibit 195 (68).
[64] Exhibit 194.
[65] Exhibit 194 (4).
[66] Exhibit 194 (9).
[67] Exhibit 197.
[68] Exhibit 197 (191), (235) and (246).
The plaintiff relied on the definition of refining contained in the Industry Commission's report. The definition was as follows: '[t]he final purification process of a metal or mineral'.[69]
[69] Exhibit 127 (193).
The defendant relied also on the following:
(a)The definition of 'refine' in 'A Glossary of Mining and Mineral Industry' published in 1920 by the Bureau of Mines in the United States which was in the following terms:[70]
[70] Exhibit 435.
1. To free from impurities; to free from dross or alloy; to purify, as metals; to cleanse. 2. To treat cast-iron in the refinery furnace so as to remove the silicon.
(b)The reference to refining in a Minerals, Metals and Sustainability: Meeting Future Material Needs[71] which was as follows:
The impure metal from smelting and the metal-containing solution from leaching normally contain impurities extracted along with the metal of interest. The aim of refining is to reduce the concentration of these to levels that meet the specifications for traded metal commodities. The focus in refining is on impurity elements rather than on the valuable metal.
The defendant referred to the text surrounding the description of refining quoted above and, in particular, that the author included under the heading 'refining', operations such as chemical precipitation, solvent extraction and ion exchange - being operations undertaken at the Beverley plant. It appears that in broad terms the author uses the term 'refining' to encompass the earlier stages of 'purification' and not just the final stage.
(c)The definition of refining adopted by the Sumitomo Metal Mining Company, which is, 'any process that increases the grade or purity of a metal' and that adopted by the Anglo American Company, which is, 'to produce the pure state of a commodity from its ore'.[72]
(d)An explanation of the term 'beneficiation' in a publication of the Southern African Institute of Mining and Metallurgy that included a reference to the term refining.[73] I will make further reference to this publication when reviewing Mr Dunn's evidence.
[71] Exhibit 399 - Rankin W, Minerals, Metals and Sustainability Meeting Future Material Needs (2011).
[72] Exhibit 308 [1.2].
[73] Exhibit 434.
The expert evidence
Reports from each of Professor Trench, Mr Lawson and Mr Dunn were tendered,[74] together with a 'joint expert memorandum' summarising the points on which, in pre-trial conferral, they agreed and those on which they disagreed and providing a brief explanation of their respective views.[75] The experts gave evidence concurrently. The expert evidence formed a significant part of each side's case and I will review it at some length.
Joint expert memorandum
[74] Exhibits 305, 306 and 308 respectively.
[75] Exhibit 312.
In the 'joint expert memorandum' the experts recorded the following points of agreement:[76]
(a)Refining involves purification and therefore upgrading from an impure to a pure state.
(b)Refining can be either hydrometallurgical and/or pyrometallurgical in nature.
(c)Upgrading during the physical process of mining does not constitute refining.
(d)Refining ends with the production of a high purity product and may include one or more unit operations prior to the final product being produced.
(e)Refining involves transformation of an intermediate process product.
(f)The final refined product has a high degree of purity.
(g)A refined product is fungible.
(h)Multiple stages of processing are required to obtain a pure metal or metal product from the ore.
[76] Exhibit 312.
Mr Dunn and Mr Lawson agreed that the 'refined product' need not be a metal but could be a compound of a metal.[77] Professor Trench did not disagree with this proposition but his view was, in effect, that refining is a term most commonly used to describe the production of pure metals.
Professor Trench
Evidence-in-chief
[77] Exhibit 312 (8).
Professor Trench is a 'mineral economist, geophysicist and business management consultant'. He has a Bachelor of Science (Geology), a Master of Science (Mineral Economic), a Masters of Business Administration and a Doctor of Philosophy (Geophysics). He holds the positions of 'Professor of Practice and MBA Director' at the University of Western Australia Business School. He holds, and has held, a number of other academic positions. Professor Trench has been actively involved in the mining industry in Australia since 1992 and is, and has been, a director of Australian-listed resources companies operating in Australia and overseas.[78]
[78] Exhibit 305 [23].
There was no challenge to Professor Trench's qualifications to express opinions on the issues. There was no attack on Professor Trench's credit. Rather senior counsel for the defendant submitted that while Professor Trench was an honest and candid witness he was not experienced in the technical aspects of mining or metal processing and contended that his evidence largely constituted a literature review.[79]
[79] ts 324.
Professor Trench was asked to express opinions on whether there was any commonly accepted meaning in the mining industry of the following terms:
(a)net smelter return;
(b)refining; and
(c)smelting.
In addition, he was asked to say whether his opinion would differ if his analysis was limited to:
(d)any common meaning which existed in or around 2002; and
(e)the Australian mining industry.
In Professor Trench's opinion the commonly accepted meaning of net smelter return in the global mining industry was as follows: '[t]he revenue receipts, per unit of ex-mine metal-bearing product, that are received by a mining company after the relevant tolling charges for smelting and refining of ex-mine metal-bearing product have been deducted'.[80] His opinion would not differ if his analysis was limited to any common meaning that existed in 2002 or if the analysis was limited to the Australian mining industry.[81]
[80] Exhibit 305 [27].
[81] Exhibit 305 [30].
In his oral evidence Professor Trench explained what he meant by 'ex‑mine':[82]
In - in the - in the commercial world in mining, what's referred to as the ex-mine product, both from Beverley and from all uranium operations, is actually the yellowcake product. So the mine in the commercial context, includes whatever we're going to call the processing plant that actually does this processing to create the yellowcake.
...
So if - if the question is asked what's the ex-mine product, and interestingly, that's the critical one, that's the subject to the royalty discussion. If one asks what the ex-mine product is of a gold mine, it's actually the gold dore bars that grade between 70 per cent gold and 90 per cent gold, and let's say, on average 80 per cent gold.
So I think we - hopefully, that's useful for the court to try and draw the distinction between the understanding in the mining industry of a mining product. Technically, you get an answer right next to the mine. Commercially, what's referred to the [ex-mine] product includes quite a lot of processing, however you define that processing between concentration, purification, leaching, refining or anything else.
[82] ts 253 - 254.
Professor Trench described a net smelter royalty as a 'revenue royalty' and explained that it could be distinguished from 'other common royalty constructs'. His evidence in this respect was as follows:[83]
[83] Exhibit 305 [31].
31. To put NSR into a broader royalties context, the most commonly negotiated (non-government) types of royalties for mining projects are value-based royalties, profit-based royalties, and unit-based royalties (typically unit-weight) [sometimes referred to as specific-rate royalties]. Additionally, royalty holders also write 'event-triggered' royalty payments into commercial agreements, such as the payment of specific consideration linked to project and/or production milestones. 'Hybrid' royalties also exist, where the royalty-types above are combined to calculate the total royalty payable.
31.1Value-based royalties are levied on a revenue-linked basis, and can exist in several contractual forms, of which Net Smelter Return (NSR) is one common occurrence. Gross Revenue Royalty and Ad Valorem royalty are other commonly-used descriptors that describe types of value-based, revenue-denominated, royalties.
31.2Profit-based royalties are levied on an accounting (profit and loss) basis, thus consider both the revenue‑side and cost-side of mining operations in determining the royalty payable. The cost-side may, or may not, include an assessment of non-cash deductibles such as depreciation charges. Thus, Gross Profit Royalty (ignoring non-cash accounting charges) and Net Profit Interest (NPI), which deducts agreed capital charges, both exist.
31.2.1 A Gross Profit Royalty only considers cash-based revenues and deducts operating costs only.
31.2.2 A Net Profit Interest (NPI) or Net Profit Royalty (NPR) also allows deductions for non-cash costs, such as capital expenses, prior to determining the residual $ value upon which a royalty is levied.
31.3 Unit-based royalties are contractual arrangements that charge an absolute royalty levy that is calculated solely on a per-unit-of-material basis (e.g. $ per tonne of mined ore, $ per tonne of processed ore or $ per ounce of mine production).
31.4 Event-triggered 'royalties' can take any contractual form agreed to by the contracted parties, for example royalty payments linked to achievement of project milestones (e.g. 2% NSR becomes payable after the first 50,000 ounces of gold production from a mining operation).
31.5Hybrid royalties combine a mix of royalty types. For example, a revenue-based royalty may exist alongside a profit-based royalty at the same mining operation.
31.6 The broad royalty types described above constitute the relevant types of negotiated (non-government) royalties that existed prior to 2002 and which continue to exist.
31.6.1 Selected documents that support the contention that these royalty-types existed prior to 2002 are summarised at Exhibit D to this report.
31.6.2 Selected references to documents that support the contention that these royalty types continue to exist are summarised at Exhibit E to this report.
31.7 The royalty types described above are listed in order of their commonality of use in the minerals industry. That is, value-based royalties are far more common than are profit-based royalties, which in turn are more common that [sic] unit-based royalties.
31.8 Value-based royalties common in the industry are typically lower, when described in percentage terms, than are typical profit-based royalty percentages used in the mining industry. Typical value-based royalties used in the Australian mining industry, (e.g. NSR's) are in the range 0.5-5% in my experience, whereas typical net profit-based royalty interests (e.g. NPI's) are in the range 5-25%.
31.9 A brief example is illustrative as to why NSR royalties are typically denominated as lower percentages than are NPI royalties. Say a small mining operation had an annual NSR revenue of $10,000,000 (i.e. after smelting charges have been deducted) and made an annual net profit on that revenue of say $2,000,000. If a 3% NSR royalty (based on revenue) existed over the mining operation, then such a royalty would return $300,000 to the royalty holder (i.e. 3% multiplied by $10 million NSR revenue equals $300,000). In contrast, to return the equivalent $300,000 annual amount via an NPI royalty would require an NPI of 15% to exist (i.e. 15% multiplied by the $2 million net profit equals $300,000).
(emphasis in the original and footnotes omitted)
Professor Trench supported the opinions expressed in the extract from his report set out above with references to the overview of royalty types provided by the mineral royalty company Franco Nevada in documents published for the purposes of an Initial Public Offering in 2007. The descriptions of the features of 'net smelter royalties' and 'net profit interest' royalties in those documents were consistent with the descriptions given by Professor Trench.[84]
[84] Exhibit 305 [36] - [39].
Professor Trench drew support for his opinions about the percentages of typical net smelter royalties and typical net profit interest royalties by reference to the results of a benchmarking study completed by Aurum Analytics supplemented by further research and analysis undertaken by him.[85]
[85] Exhibit 305 [32] - [35].
In Professor Trench's opinion, there is, and was in 2002, a commonly accepted meaning of the term refining within the global mining industry and within the Australian mining industry. The substance of Professor Trench's evidence was that refining is understood as the last physicochemical processing step in the process value-chain for a metal-bearing product, whereby remaining chemical impurities are physically separated from the metallic intermediate product, resulting in a pure metal final-product. Professor Trench gave an 'alternate definition' of refining which was that, '[r]efining refers to a final stage of metal processing that typically achieves a very high purity of metal as an output, such as for example, to a level of purity consistent with the chemical specifications of metals as they are traded on the London Metals Exchange (LME) and other metals exchanges'.[86] Professor Trench said that typically but not always refining follows a pyrometallurgical (heat based) smelting treatment of metal concentrates to subsequently produce a near-pure refined metal, such as for gold or copper. Although expressed in (slightly) different language, I do not understand Professor Trench's 'alternate definition' to connote a process with attributes that are different from those connoted by his primary definition.
[86] Exhibit 305 [69] - [70].
Professor Trench's view was that refining as understood in the mining industry is distinct from the refining of intermediate chemical products but he identified two exceptions. In his report he explained his view as follows: [87]
73I note that refining as understood in the mining industry is distinct from the refining of intermediate chemical products. That is, exceptions in the use of the term refining exist for intermediate steps in some metal value chains, where constituent chemicals are refined. Examples exist in the aluminium and uranium value chains. These exceptions however do not meet the above definition of refining in the mining industry on two counts in that:
73.1Intermediate chemical production does not represent the final stage of metal processing;
73.2These processes do not result in high-purity metal.
[87] Exhibit 305 [73].
Professor Trench explained that the refining of the chemical alumina (Al2O3) occurs between the mining stage and final-purity end-metal production in the aluminium value chain. With respect to the uranium value chain Professor Trench explained that the processing stage, which occurs after the production of yellowcake, was sometimes referred to as refining,[88] though as I record below Professor Trench was hesitant to refer to these post-yellowcake production processes as refining.
[88] Exhibit 305 [75].
Professor Trench supported his evidence by reference to a list of 50 references in published sources in which the term refining is applied to different metals and other commodities. He contended that the citations demonstrated that 'refining is a commonly-used, well-understood, industry term in the mining industry, specifically relating to the final processing step to achieve metal products of specified high purity'.[89] The list of references included the definitions of refining in The Mining Valuation Handbook and the Industry Commission report and the description of refining quoted earlier from Minerals, Metals and Sustainability - Meeting Future Material Needs.
[89] Exhibit 305 [76] and 'Exhibit F'.
Professor Trench's evidence about the meaning of the term 'smelting' was not controversial. His evidence was as follows:
85.In my opinion, there is a commonly accepted meaning of the term smelting in the global mining industry.
86.A suitable definition that fits with the commonly accepted meaning for smelting could be written as follows: the pyrometallurgical (heat-based) process in the value-chain for a metal-bearing product, whereby impurities are physically separated from an intermediate metallic product through the application of heat in the presence of other key compounds, where the smelting temperature, and also the other elements present, vary between metals and with the smelting technology in use, such that the resulting metal-bearing product has a concentration of the payable metal that is materially higher than prior to smelting.
87.An alternate definition that would fit within the commonly accepted meaning for smelting could be written as follows: Smelting refers to a pyrometallurgical (heat-based) stage of metal processing that achieves greater purity of payable metal as an output than input, such as for example, the conversion of a concentrate metal product to a matte or blister, with an output level of purity and chemical specification then suitable for subsequent metal refining.
88.In summary, while exact wording within definitions of smelting varies, the definitions speak to a consistent meaning.
89.My answer to the question of the commonly accepted meaning in the mining industry of the term smelting would not differ at all if my analysis was limited to:
89.1 a) any common meaning which existed in or around 2002; and
89.2 b) the Australian mining industry
(emphasis in the original and footnotes omitted)
Professor Trench concluded his report with observations about the 'metal value chains' for certain metals to illustrate the roles played by smelting and refining in the extraction processes. Professor Trench selected copper, gold, iron, lead, nickel, silver, tin and zinc. He selected these metals for two reasons, first, because he had experience of each of those metal industries and, secondly, they were globally significant metal markets. Professor Trench's observations were as follows:
100I note that there are high-level similarities between the processing stages for each of these metals.
100.1.1.Mining: The mine grades for various metals vary depending upon the value of the contained metal. Highest value metals can be mined at extremely low grades (grams per tonne) whereas lower value metals require higher in-situ grades to justify mine development (in per cent per tonne). That is,
100.1.1.1 Precious metals, gold and silver, can be economically mined at grades that are in parts per million, i.e. grams per tonne.
100.1.1.2 Base metals have sufficient metal value that in-situ grades of ~1% to ~10% are economic to mine.
100.1.1.3 Lower value per tonne, bulk commodities, such as iron ore, typically require far higher in-situ grades to be economic >55% Fe.
100.1.2 Concentration: Initial mineral processing seeks to remove the gangue (waste) minerals and selectively keep the payable, valuable metals. The level of concentration that is achievable varies between different metals and between different ore-types of those metals.
100.1.2.1 Precious metal concentrates result from physical and chemical separation, where the specific process varies by ore type (and where the concentration is influenced by optimising the recovery of all the payable metals in the mined ore). As gold is denser than waste minerals (for example rock-forming silicates), gravity separation is one method used to achieve a gold concentrate. Where base metals are present with precious metals in the ore, flotation methods are employed to selectively concentrate gold and copper for example into a metal-bearing concentrate. Gold, for example, may concentrate 10-fold into copper-gold concentrates from the original mined grade.
100.1.2.2 Base metals are also concentrated using both physical (e.g. heavy media separation) or chemical (flotation methods), resulting in metal concentrate grades typically as follows: Copper (20-40%), Tin (30-75%), Nickel (10-20%) and Zinc (50-55%). By way of comparison, other metals achieve lower concentration at this stage. Lithium concentrate of the lithium-bearing mineral spodumene, for example, is lower in grade, typically only 5-7%.
100.1.2.3 Concentration can also be used for bulk commodities, notably for iron ores of magnetite origin, where Fe grades can reach 65-66%, higher than the typical grades of hematite iron ores that are merely crushed and made ready for direct-shipping of product without further mineral processing steps at the mine-site.
100.1.3 Smelting is typically then the next defined intermediate mineral processing step after ore concentration, within the base metals (e.g. copper, lead, zinc, nickel, tin), precious metals (e.g. gold, silver) and in the case of steel formation (where the 'smelter' is referred to as a blast furnace and the smelted product as 'pig iron').
100.1.4Refining is then the final defined step in mineral processing after smelting, in the case of base metals (e.g. copper, lead, zinc, nickel, tin), and also precious metals (e.g. gold, silver). Refined metal products are typically 99.9% purity or above. Such a high level of metal purity is required to meet the product standards of metal exchanges for the respective metals.
100.1.4.1 In contrast, steel production does not seek to achieve a 99%+ purity of iron. Pig iron is the input feed to a steel mill, where the focus is on mixing the iron content with carbon (and other alloying metals) to create alloyed steel products of varied but specific metallic composition and with associated defined physical properties that are best suited to the intended use of the steel.
In observations made at the conclusion of the concurrent evidence session, Professor Trench distinguished between the processes that increase the concentration of metal in ore which he considered fell within the meaning of the term 'upgrading' and his understanding of the meaning of the term refining.[90]
Cross-examination
[90] ts 254.9.
The only challenge to Professor Trench's evidence in relation to the meaning of net smelter royalty was directed to whether there could be a net smelter royalty if there was no smelting and no refining. The relevant passage in the cross-examination provides an insight into the basis upon which Professor Trench expressed his opinion on the meaning of refining. The cross-examination went as follows:[91]
[91] ts 127 - 129.
MYERS, MR: Well, would you have a net smelter royalty in relation to a metal the production of which doesn't involve smelting?
WITNESS, TRENCH: Absolutely is the answer to that. So the - - -
MYERS, MR: Well, how would it be a net smelter royalty if there's no smelting?
WITNESS, TRENCH: Well, the classic one would be copper. So there's lots and lots of net smelter return royalties in copper, but 80 per cent of the world's copper goes through a smelter whereas 20 per cent of the world's copper is produced by solvent extraction and electrowinning, and so therefore there's no actual smelter in the 20 per cent pathway to produce the final copper, but there's still plenty of net smelter - you still talk about net smelter returns in copper and net smelter return royalties in copper. So I take your point, it is rather odd, but it's commonly accepted that a net smelter return royalty can exist in copper even in the absence of a smelter, believe it or not. So that's, again, perhaps unusual for the uninitiated, Mr Myers.
MYERS, MR: What about - let's keep with uranium for the moment. What about uranium where there's no smelting and no refining? That's your view, isn't it?
WITNESS, TRENCH: Certainly no smelting. I'm erring towards no refining, but it all depends on one's definition of refining if one accepts that a loose definition of refining is – of just increasing the percentage of metal in the product as it goes, then you could argue, as Mr Dunn's report does, that refining exists. As I say, my counterpoint on that would be if you open the floodgates to that one, refining would be everywhere in every plant of every metal on the planet because it's such a permissive definition that refining would just be everywhere, but -sorry. You have to come back to your point, Mr Myers. Could you ask me your question again and I will answer for you.
MYERS, MR: Is it your view that refining only follows smelting, can you have refining where you haven't had smelting?
WITNESS, TRENCH: Yes, you can have refining without smelting before it, yes, and the - - -
MYERS, MR: Well, isn't that what happens at Beverley?
WITNESS, TRENCH: No I would say not. The classic example would be copper cathodes produced from an electrowinning plant where you've produced a final pure metal product which can be sold on something like the London metal exchange, and you've got there without needing a smelter. So that's the classic. The difference I would say in anything that happens at Beverley is that you don't end up with a final metal product, you end up with an intermediate uranium oxide concentrate. So one qualifies as refining and one not through my own definitions, but, as I say, I accept that definitions are contentious.
MYERS, MR: Well, in your experience, would it be usual for a royalty agreement for payment of a royalty to be based upon a net smelter return whether the recovery doesn't involve smelting or refining?
WITNESS, TRENCH: Certainly, as I alluded to earlier, you can have a net smelter return where there's no smelter. I think the next smelter return - again, where there's no refining, I think - I'm trying to think of any examples. The copper example has a refinery, because the SX/EW plant is the copper refinery. So I can't think of an example where there's neither smelter nor a refining process to produce (indistinct) - - -
MYERS, MR: Well, that's what (indistinct) - - -
WITNESS, TRENCH: - - - metal.
MYERS, MR: That's what we have at Beverley, isn't it? That's what we have at Beverley?
WITNESS, TRENCH: Well, if I'm saying there's no smelter, and I'm saying there's no refining at Beverley, then all you've really got is a concentration plant. So admittedly, it's more complex than your normal concentration plant, but at the highest level, there are just really three stages of processing of (indistinct) metal, maybe four if you include mining it.
You've got to mine it first, concentrate it to some degree, a degree of second (indistinct) which often is a smelter, but not always, and then a degree of final processing, which is the metal refining. So it depends if you look at the very, very high level, or a micro level. At the high level, the Beverley Plant is just a concentrator, with apologies to all of the great, skilled operators that I'm sure work there. It's a metal concentrator plant, rather than a (indistinct) - - -
MYERS MR: (Indistinct) it performs the functions , which you would associate with smelting and/or refining.
WITNESS TRENCH: No, no - - -
In cross-examination Professor Gray:
(a)accepted his analysis of the limit of a reasonable charge (that is, a charge made in respect of capital invested) was established if it was cheaper for the defendant to build its own plant than pay the charge demanded by Heathgate and that it was fair to say that this analysis reflected a bargaining position 'where Heathgate has [the defendant] over a barrel' and that was the way to interpret his charge of $8.16;[278]
[278] ts 286 - 287.
(b)said that he had adopted $180 million as the replacement value of the asset in 2014 because that is the only figure he had been given and had he been given other figures such as the present value of the asset they would have been relevant to consider as alternatives to the replacement cost though the replacement cost 'establish[ed] the upper end of [a] reasonable economic zone [for the hypothetical bargain that may have been struck]' but the upper end figure did not take into account alternatives that Heathgate might have been prepared to take because, for example, there were no other users of the Beverley plant and the defendant was the only potential customer;[279]
(c)accepted the proposition that the initial valuation of the asset-base was often contentious in developing a building block approach because different methodologies can lead to fundamentally different values;[280]
(d)accepted that the fact that the defendant was the only potential customer would be relevant because it would help establish the lower end of the economic zone;[281]
(e)accepted that he assumed that the Beverley plant would be 'totally worthless' at the end of 2029;[282]
(f)accepted that a 2010 estimate of the cost of building a plant to process 3,000,000 pounds of yellowcake was a preferable figure to use than a 2020 replacement costs figure;[283]
(g)accepted that if the defendant did not have exclusive use of the Beverley plant that would alter his analysis;[284]
(h)accepted that if the life of the Beverley plant was extended that would necessitate a revision of his calculations;[285]
(i)accepted that if the total resource at Four Mile was increased that would necessitate a revision to his calculation;[286] and
(j)accepted that if the agreement as to fees could be renegotiated to take into account any change of circumstances that would necessitate a revision to his calculations.[287]
The parties' contentions
[279] ts 290.
[280] ts 289.
[281] ts 291.
[282] ts 291.
[283] ts 292 - 293.
[284] ts 293.
[285] ts 294 - 295.
[286] ts 294 - 295.
[287] ts 295.
In summary the plaintiff contended:
(a)Professor Gray's building block approach was suitable for regulating a monopoly service provider's pricing but was not apt as a measure for assessing the reasonableness of Heathgate's charges because Heathgate was not a monopoly service provider - it should not be viewed as a price-maker. The building block approach assumed that the bargaining power lay entirely with Heathgate. Mr Ter-Martirosyan's benchmarking approach should be preferred.
(b)The assumptions adopted by Professor Gray were unsound - in particular, the adoption by Professor Gray of the replacement value of the Beverley plant as the opening capital basis for the calculation of the capital charge of $8.16 per pound as opposed to the price paid by Heathgate or the value of the Beverley plant in 2014. In respect of Professor Gray's assumptions the plaintiff relied on the various matters accepted by him in cross‑examination about the assumptions.
(c)The remediation component of the utilisation fee was unreasonable as it would result in Heathgate recovering an amount in respect of remediation that exceeded, by a very substantial margin, its liability for remediation.
(d)Lord Mansfield's dictum in Blatch v Archer,[288] that '[i]t is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted' should be applied.
[288] Blatch v Archer (1774) 1 Cowp 63; 98 ER 969, 970.
In summary the defendant contended:
(a)The plaintiff had failed to discharge the onus on it to establish that the Allocable Charges charged by Heathgate were unreasonable and in excess of the amounts that the defendant would have incurred if such operations were undertaken at facilities not owned or controlled by an Affiliate.
(b)The plaintiff had not only failed to prove that the charges were unreasonable but had failed to prove that the services would have been available for some lesser amount if Heathgate had not provided them.
(c)Mr Ter-Martirosyan's benchmarking exercise was flawed because there was insufficient information to establish that the comparators used by him were reliable benchmarks.
Disposition
The following observations may be made.
First, the burden of proof rests on the plaintiff to establish the negative proposition that the charges, costs and penalties were unreasonable or exceeded the amounts the defendant would have incurred if such operations were carried out at facilities not owned or controlled by Heathgate. In the circumstances to which I refer in more detail below, there is an evidentiary onus on the defendant. The underlying principle was explained by Campbell J in Hawksford v Hawksford:[289]
The distinction between an onus of proof and an onus of adducing evidence is of particular relevance in the present situation. Where party A has the legal onus of proving a negative proposition, and relevant facts are peculiarly in the knowledge of party B or where party B has the greater means to produce evidence relating to those facts, then provided party A establishes sufficient evidence from which the negative proposition may be inferred, party B then comes under an evidential burden, or an onus of adducing evidence. (citations omitted)
[289] Hawksford v Hawksford [2005] NSWSC 463 [54].
Campbell J's explanation was cited with approval by Beazley P (with whom MacFarlan and Gleeson JJA agreed) in Crowe-Maxwell v Frost,[290] who observed that Campbell J's statement was an application, in the context of proof of a negative proposition, of the principle in Blatch v Archer that:[291]
[A]ll evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.
[290] Crowe-Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414 [90] - [91].
[291] Blatch v Archer (970).
Secondly, the only direct evidence as to the purpose of the utilisation fee was given by Mr Bartels. Mr Bartels evidence about the purpose of the utilisation fee was unequivocal, it was that '[a] big part of the utilisation fee', 'by far and away the biggest use of that utilisation fee' was for 'the upkeep and the maintaining of the plant' - 'to maintain the plant, beyond its original plan of 10 to 15 years'.[292] I attach particular weight to Mr Bartel's evidence: he is Heathgate's most senior executive; his explanation of the purpose of the utilisation fee was volunteered by him; and, it was the only direct evidence of the purpose of the utilisation fee given on the defendant's behalf.
[292] ts 152.
The defendant includes repair and maintenance of the Beverley plant and its infrastructure under various 'Cost Centres' as 'Allocable Charges'. I infer that there is (at least) some element of double recovery of the cost of repairing and maintaining the Beverley plant. It is difficult to make a finding in more exact terms because there is no evidence of the costs of upkeep and maintenance to which Mr Bartels referred in his evidence. Double recovery of some or all of the cost of repairing and maintaining the Beverley plant supports the conclusion that the charges, costs and penalties are unreasonable.
Thirdly, there is no evidence that the rationale for the utilisation fee was the recovery of capital invested in the construction of the Beverley plant. The 'justification' for the utilisation fee that the defendant contended was to be found in Mr McConachy's correspondence with Mr Johnston of Alliance did not refer even indirectly to the utilisation fee as a charge for the capital invested by Heathgate in the Beverley plant. Mr McConachy provided no explanation of the basis for charging the utilisation fee. Rather, his comments about the utilisation fee and the management fee were focussed on the commercial reasons why it was advantageous to the joint venture to use the Beverley plant rather than construct 'a replicated processing facility'.
The defendant was able to instruct Professor Gray that $0.75 of the utilisation fee was a remediation charge and that the utilisation fee also covered licensing and lease costs amounting to $1.5 million per year. If the defendant was able to provide Professor Gray with such precise instructions in respect of the 'remediation charge', it is reasonable to infer that it was able to provide Professor Gray with the details of the other components of the utilisation fee but chose not to do so. As Professor Gray recorded at [105] of his report in the absence of the provision of details by the defendant he inferred that the utilisation fee is a capital charge. I do not accept that the utilisation fee is a capital charge. Not only is there no evidence to that effect but it is inconsistent with, if not contradicted by, Mr Bartels' evidence. The reasonableness of the utilisation fee as an 'Allocable Charge' must be assessed by reference to the cost incurred in respect of which the charge was levied. On the basis of Mr Bartels' evidence the reasonableness of the utilisation fee must be assessed by reference to the costs of the upkeep and maintenance of the Beverley plant. That a utilisation fee based on the recovery of capital costs might (hypothetically) be reasonable does not establish the reasonableness of a charge levied in respect of a costs falling within another category (repairs and maintenance).
Fourthly, the benchmarking approach adopted by Mr Ter-Martirosyan is a legitimate method of assessing the reasonableness of the utilisation fee and the management fee. I accept that the particular circumstances of this case made the benchmarking exercise a difficult one. There is a limited range of potential comparators and the reliability of the comparators identified by Mr Ter-Martirosyan was reduced by the lack of detailed information. In assessing the reliability of Mr Ter-Martirosyan's opinions I take into account the limitations to which I have just referred (which were acknowledged by Mr Ter-Martirosyan in general terms) and that Mr Ter-Martirosyan had included the capital fee within his definition of 'HGR Fees' and the critique provided by Professor Gray of Mr Ter-Martirosyan's benchmarking exercise in the joint expert memorandum.[293] Making allowance for those matters I consider that Mr Ter-Martirosyan's evidence establishes that the utilisation fee and the management fee are unreasonable because they exceeded the fees that would have been charged had the Beverley plant been owned by a party that was not an Affiliate.
[293] Exhibit 313, in particular [34] (Mine Studies) and [40] (Mining contractors).
Fifthly, it is unnecessary for the plaintiff to establish that there was, in fact, an alternative provider of refining services. The reasonableness of Heathgate's charges are assessed on the basis of the existence of a hypothetical alternative provider of services.
Sixthly, I accept Professor Gray's evidence that the building block approach has applications in commerce outside the field of regulatory economics. In this case, however, the benchmarking approach is to be preferred. In reaching this conclusion I have considered the views expressed by Professor Gray and Mr Ter-Martirosyan at [5] of the joint expert memorandum on the applicability of the building block approach.[294] On balance I find the views of Mr Ter-Martirosyan more persuasive. In particular, Mr Ter-Martirosyan's observation to the effect that the underlying building block assumptions as to the recovery of capital and return on capital do not apply in more competitive market situations,[295] and, in my assessment, in the hypothetical situation of an arms-length negotiation, Heathgate was not a price-maker, that is it was not in a position to dictate the price at which it permitted the defendant to process uranium ore at the Beverley plant. Underlying this assessment is the fact that in 2014 the Beverley plant was at the end of its design life and Heathgate's requirement to process uranium ore through the plant was reduced to approximately 10% of the plant's capacity.
[294] Exhibit 313.
[295] Exhibit 313 [5.3].
Seventhly, assuming against the finding I have made that the utilisation fee is a capital charge and the building block approach is adopted, then I consider that revisions are required to the assumptions made by Professor Gray to reflect more closely the particular facts of this case. In particular:
(a)the Beverley plant should be valued at market value and not at replacement cost - there was no evidence of the market value of the Beverley plant in 2014 and thus no finding as to that value can be made;
(b)the level at which the capital charge should be set should not be at the upper end of the 'reasonable economic zone', that is, the hypothesis that Heathgate had the defendant 'over a barrel' should not be adopted; and
(c)the remediation element of the utilisation fee should be adjusted to a level commensurate with a proportion of the rehabilitation liability reflecting the level and duration of the defendant's use of the Beverley plant.
More generally, Professor Gray's assumptions should be adjusted in accordance with the matters accepted by him in principle in cross-examination.
Eighthly, there was no evidence of the quantum of management fees incurred by Heathgate which it recovered by charging a management fee of 15% of the Operating Costs. Factors relevant to the reasonableness of the management fee include: the cost incurred in providing the management services; the degree of expertise required to provide those services; the market; and, if the fee is based on a percentage of the operating costs to what extent the management fees are fixed and to what extent they are variable.
I consider that Mr Ter-Martirosyan's evidence is sufficient to raise an inference that the management fee is unreasonable and that there was an evidentiary onus on the defendant to establish that the fee was reasonable which it has not discharged.
The observations I have made lead me to conclude that the utilisation fee and the management fee components of the Allocable Charges are unreasonable. The limitations in the evidence to which I have referred prevent me from making a finding as to what would be a reasonable charge for each of these costs.
Although I do not decide the issue on this basis I would add the following observation. Mr Genaro's evidence does not suggest that the management services vary in accordance with the operating costs. And, a management fee which increases in line with operating costs does not encourage close financial management. Rather, it gives rise to an obvious conflict of interest. In my judgment, if the management fee was negotiated between parties at arms' length, absent some special considerations (of which there is no evidence in this case), the user of the plant would not agree to pay a management fee that was based on a percentage of the operating costs. In my view, this provides a separate basis for concluding that the management fee charged by Heathgate is unreasonable though I do not determine the issue on this basis as it was not argued by the plaintiff and the defendant has not had the opportunity to respond to it.
Conclusions
I will hear from the parties as to the orders to be made and costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
RC
Associate to the Honourable Justice Tottle
13 APRIL 2022
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: APG AUS NO 3 PTY LTD -v- QUASAR RESOURCES PTY LTD [2022] WASC 123 (S)
CORAM: TOTTLE J
HEARD: ON THE PAPERS
DELIVERED : 12 AUGUST 2022
PUBLISHED : 12 AUGUST 2022
FILE NO/S: CIV 1955 of 2019
BETWEEN: APG AUS NO 3 PTY LTD
Plaintiff
AND
QUASAR RESOURCES PTY LTD
Defendant
Catchwords:
Interest - Rate of interest - Whether pre-judgment interest should be calculated at statutory interest rate or 10 Year Australian Government bond yield rate - Interest awarded at statutory interest rate
Legislation:
Civil Judgments Enforcement Act 2004 (WA), s 8
Civil Judgments Enforcement Regulations 2005 (WA), r 4
Rules of the Supreme Court 1971 (WA), O 36 r 20
Supreme Court Act 1935 (WA), s 32
Supreme Court Act 1970 (NSW), s 94
Result:
Plaintiff awarded pre-judgment interest rate of 6%
Category: B
Representation:
Counsel:
| Plaintiff | : | T N Owen |
| Defendant | : | J Taylor SC |
Solicitors:
| Plaintiff | : | Clayton Utz |
| Defendant | : | Allens |
Cases referred to in decision:
Batchelor v Burke [1981] HCA 30; (1981) 148 CLR 448
Grincelis v House [2000] HCA 42; (2000) 201 CLR 321
Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60
M.P.B. (SA) Pty Ltd v Gogic [1991] HCA 3; (1991) 171 CLR 657
Province Leader of The Oceania Province of The Congregation of The Christian Brothers v Lawrence [2021] WASCA 77
TOTTLE J:
Introduction
On 28 April 2022 I ordered that judgment be entered in the plaintiff's favour in the sum of $2,693,222.48, which amount represented the aggregate of a shortfall in 13 royalty payments due by the defendant to the plaintiff in the period between February 2016 and February 2019. The defendant accepted the plaintiff was entitled to interest on the outstanding amounts but, in the absence of a contractual provision specifying an interest rate, there was a dispute about the appropriate rate. The plaintiff claimed interest at the rate of 6% per annum. The defendant contended the 6% rate was punitive having regard to the purpose of awards of pre‑judgment interest and that prevailing interest rates were much lower and in a general decline. The defendant contended that it would be more appropriate to calculate pre‑judgment interest using the 10 Year Australian Government bond yield rate at the relevant times.
Statutory framework
Section 32 of the Supreme Court Act 1935 (WA) provides:
(1)In any proceedings for the recovery of any money (including any debt or damages or the value of any goods), the Court may order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date when the judgment takes effect.
(2)This section does not -
(a)authorise the giving of interest upon interest; or
(aa)apply in relation to any general damages in respect of pain and suffering or the loss of the enjoyment or of the amenities of life awarded in relation to personal injury or the death of a person; or
(b)apply in relation to any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise; or
(c)affect the damages recoverable for the dishonour of a bill of exchange.
(2a)In subsection (2)(aa) personal injury includes any disease and any impairment of a person’s physical or mental condition.
Order 36 r 20 of the Rules of the Supreme Court 1971 (WA) provides:
When computing interest for the purposes of section 32 of the Act, subject to any evidence adduced, the Court may use, as a guide, the rate of interest prescribed from time to time for the purposes of section 8 of the Civil Judgments Enforcement Act 2004.
Section 8(1) of the Civil Judgments Enforcement Act 2004 (WA) provides:
(1)Interest is to be paid on the unpaid amount of a judgment sum from the date of the judgment until the date on which the judgment sum is paid —
(a)at the rate prescribed by the regulations; or
(b)at the rate set by the court in the judgment or by an order made after the judgment is given.
The rate of interest prescribed by reg 4(1) of the Civil Judgments Enforcement Regulations 2005 (WA) for the purposes of s 8(1)(a) of the Civil Judgments Enforcement Act 2004 is 6 % per annum.
Applicable principles
In Haines v Bendall,[296] Mason CJ, Dawson, Toohey and Gaudron JJ, made the following observations about s 94(1) of the Supreme Court Act 1970 (NSW) (the NSW provision equivalent to s 32(1) of the WA Act):
The power to award interest on damages for the period between the date when the cause of action arose and the date on which a judgment takes effect is conferred by s 94 of the Supreme Court Act. The section confers power on the Supreme Court to order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money between the date when the cause of action arose and the date when the judgment takes effect.
An award of interest up to the date of judgment is an award of interest in the nature of damages: Fire and All Risks Insurance Co Ltd. This statement acknowledges that the award of interest is an integral element in the attainment of the object of damages, namely, to compensate a plaintiff for injury sustained. Hence the award of interest is compensatory in character. While '[i]nterest should not be awarded as compensation for the damage done' (emphasis added) (Jefford v Gee), the award of interest is nevertheless an essential element in the achievement of true compensation for that damage. In Thompson v Faraonio, the Privy Council stated that '[t]he reason for awarding interest is to compensate the plaintiff for having been kept out of money which theoretically was due to him at the date of his accident' (emphasis added): see also Batchelor v Burke, per Gibbs CJ; MBP (SA) Pty Ltd v Gogic; cf Ruby v Marsh, per Barwick CJ. The award of interest for the period of delay in payment between the date of accrual of the cause of action and judgment affords the fair legal measure of compensation: Pheeney v Doolan, per Reynolds JA. Thus, it is the award of damages and, where appropriate, interest awarded on damages for the period up until the judgment takes effect which allows the plaintiff to be placed in or restored to the situation, as far as money can do, in which he or she would have been but for the defendant's negligence.
Section 94(1) of the Supreme Court Act confers a wide discretion on a court awarding interest. That discretion must, however, be exercised in accordance with legal principle: Cullen v Trappell, per Gibbs J. That means that the discretion must be exercised in conformity with the general principles governing the award of damages so that an award of interest on damages for personal injury should do no more than assist in the restoration of a plaintiff to the position in which he or she would have been but for the defendant's negligence. (citations omitted)
[296] Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60, 66.
In Province Leader of The Oceania Province of The Congregation of The Christian Brothers v Lawrence[297] the Court of Appeal said of s 32 of the Supreme Court Act:
[297] Province Leader of The Oceania Province of The Congregation of The Christian Brothers v Lawrence [2021] WASCA 77 [60] - [61].
1.A fourfold discretion arises in relation to s 32. Initially, whether to order interest at all. If so, further discretions arise as to: the interest rate to be applied; the amount on which interest accrues (which may be an amount less than the whole of the judgment); and, finally, over what period interest is to run.
2.The principles in relation to the award of pre-judgment statutory interest include the following:
(a)An award of interest up to the date of judgment is an award of interest in the nature of damages; it is compensatory in character. Thus understood it is an element in the attainment of the object of damages, namely, to compensate a claimant for the injury sustained. However, it 'should not be awarded as compensation for the damage done'.
(b)The reason for awarding interest is to compensate the claimant for having been kept out of the money which theoretically was due to him or her at the date the loss commenced - it operates to ensure that the claimant receives a current equivalent of money's worth.
(c)An award of interest on damages for personal injury should do no more than assist in the restoration of a claimant to the position in which he or she would have been but for the defendant's negligence.
In the latter respect, the purpose or object of s 32 is to do more complete justice between the parties. (footnotes omitted)
Interest is awarded to compensate the plaintiff for the detriment that he has suffered by being kept out of his money, and not to punish the defendant for having been dilatory in settling the plaintiff's claim.[298]
[298] Batchelor v Burke [1981] HCA 30; (1981) 148 CLR 448, 455 (Gibbs CJ).
In M.P.B. (SA) Pty Ltd v Gogic,[299] in a joint judgment, the members of the High Court discussed the question of whether it was fairer to use a fixed rate of interest (4% per annum) or the real rates of interest (commercial rates). The issue under consideration was interest on damages for pain and suffering and the consideration took place against the background of high rates of inflation and relatively high interest rates. The Court observed:[300]
No doubt whatever interest rate is used to compensate a plaintiff, it can be at best only a rough guide as to the value of the plaintiff's loss during the period when he or she was deprived of the use of his or her money.
And in a later passage said:[301]
The question remains, however, whether it is not fairer to the parties to use a formula which applies the real rate or rates of interest applicable in the relevant period rather than a fixed figure such as the 4 per cent figure selected in Wheeler v. Page. This could be done, for example, by taking the commercial rate or the ten-year bond rate and deducting a figure for inflation. This approach has the advantage of focusing on the real interest rate which would have been available to a plaintiff for the purpose of investment during the period that the plaintiff was kept out of his or her money. But it tends to assume - erroneously - that the purpose of the award of interest is to compensate a plaintiff for being deprived of the opportunity to invest his or her money. A plaintiff is awarded interest because he or she has been deprived of the use of his or her money, not because he or she has forgone investment opportunities. It would be wrong, for example, to refuse to award a plaintiff interest simply because the real rate of interest during the relevant period was zero or a negative figure. Moreover, to award interest calculated by reference to the real rate of interest, when it has been a positive figure, ignores the important fact that the return to the real-life investor from his or her investment is diminished by income tax on both the inflationary and real profit components of that return. Thus, the use of the real rate of interest figure as the measure of a plaintiff's loss in being deprived of his or her damages for pre-trial pain and suffering does not seem inherently superior to the use of a fixed figure.
No doubt the selection of a figure such as the 4 per cent figure chosen in Wheeler v. Page is somewhat arbitrary. But it represents the judgment of the Supreme Court of South Australia as to what is fair and reasonable compensation for a plaintiff in that State for being deprived of the use of his or her money after taking into account that, from time to time, the real rate of interest will rise above or fall below that figure. Until the present case it had been acted upon in South Australia for over seven years. In the circumstances, the use of the 4 per cent figure seems to us to be more likely to achieve fair and reasonable compensation for plaintiffs than the use of the real rate of interest figure - which may result at times in a plaintiff obtaining no or little interest and at other times an amount of interest greater than the return which could be achieved by real-life investors on a comparable sum after the incidence of income tax.
[299] M.P.B. (SA) Pty Ltd v Gogic [1991] HCA 3; (1991) 171 CLR 657.
[300] M.P.B. (SA) Pty Ltd v Gogic, 664.
[301] M.P.B. (SA) Pty Ltd v Gogic, 666.
In Grincelis v House,[302] in a joint judgment, the members of the High Court, said of the statutory purposes of an award of interest:
As was noted in Gogic:
'The function of an award of interest is to compensate a plaintiff for the loss or detriment which he or she has suffered by being kept out of his or her money during the relevant period: [Batchelor v Burke (1981) 148 CLR 448 at 455, per Gibbs CJ]'
There is no doubt that this is a very important purpose of statutory provisions providing for the award of interest on the amount of a debt or damages in respect of the period between the cause of action accruing (or, in some statutory provisions, the commencement of the proceedings) and the date of judgment. It may be, however, that statutory provisions for interest serve not only that purpose, but also a purpose of encouraging early resolution of litigation. That statutory awards of pre-judgment interest may have such a purpose may be more readily understood in relation to claims for debts or sums certain than in personal injury cases where it will often be in the interests of the plaintiff to wait until injuries have stabilised before bringing the action to trial. For present purposes, however, it is sufficient to have regard to the compensatory purpose of interest. (footnotes omitted and emphasis added)
[302] Grincelis v House [2000] HCA 42; (2000) 201 CLR 321 [16] (the Court).
Overview of the opposing arguments
The plaintiff argued:
(a)In commerce, interest on outstanding debts is compounded - it is an oversimplification to identify commercial rates of interest as a guide to the appropriate interest rate.
(b)The plaintiff is a profit-making entity and it is reasonable to infer that it would have used the funds it ought to have been paid in a profitable way. It should receive 'commercially sufficient compensation' for being kept out of its money and this would not be provided by the lower commercial rates.
(c)In so far as it is possible to tell, decisions of this court do not support the proposition that interest should be awarded at a lower rate than the statutory rate.
(d)Awarding interest at the statutory rate encourages the early resolution of disputes and in the absence of a compelling reason, this court should not depart from the rate stipulated by the statute.
The defendant relied on evidence of the interest rates set by the Reserve Bank of Australia between 2016 and 2019,[303] the effect of which was that those interest rates had decreased from 2% in February 2016 to 0.75% in December 2019. The defendant adduced evidence of the 10 Year Australian Government Bond yield rates for the period between 2016 and 2021 and calculated that the interest payable on the basis of the application of those yield rates would be $260,708.06 compared to $795,023.92 if the statutory rate of 6% were applied.
[303] Affidavit of Joseph De Gennaro sworn 19 May 2022.
The defendant contended the 6% interest rate is excessive and well above what can be considered necessary to compensate the plaintiff from being out of its money. The defendant contended the application of the 6% rate would have a punitive effect and the appropriate rate to apply is the 10 Year Australian Government Bond yield rate because that latter rate reflects 'the actual commercial cost of money between 2016 and 2019'.
Disposition
I consider the statutory rate of 6% should be the rate applied to the outstanding royalty payments. My reasons are as follows:
The variety of circumstances in which a party may suffer the loss of being kept out of money to which it was entitled means a single method of measuring that loss, applied universally, will from time to time generate outcomes that may appear arbitrary.
Thus it is that the application of the statutory rate of 6% is only capable of being a 'rough guide' to adopt the expression used in Gogic. That said, the statutory rate has been applied in this jurisdiction since (at least) 2005. It has the advantage of certainty. In that respect the application of the statutory rate serves to encourage the resolution of disputes. The defendant has not identified any decision of this court in which another 'benchmark' interest rate has been applied in place of the statutory interest rate.
The adoption of the 10 Year Australian Government Bond yield rates would itself be arbitrary. There is no basis to assume that the yields on 10 Year Australian Government Bonds are a closer reflection of the loss suffered by the plaintiff from being kept out of its money than the statutory rate. Further, the 10 Year Australian Government Bond yield rate reflects a return on investment rather than 'the actual commercial cost of money'.
Relatedly, the contention that, by comparison with the Reserve Bank of Australia interest rate, the statutory rate of 6% is punitive, rests on the assumption that the loss suffered by the plaintiff may be assessed by reference to the interest rates set by the Reserve Bank of Australia. There are (at least) two reasons why this cannot be assumed: first, the plaintiff's internal rate of return on funds employed in its business may be higher (and, it is not unreasonable to infer, would be higher) than the rates set by the Reserve Bank of Australia; and secondly, the plaintiff may rely on bank debt to finance its business and pay rates of interest that are higher than the Reserve Bank of Australia rates and - as the plaintiff pointed out - commercial lenders compound interest.
The defendant has not established a sufficient reason to depart from the application of the statutory rate. The parties should file a minute of orders giving effect to these reasons.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
RC
Associate to the Honourable Justice Tottle
12 AUGUST 2022
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