Valuer-General v Perilya Broken Hill Ltd - [2013] NSWCA 265

Court of Appeal

New South Wales

Case Title: Valuer-General v Perilya Broken Hill Ltd

Medium Neutral Citation: [2013] NSWCA 265

Hearing Date(s): 23 July 2013

Decision Date: 16 August 2013

Before: Emmett JA at [1];
Leeming JA at [12];
Preston CJ of LEC [110]

Decision:
(1) Appeal allowed.

(2) Set aside the orders of the Land and Environment Court of 19 October 2012.

(3) Remit the proceedings to the Land and Environment Court for determination by that Court in accordance with the decision of this Court.

(4) There be no order as to costs of the appeal.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Catchwords: APPEALS - appeal from valuation decision limited to question of law - scope of appeal - error of law in failure to bring to account cashflow - no error of law in arithmetic error

COURTS AND JUDGES - statement of reasons for decision - appeal limited to question of law - extent of duty to give reasons - no error in giving short reasons

MINES AND MINERALS - operation and history of mining legislation - nature of rights conferred by mining lease - nature of rights of owner of privately owned minerals

VALUATION - methods of valuation - hypothetical fee simple of mine - valuation by discounted cashflow of hypothetical mine - application of royalty provisions in Mining Act 1992 as generally applicable public law - parties' cashflows included royalty payments as expenses but did not include receipts of royalty for privately owned minerals - valuation set aside and proceeding remitted

Legislation Cited: Land and Environment Court Act 1979
Land and Income Tax Assessment Act 1895
Land Tax Assessment Act 1910 (Cth)
Mining Act 1906
Mining Act 1973
Mining Act 1992
Mining on Private Lands Act 1894
Valuation of Land Act 1916

Cases Cited: AMP Henderson Global Investors v Valuer General [2004] NSWCA 264; (2004) 134 LGERA 426
Archibald v Byron Shire Council [2003] NSWCA 292; (2003) 129 LGERA 311
Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (1999) 74 ALJR 209
Brisbane City Council v Valuer-General for the State of Queensland (1978) 140 CLR 41
Cadia Holdings Pty Ltd v State of New South Wales [2010] HCA 27; (2010) 242 CLR 195
Chief Commissioner of State Revenue v Platinum Investment Management Ltd [2011] NSWCA 48; (2011) 80 NSWLR 240
Colon Peaks Mining Co v Wollondilly Shire Council (1911) 13 CLR 438
Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336
Gollan v Randwick Municipal Council [1961] AC 82
ISPT Pty Ltd v Valuer General [2009] NSWCA 31; (2009) 165 LGERA 25
Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111
Melwood Units Ltd v Commissioner of Main Roads [1979] AC 426
Moolarben Coal Mines Pty Ltd v Director-General of the (former) Department of Industry and Investment NSW (Agriculture Division) [2011] NSWLEC 191; (2011) 186 LGERA 342
Perilya Broken Hill Ltd v Valuer-General [2012] NSWLEC 235
Perpetual Trustee Co Ltd v Valuer-General [2008] SASC 169; (2008) 101 SASR 110
Piglowska v Piglowski [1999] UKHL 27; [1999] 1 WLR 1360
Resource Pacific Pty Ltd v Wilkinson [2013] NSWCA 33
Roads and Traffic Authority v Hurstville City Council [2001] NSWCA 11; (2001) 112 LGERA 223
Roads and Traffic Authority v Mosca [2006] NSWCA 159; (2006) 146 LGERA 335
Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610
Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247
Taupau v HVAC Constructions (Queensland) Pty Ltd [2012] NSWCA 293
Ulan Coal Mines v Minister for Mineral Resources [2008] NSWCA 174; (2008) 161 LGERA 391
Valuer-General v New South Wales Golf Club [2012] NSWCA 355; (2012) 192 LGERA 105
Wade v New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177
Waterways Authority v Fitzgibbon [2005] HCA 57; (2005) 79 ALJR 1816
Whitehouse Properties Pty Ltd v Bond Brewing (NSW) Ltd (1992) 28 NSWLR 17
Yates Property Corporation Pty Ltd (in liq) v Darling Harbour Authority (1991) 24 NSWLR 156

Category: Principal judgment

Parties: Valuer-General (Appellant)
Perilya Broken Hill Ltd (Respondent)

Representation

- Counsel: Counsel:
TS Hale SC; M Carpenter (Appellant)
R Lancaster SC; L Thomas (Respondent)

- Solicitors: Solicitors:
Crown Solicitor's Office (Appellant)
Sparke Helmore Lawyers (Respondent)

File Number(s): 2012/345737

Decision Under Appeal

- Before: Lloyd AJ

- Date of Decision: 19 October 2012

- Citation: Perilya Broken Hill Limited v Valuer-General [2012] NSWLEC 235

- Court File Number(s): 2011/30076

JUDGMENT

EMMETT JA: This appeal is concerned with the valuation by the appellant, the Valuer-General, of land owned by the respondent, Perilya Broken Hill Limited (Perilya). The land in question is situated at Broken Hill and is known as the North, South and Potosi Mines (the Land). Lead, zinc and silver have been mined on the Land under mining leases taken to have been granted under the Mining Act 1992 (Mining Act).
The Valuer-General determined the land value of the Land under the Valuation of Land Act 1916 (Valuation Act) as at 1 July 2007 as $20.9 million. An objection to that valuation was disallowed by the Valuer-General and Perilya appealed under s 37 (read with s 29(3A)) of the Valuation Act to the Land and Environment Court. A judge of the Land and Environment Court, sitting with an acting Commissioner, allowed the appeal, revoked the determination of the Valuer-General and determined the land value as $4.9 million. The Valuer-General now appeals from those orders under s 57 of the Land and Environment Court Act 1979, under which an appeal lies to this Court on a question of law.
The question before the primary judge was the value of the Land for the purposes of the Valuation Act. Under s 6A(1), the land value of land is the capital sum that the fee simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require. The value is to be determined on the assumption that the improvements, if any, on the land, other than land improvements, had not been made. Under s 4, land improvements include, relevantly, excavation, filling, grading or levelling of land associated with the operation of any mine or extractive industry.
There were no comparable sales that might inform the land value of the Land and the parties agreed that the price that the fee simple of the Land might be expected to realise is the present value of the royalties to be paid to the owner of the fee simple by the operator of the mines on the Land for the life of the mines. The parties agreed that the estimated life of the mines as at 1 July 2007 was five and half years and that the cost of purchasing and installing the improvements, plant and machinery necessary to operate the mines as at 1 July 2007 would be $195 million. It was also agreed that a royalty of 4 per cent of the profit per annum would be paid to the owner of the Land.
The primary judge concluded that the net present value of that royalty stream as at 1 July 2007 was $4,904,435.66, which his Honour rounded to $4,900,000. His Honour concluded that that was the capital sum that the fee simple of the Land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require, on the assumption that the improvements, other than land improvements, had not been made.
The principal ground of appeal relied on by the Valuer-General is that the primary judge erred in failing to take into consideration that the capital value of the fee simple of the Land included the title to minerals in the land and in failing to take into account that Perilya, as the owner of the Land, would be entitled to receive royalties from the State of New South Wales in respect of the value of the minerals recovered from the Land by the notional operator of the mines.
Under s 282 of the Mining Act, the holder of a mining lease is liable to pay royalty to the Minister on publicly owned minerals recovered under the mining lease. Under s 284(1), the holder of a mining lease is liable to pay royalty to the Minister on privately owned minerals recovered from the land as if those minerals were publicly owned minerals. The question of whether or not the lead, zinc and silver in the Land as at 1 July 2007 were publicly owned minerals or privately owned minerals was not explored by the primary judge, for the simple reason that his Honour was not asked to consider that question.
Under s 283(1) of the Mining Act and cl 44 of the Mining Regulations 2003 (the Regulations), royalty on a publicly owned mineral consisting of lead, zinc or silver is payable at the rate of 4 per cent of the value of mineral recovered. The value of minerals recovered is to be calculated in the manner determined by the Minister.
Under s 284(2), if royalty is paid to or recovered by the Minister in respect of a privately owned mineral, the Minister is to pay seven eighths of the amount so paid or recovered to the owner of the mineral. Thus, Perilya, as the owner of the Land, would be entitled to receive seven eighths of the amount of royalty paid to or recovered by the Minister in respect of any privately owned minerals in the Land as at 1 July 2007.
I have had the advantage of reading in draft form the reasons of Leeming JA for concluding that, if the minerals were privately owned, the royalty that would be payable to Perilya, as owner of the Land, should be brought to account in arriving at the land value. If some of the minerals were publicly owned, it would be necessary to treat them differently from privately owned minerals. Section 6A required that question to be considered. I agree with Leeming JA that the failure to do so amounts to an error of law. I also agree with Leeming JA that the contention advanced on behalf of Perilya that the primary judge proceeded on the basis of an agreed methodology is not a basis for upholding the determination of the primary judge.
It is somewhat extraordinary that the Valuer-General, in the submissions made to the Court of Appeal, accepted, in effect, that the determination from which the appeal to the Land and Environment Court was brought, and the contentions advanced to the Land and Environment Court on behalf of the Valuer-General, were misconceived and wrong. For that reason, I agree with the conclusion reached by Leeming JA that, notwithstanding that the appeal should be upheld on the ground briefly outlined above, there should be no order as to the costs of the appeal. I agree with the orders proposed by Leeming JA and his Honour's reasons for those orders.
LEEMING JA: The Valuer-General appeals pursuant to s 57(1) of the Land and Environment Court Act 1979 (LEC Act) from the decision of the primary judge allowing the appeal of the respondent (Perilya) pursuant to s 37 of the Valuation of Land Act 1916 (ValuationAct). The Valuer-General's appeal is limited to a question of law. The subject of the litigation is some 3,033 hectares of land at Broken Hill whose highest and best use, as at the valuation date of 1 July 2007, was as a mine for the production of zinc, lead and silver. The Valuer-General determined the land value as $20.9 million; the Court below allowed the appeal and determined the land value as $4.9 million.
In my opinion, in the special circumstances of this litigation, the appeal must be allowed and the matter remitted for redetermination in accordance with law. The essential steps leading to that conclusion are as follows. The starting point is the hypothetical unencumbered fee simple contemplated by s 6A of the Valuation Act, whose value is determined by reference to its highest and best use, namely, a mine. The (hypothetical) mine is appropriately valued by determining a present value of the income stream generated by the production of minerals. The income stream generated by that (hypothetical) mine is valued having regard to laws of general application, one of which is the Mining Act 1992 (Mining Act), and in particular, the provisions relating to royalties in Part 14. The valuation determined by the Court reflected the payment of a royalty stream pursuant to s 284(1) of the Mining Act. However, although the litigation proceeded on the footing that the minerals were privately owned, the valuation did not have regard at all to the receipt of royalty which the owner of the fee simple would enjoy pursuant to s 284(2).
That error came about principally because the Valuer-General adopted a methodology which did not incorporate s 284(2) royalty, although otherwise descending into the detail of other items of revenue and expense. Perilya proposed a similarly detailed methodology, which likewise failed to incorporate that royalty. Late in the day, the Valuer-General sought to justify his methodology by reference to the owner's notional receipt of royalty, which was successfully resisted by Perilya having regard to the way in which the trial had been conducted. However, the approach which was adopted did not accord with what s 6A of the Valuation Act required, and must be set aside.
Although the Valuer-General maintained that, in those circumstances, his own valuation should stand on the basis that Perilya had failed to discharge its onus, the consequence of the Valuer-General's submission was that his own valuation was also contrary to law. The matter should in my opinion be remitted.
The Valuer-General made other complaints about the methodology, all of which should be rejected. In circumstances where the Valuer-General positively submitted that his own approach had been wrong, there should in my opinion be no order of the costs of the appeal.
The unusual circumstances of this litigation outlined above make it necessary to set out in some detail the competing methodologies of the parties, and the course of the trial. Before doing so, it is convenient to address the applicable legal principles.

The statutory framework for determining land value

The Valuer-General is to establish and maintain a Register of Land Values (Valuation Act, s 9(1)(a)), and ascertain the land value of each parcel of ratable land each year (Valuation Act, s 14A(1)). From the information contained in the Register, the Valuer-General is to provide a valuation list to each rating or taxing authority relating to the land within the authority's area (Valuation Act, s 48(1)), and a rating or taxing authority is required to use the valuation list as the basis for its rate or tax on any land included in the list (Valuation Act, s 61).
In order to determine the "land value", the starting point is the definition in s 6A of the Valuation Act:
"The land value of land is the capital sum which the fee-simple [sic] of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide [sic] seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made."
That language has a long history. It reflects the terms of the definition of "unimproved value" in s 68 of the Land and Income Tax Assessment Act 1895 and subsequently the definition of "unimproved value" in s 3 of the Land Tax Assessment Act 1910 (Cth). The early history of the construction of those definitions was described by Lord Radcliffe in Gollan v Randwick Municipal Council [1961] AC 82 at 97-98. Ultimately, the position was resolved, so far as is presently relevant, by Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610 and Gollan. In Royal Sydney Golf Club, a case concerned with the Land Tax Assessment Act, the High Court held that the definition required a valuation of a hypothetical fee simple, free not only from all encumbrances, but also subject to no conditions or reservations on the grant: "in assessing the unimproved value an estate in fee simple must be taken as the hypothesis unencumbered and subject to no condition restricting the use or enjoyment of the land" (at 623). However, although conditions or restrictions on use or enjoyment attaching to the grant were to be disregarded, public laws of general application were to be brought to account: "There is all the difference between a public law affecting the enjoyment of land and a restriction of title" (at 624). Accordingly, the High Court held that restrictions on the use of the land deriving from the County of Cumberland Planning Scheme, even though only operating over a small part of the New South Wales, was such a law.
Those principles were applied to the materially identical language of the Valuation Act in Gollan. Lord Radcliffe, delivering the advice of the Judicial Committee, said that there was no doubt as to the correctness of a distinction between an obligation or restriction deriving from the original Crown grant, as opposed to an Act (at 98), and that the principles applied to the Valuation Act notwithstanding its different purpose from the Land Tax Assessment Act (at 100-101).
Subsequently, those principles have regularly been applied to valuations under the Valuation Act, in this Court most recently in Valuer-General v New South Wales Golf Club [2012] NSWCA 355; (2012) 192 LGERA 105; see also Perpetual Trustee Co Ltd v Valuer-General [2008] SASC 169; (2008) 101 SASR 110 at [36]-[53] (Bleby J, Duggan and Anderson JJ agreeing).

Regulation of mining in New South Wales

It is plain that the Mining Act is a State law of general application to which regard must be had in considering the hypothetical fee simple defined in s 6A in accordance with what was held in Royal Sydney Golf Club and Gollan. For present purposes, the provisions relating to royalties are what matter. They turn on the difference between "publicly owned" and "privately owned" "minerals".
Zinc, lead and silver have in recent years been "minerals" (see clause 5 and Schedule 1 of the Mining Regulation 2010 and clause 5 and Schedule 2 of the Mining Regulation 2003). All minerals are either privately owned or publicly owned. A publicly owned mineral is a mineral that is owned by, or reserved to, the Crown; a privately owned mineral is a mineral that is not a publicly owned mineral: see the Dictionary to the Mining Act. In order to appreciate the differences as they applied in 2007, it is necessary to say something as to the history of legislation governing mining in New South Wales, which was summarised by Windeyer J in Wade v New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177 at 186-195 and by French CJ in Cadia Holdings Pty Ltd v State of New South Wales [2010] HCA 27; (2010) 242 CLR 195 at [35]-[42].
First, zinc, lead and silver were not always "minerals". To be precise, silver was a mineral (but lead and zinc were not) for the purposes of the Crown Lands Act 1884: s 4, and see s 7. Silver and lead were minerals (but zinc was not) for the purposes of the Mining Act 1906: s 3. From the late nineteenth century, Crown grants of land contained reservations of all "minerals", although previously the grant would be construed by reference to the common law: Colon Peaks Mining Co v Wollondilly Shire Council (1911) 13 CLR 438 at 443-444. The common law always treated gold as having a special position, and Windeyer J noted that silver might be in a similar position: Wade at 186.

Hence, deposits of zinc, lead and silver ore might or might not be included within, or reserved from, the original Crown grant depending on when it was made. Further, if the grant predated 1884, there might be a contestable question as to silver. Having regard to the course taken at trial (see further below), none of this was explored at all.
Secondly, commencing with the Mining on Private Lands Act 1894, there was power to grant mining leases over private land. The holder of such a lease was authorised to mine minerals located on the land, which had been reserved to the Crown: ss 3 and 11. In return, the holder of the mining lease had to pay compensation to the landowner to the extent that his or her enjoyment of the land was impaired: ss 16-18, and royalties to the Crown: see Wade at 189. Of course, a mining "lease" is not a lease in any conventional sense. Instead, as Windeyer J said in Wade at 192:
"[A lease of minerals reserved to the Crown] is really a sale by the Crown of minerals reserved to the Crown to be taken by the lessee at a price payable over a period of years as royalties."
Moreover, from 1919, a statutory concept which was even more foreign to legal principle was created, for it became possible for persons other than their owner to be authorised to mine privately owned minerals. Windeyer J described the position as follows (at 195):
"[Prior to 1919, when] the landowner was himself the owner of the minerals on his land, only he, or someone permitted by him might lawfully mine them. No one could acquire any right in them except through him and with his assent. However - by Div. 4A added to Pt IV by Act No. 41 of 1918 - as from 1st January 1919 a mining warden became empowered to grant to any holder of a miner's right an authority to enter private lands and search for minerals not reserved to the Crown (s. 70A). And the holder of any such authority to enter can, if he wishes, apply for a mining lease. Rent and compensation must be paid to the landowner. And royalties, as prescribed by s. 70C and the Regulations, for minerals taken must be paid to the Minister on behalf of the landowner, or if the landowner be not himself the owner of the minerals, on behalf of the owner of the minerals. The obvious policy of this is to encourage mining. The means adopted involve a further, and quite radical, interference with the common law rights of a landowner. Even when he owns the minerals in his land he must suffer them to be mined unless he be active in mining them himself."
Thirdly, where it is lawful to mine a mineral (whether publicly or privately owned) through being the holder of a mining lease, the mining lease authorises its holder to bring into existence new property, namely, the ore when it is severed from the land, which the holder acquires title to. That is confirmed by s 11 of the Mining Act, which declares that any mineral lawfully mined becomes the property of the person by or on behalf of whom it is mined at the time it is severed from the land, subject to the provisions of any private agreement.
Speaking generally, the same basic structure established around a century ago, whereby mining leases may be granted in respect of privately owned or publicly owned minerals, may still be seen in the 1992 Act. Mining leases may or may not extend to the surface of land (and may be granted over land to specified depths below the surface): s 68(3). The power to grant a mining lease over the surface of any land on which there is a dwelling house, a garden or certain other improvements is subject to obtaining the written consent of the landowner: s 62 and see Ulan Coal Mines v Minister for Mineral Resources [2008] NSWCA 174; (2008) 161 LGERA 391. Similarly, a mining lease may not be granted over the surface of land which is "agricultural land" without the landowner's written consent: see Moolarben Coal Mines Pty Ltd v Director-General of the (former) Department of Industry and Investment NSW (Agriculture Division) [2011] NSWLEC 191; (2011) 186 LGERA 342. But once again, speaking generally, although there is a statutory right to compensation under Part 13, ultimately the landowner can be obliged to suffer even privately owned minerals to be mined by the holder of a mining lease in the manner indicated by Windeyer J in Wade at 195.
In addition to the right to compensation under Part 13, the Mining Act confers rights to royalty pursuant to Part 14. Section 282 provides that the holder of a mining lease is liable to pay royalty to the Minister on the publicly owned minerals recovered under the lease. Section 283 authorises regulations specifying the rate of royalty and the manner of calculating the quantity of minerals recovered, and states that the value of minerals recovered is to be calculated in the manner determined by the Minister. Subject to the owner and the holder of the mining lease agreeing otherwise, the same is achieved in respect of privately owned minerals by ss 284 and 285. In that case, the Minister is required to deal with the royalty so received in accordance with s 284(2):
"(1) The holder of a mining lease is liable to pay royalty to the Minister on privately owned minerals recovered from the land as if those minerals were publicly owned minerals.
(2) If royalty (including any interest on royalty) is paid to or recovered by the Minister in respect of a privately owned mineral, the Minister is to pay:
(a) seven-eighths of the amount so paid or recovered to the owner of the mineral, and
(b) one-eighth of the amount so paid or recovered to the Treasurer for payment into the Consolidated Fund."
At the material time, the effect of reg 44 of the Mining Regulation 2003 read with Schedule 7 was that the base rate of the royalty on zinc, lead and silver was 4% of the value of the mineral recovered.
The upshot of the foregoing is that in the real world, absent any contrary agreement, in July 2007 the holder of a mining lease was obliged to pay a royalty of 4% on the value of zinc, lead and silver recovered to the Minister, and, if the mineral was not owned by or reserved to the Crown, then its owner was entitled to receive seven-eighths of that royalty from the Minister. The question that is central to this appeal is, how do those principles apply to the hypothetical fee simple which falls to be valued in accordance with s 6A of the Valuation Act?
There is no a priori correct way to determine the land value. One traditional approach to valuation involves seeking out relatively contemporaneous sales of comparable properties: cf Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111 at [16]. However, that approach is regularly not available in the case of land whose highest and best use is a mine. There are typically no comparables. For many years, it has been traditional for such land to be valued by reference to the present value of the cashflow that the mine would generate. It is plain that that method is available to be used as a basis to determine the s 6A land value.
It is also plain that there will be a variety of ways in which the land value of the hypothetical fee simple may be calculated validly. As Mason J said, "valuation is not an exact science, but an exercise in estimation": Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 374; see also Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (1999) 74 ALJR 209 at [12] (Gleeson CJ) and [277] (Callinan J) and Chief Commissioner of State Revenue v Platinum Investment Management Ltd [2011] NSWCA 48; (2011) 80 NSWLR 240 at [95] (Handley AJA). Valuation regularly involves subjective judgments and must inevitably leave room for differences of opinion: AMP Henderson Global Investors v Valuer General [2004] NSWCA 264; (2004) 134 LGERA 426 at [54] (Tobias JA). However, in all cases, the methodology must conform with s 6A.
If the highest and best use of land is an underground mine, then in my view three things flow in respect of the application of the principles in Royal Sydney Golf Club and Gollan to a public law of general application, being the Mining Act. First, an underground mining lease may be granted irrespective of the owner's consent. Secondly, there is force in the proposition advanced by the Valuer-General that the land is treated as a fee simple without any mineral reservation, so that the minerals are privately owned. Thirdly, the land owner will be entitled to compensation pursuant to Part 13 and royalty pursuant to Part 14. However, although these issues were raised during the hearing of the appeal, this Court was asked not to determine them, and since it is not necessary to do so in order to resolve the appeal, I do not.
The essential integers in a discounted cashflow calculation will be the revenue and costs (both capital and operating) over time, and the discount rate. It is easy to see that the calculation could be performed at a level of greater or lesser generality. And it is consistent with the Valuer-General's obligation to value all ratable land in New South Wales annually to do so in a way that is transparent, and relatively straightforward, and broadly applicable. As senior counsel for Perilya put it, "There is nothing in either the Valuation of Land Act or the Mining Act that makes [a valuation based on a 4% royalty upon net operating income] necessarily incorrect or unavailable as a methodology for parties to adopt or for a Court to adopt". However, ultimately where there is an objection and a determination on the merits by the Land and Environment Court, the essential question will be to determine a land value which corresponds to what s 6A demands.
Obviously enough, in the case of a mine, the land value is not the present value of the mine. It is the value of an unencumbered, hypothetical mine, stripped of improvements save for land improvements, operating in accordance with State laws of general application, but not subject to conditions or restrictions deriving from the grant. It may be said that that is a highly artificial calculation, to which the answer is, of course, that is what the Act and other cognate legislation have provided for over many decades.
The valuer will face a series of choices in deriving the inputs into a discounted cashflow calculation. One dimension of those choices relates to the level of generality to be chosen - for example, is allowance to be made for tax? If so, what to do about depreciation? How to determine what the hypothetical operating costs will be? All these matters lie within the expertise of the valuer. However, where (as here) both sides choose to advance quite detailed calculations to determine land value, it is important that no significant component be overlooked. In the circumstances described below, the focus on the detail led to both sides completely failing to take into account what was the largest component of the income stream which the owner of the fee simple would enjoy from the hypothetical mine, namely, royalty pursuant to s 284(2), notwithstanding that it was common ground that the zinc, lead and silver were to be treated as privately owned for the purpose of the exercise and that it was appropriate to bring to account the s 284(1) royalty paid by the operator. To that extent, in my opinion the determination did not accord with what is required by s 6A, which amounts to an error on a question of law. That error came about through the way in which the parties, principally the Valuer-General, ran the case.

The Valuer-General's valuation and Perilya's appeal

The Valuer-General determined the land value as at 1 July 2007 as $20.9 million. The basis on which that determination was made was never placed in evidence.
Perilya's objection pursuant to s 29 of the Valuation Act was disallowed by the Valuer-General: s 35B. Perilya exercised its right of appeal to the Land and Environment Court pursuant to s 37 of the Valuation Act. In that appeal, Perilya bore the onus of proof (s 40(2)) and the Court was empowered to confirm or revoke the decision, or make a new decision, or remit the matter to the Valuer-General (s 40(1)). Perilya's appeal was not limited to the grounds of its objection (s 39).
Perilya's originating process contended for a land value of $11 million (later, it contended for a lower value). Its "outline of objection to valuation" stated that Perilya relied on "relevant provisions of the Mining Act 1992" including ss 282 and 284. It asserted that the Valuer-General "did not acknowledge or bring to account a number of significant costs, expenses and/or deductions", including (in paragraph 14):
"The amounts the owner [sic] will be liable to pay as the royalty for which provision is made in ss 282 and 284 of the Mining Act 1992. The owner of minerals receives seven-eighths, or 87.5%, of the royalties based upon a formula directly reliant upon assumed sale price of minerals ...
The consideration that the adopted discounted cash flow (DCF) applied to the gross royalty stream should generally derive a value for the land that is similar to or consistent with the value that is derived by application of a reasonable DCF to the net royalty stream, which is the gross royalty stream less 12.5% statutory royalty and the cost of rehabilitation and associated expenses."
Those contentions were not strictly accurate. In particular, it seems likely that the first reference to "owner" must be taken to be a reference to the holder of the mining lease, whose obligation was to pay a royalty to the Minister, seven-eighths of which was to be returned to the owner of privately owned minerals. However, it is quite clear that Perilya was contending that the "net" 12.5% royalty paid to the State was required to be brought to account in the discounted cashflow calculation. As will be seen below, it may be that the reference to "less 12.5% statutory royalty" led to confusion.
By documents filed on 16 December 2011 and 1 March 2012 respectively both Perilya and the Valuer-General served a "statement of valuation methodology". Those documents had a deal of common ground. Both proceeded on the basis that first there must be a notional removing of improvements other than "land improvements" (in general terms, that meant that the mining and processing equipment is assumed not to be present on the land for the purpose of the valuation exercise, but roads, mine shafts and any other excavation, filling, grading or levelling associated with the operations of the existing mine were deemed to remain). Secondly, the valuer was to assume a notional sale transaction of the fee simple of the land on the basis of the assumptions in s 6A of the Valuation Act. Thirdly, the determination of the price of the sale required an assessment of the range of potential users, and a determination of the highest and best use of the land. It was ultimately common ground that the highest and best use of the land was as a mine. Fourthly, on the common premise that the notional purchaser would enjoy a future cash stream from the operation of a mine, that cash flow was to be discounted to a net present value, taking appropriate account of risk.
With the advantage of hindsight it may seem strange, but it was common ground that it was appropriate to bring to account the royalties for which provision was made in ss 282 to 284 of the Mining Act. More particularly, Perilya repeated the first contention from its "outline of objection to valuation" reproduced, while the Valuer-General said that the hypothetical vendor and purchaser would make an assessment of:
"the amounts the reasonable notional purchaser as owner will be liable to pay as the royalty for which provision is made in ss 282 to 284 of the Mining Act 1992 but bearing in mind that any such royalty paid can be treated as an operational expense of the mine and that if the vendor or purchaser is also the owner of the mineral resource they would be entitled to receive from the Crown seven eighths of the statutory royalty payable by the operator under the Mining Act 1992."

The parties' expert reports

The parties exchanged expert reports shortly prior to the hearing. In light of the substantial common ground in valuation methodologies, a deal of common ground was reflected in the joint experts' report which was prepared shortly before the trial. That agreement included that there were 11.2 million tonnes of reserves, that the cost of purchasing, installing and operating the improvements to operate the mine would be $195 million, and that the life of the mine would be 5.5 years. The agreement also extended to the recovery rates for zinc, lead and silver during the production phase.
The joint experts' report recorded what was said to be agreement as to royalty rate of 4%. That "agreement" was illusory and apt to confuse. It was apt to confuse because it was a mere coincidence that the agreed 4% to be paid to the owner was identical to the statutory royalty to be paid to the Minister, both of which royalties were to be calculated very differently. The statutory royalty was to be calculated on the value of minerals recovered, while both experts agreed that the hypothetical royalty to be paid by the operator was to be calculated on the operator's profit. Further, the agreement was illusory, because Perilya's expert Mr Herdman said it was 4% of the operator's after-tax profits, while the Valuer-General's expert Mr Hopcraft said it was 4% of the operator's pre-tax profits.
The experts approached the valuation task as follows. Mr Hopcraft said that he followed the "Rating and Taxing Valuation Procedures Manual Version 6.2.2", a document prepared on behalf of the Valuer-General. He said that he had "utilised royalty rates as indicated by the Department of Industry and Investment" and that he had used "allowable deductions for operational expenses such as treatment expenses, shipping and freight, administration costs, depreciation on mill, depreciation of plant and equipment estimated at 65% of gross production value". He calculated the gross revenue for each of the years of production by multiplying the amount of production by its sale price. To that product he applied a further factor, being the margin of 35%, to obtain the net revenue (after operating costs) and to that he applied a rate of 4% to obtain the royalties. That cashflow was discounted applying a discount rate of 25%.
This was consistent with the Rating and Taxing Valuation Procedures Manual on which Mr Hopcraft relied. In particular, the royalty rate of 4% and the discount rate of 25% were taken from the Manual, which also advised that a reasonable operating margin would be between 30% and 40%.
The Valuer-General's "Statement of Valuation Methodology" said of the extract from the Manual that:
"[It] is faithful to the terms of s 6A for the following reasons:
(i) An amount equivalent to the applicable Crown royalty rate is adopted by the Valuer General in determining the Land Value of the land. This ensures uniformity of calculation and assessment across a broad range of mining operations.
(ii) The Crown Royalty rate is adopted and utilised in the Valuer General's calculations as the notional income stream from royalties flowing from the mine operator to the hypothetical owner."
However, why fidelity to s 6A is achieved by applying as the hypothetical licence fee charged by the owner to the hypothetical mine operator the same rate on the mine operator's pre-tax profits as the operator would have to pay to the Minister on the value of production was not explained. Although at the forefront of the Valuer-General's submissions on the appeal was the seven-eighths royalty stream to the owner of privately owned minerals pursuant to s 284 of the Mining Act, neither Mr Hopcraft's report, nor the Manual on which he relied, made provision for that income stream. It was not contended that the 4% on profits somehow reflected the 3.5% royalty on production which the owner of privately owned minerals would derive. Indeed, on the case as ultimately advanced to this Court, it is impossible for the cashflow calculated by Mr Hopcraft to be reconciled with the statutory royalty.

On the other hand, Perilya's expert Mr Herdman used a margin of 28.69%, based on the average actual operating margin at the mine over the previous 4 years. He used the same royalty rate of 4%, but applied it to the after-tax profit of the operator. He applied the same discount rate of 25%. In the report he defended at trial, he included a further deduction in each of the five full years production of $9,956,683 (and a pro rata amount for the sixth year), which were said to be the "SS 282 to 284 of Mining Act Payment State Royalty (See paragraph 14 outline of objection)." (That is a reference to the extracts of paragraph 14 reproduced above.) Those amounts were exactly 12.5% of the net operating revenues for each of the production years. In all, Perilya sought to reduce the hypothetical cashflow by some $54 million over the life of the mine by reference to a 12.5% royalty paid on net operating revenues.
Those large annual deductions of $9,956,683 were readily demonstrated to be erroneous. First, Mr Herdman made no attempt to reconcile the double-counting - for one of the operating expenses which contributed to his calculation of margin was the royalties to the Minister payable under s 282. Secondly, the royalties paid under s 282 to the Minister, or received under s 284 by the owner, were royalties on the value of the resource recovered, not the gross profit. Thirdly, the valuer had seemingly completely misunderstood how the 12.5% was derived. True it is that in the case of privately owned minerals, a net amount of 12.5% of the total royalty was kept by the State, after the remaining seven eighths was payable to the owner pursuant to s 284. But in the case of privately owned minerals, the State keeps 12.5% of the 4% royalty paid, and the owner receives 87.5% of the 4% royalty paid. Even putting to one side the conceptual errors referred to above, the only meaningful additional deduction would have been one of 12.5% x 4% or 0.5%, reflecting the royalty amount which the owner never recovered. It may be that a source of that error is the reference in Perilya's "outline of objection to valuation" of "less 12.5% statutory royalty" extracted above.
To anticipate what is described below, much of this erroneous reasoning was effectively exposed in cross-examination, and, very properly, that claim was abandoned by Perilya on the last day of the trial before final addresses commenced. The result of Perilya's abandonment of that aspect of its valuation was that nowhere in the materials propounded by it to the Land and Environment Court was allowance made for the royalty stream to the owner for privately owned minerals.

The course of the trial

Not surprisingly, the issues as framed by the parties and in particular in the joint experts' report guided the conduct of the trial. In opening, senior counsel for Perilya accepted that the minerals were privately owned and referred to the allowance for the 12.5% royalty payment which Mr Herdman had made. Senior counsel for the Valuer-General referred to the fact that the minerals were privately owned but for a very different purpose:
"... [A]mongst the expenses on the part of a miner would be the payment of royalties to the government based upon it being a public mineral. We would say that the effect of 6A is that it is not [scil a public mineral] and that is a factor which is relevant to net operating profits, not that we are seeking to change our valuation, but the fact that there is no obligation to pay to the Crown royalties on the basis it's a public mineral makes our assumption of 35% margin all the more conservative. That's the only way it arises the way we see it. It doesn't affect the bottom line." [Black 38W]
Opposition was then taken to the tender of titles which was said to reveal that in each case Perilya was the registered proprietor and that there had been a reservation of minerals. Senior counsel for Perilya said:
"For my part if my learned friend is making a case that there's some statutory provision or there's some exclusion that's necessary by reference to documents that aren't yet in evidence and by reference to some principle of law that hasn't yet been explained apart from the general reference to 6A, that needs to be explained. The Crown grant refers to, as I understand it, ordinarily what are called the royal metals, namely gold and silver. As I understand it there's no debate that lead and zinc, privately owned, they're not encompassed on any view of what's in the Crown grant and what isn't. So my learned friend's proposition will need to be refined. I don't presently know what it is or what evidence he's bringng forward in support of it. But as your Honour has seen we rely on both the provision as to public minerals and as to private minerals as giving the statutory basis for the 12 and a half per cent."
Counsel for the Valuer-General then said:
"We accept, just to make it plain, we accept these minerals are private rather than public. ... And the reason we do so is by virtue of s 6A which operates in such a way that notwithstanding the reservation that is in fact recorded in the certificates of title, that derogates from the pure fee simple which is required to be assumed under s 6A."
In short, there was agreement that the minerals were privately owned, but both parties sought to advance divergent submissions based on that agreement. Perilya sought to obtain the benefit of a $54 million reduction in cashflow from a 12.5% royalty on net operating revenues. The Valuer-General sought to point to the s 284(2) royalty stream to indicate the conservatism of his 35% margin. Neither party sought directly to bring the revenue stream to account. Moreover, neither party sought to justify how other elements of their models made allowance for the s 284(2) revenue stream.
The evidence concluded on the second day. On the third day the Valuer-General sought to tender the Minister's determination, consistently with what had been indicated in opening:
"We tender that document, being the ministerial determination under 283(5), not in order to change the 35% margin that we have adopted in our valuations, we don't want a re-calculation, but rather simply to confirm the conservative nature of the 35% having regard to the determination of the minister under 283(5)."
Perilya complained that that should have been put to the experts when they were cross-examined. The tender was rejected, and there is no challenge on appeal to that rejection. Counsel for Perilya then said that if the Valuer-General were to approach the question of valuation by reference to the net present value of the statutory royalty to the owner, then he would seek leave to withdraw any concession which had been made that the minerals were privately owned. It is fair to say that in the course of closing addresses, both counsel maintained the positions outlined above.

The judgment at first instance

The judgment below was delivered promptly, one week after the conclusion of the three day trial. Its structure reflected the joint experts' report, and the areas of agreement and disagreement identified in it. It did not address the question of any s 284(2) royalty at all, which amounted to an acceptance of the position advanced by Perilya.
It is necessary, in order to address the Valuer-General's subsidiary grounds of appeal, all of which in my opinion fail, to set out the detail of the methodology by which the primary judge concluded that the land value was $4.9 million. The reasoning, reflected in the spreadsheets attached to the Court's judgment, was as follows:
(a)There was to be expenditure of (i) $195 million in purchasing and commissioning plant and equipment in the first two years, (ii) $10 million in start up costs in the first two years, and (iii) $23,893,742 by way of security to be lodged in the first year (relating to rehabilitation).
(b)Production would start at the beginning of year 3 and conclude 5½ years later in year 8. In each of those years, except for the last, there would be production of 76,443 tonnes of zinc, 57,475 tonnes of lead and 45,219kg of silver.
(c)The mine was assumed to run at a margin of 38.26%. That margin was calculated by reference to the actual margins achieved at the mine over the three preceding years (of 42.11%, 39.13% and 35.89%), giving a double loading to the (most recent) 2007 figure, and taking an average.
(d)The net operating revenues were derived by multiplying the quantities of zinc, lead and silver calculated above by 0.3826 (representing the margin) and by commodity prices of $3,547.74 per tonne for zinc, $2,406.81 per tonne for lead and $434.92 per kg for silver. That produced an annual net operating revenue for each of years 3 to 7 of $164,194,729.
(e)It followed that in the first two years of operation (before extraction occurred) there was negative cashflow of some $228 million, and that it was not until year 4 that the revenue from notional sales exceeded those start up costs.
(f)In each year (save for the first) a depreciation charge of $26,595,744.68 was applied (on a straight line basis) so that for years 3 to 7 there was derived a taxable income of $137,598,985.28, on which tax was payable (at 30%) yielding an annual after tax income of $96,319,290.
(g)The net income after tax was calculated by reference to the net cash flow before tax, less the depreciation charge, less the tax (although tax was only payable upon the cash flow after the depreciation had been subtracted) which resulted in a notional 4% royalty of $4,916,601.38 in the 5th, 6th and 7th years, and a much smaller amount in the 4th year (which was the first year that the mine recovered the initial capital costs).
(h)Finally, those royalties commencing in year 4 were discounted at an agreed annual rate of 25% to produce a present value of $4,904,435.66.
All this is much more comprehensible in the spreadsheets which the primary judge helpfully annexed to his reasons: see Perilya Broken Hill Ltd v Valuer-General [2012] NSWLEC 235. The primary judge expressed his conclusion as follows (at [33]):
"In the light of the foregoing, the resultant net cash flow to the mining operator, from which the 4 per cent royalty is to be paid, is calculated in accordance with the spreadsheet which is annexed to this judgment. Three matters should be noted. Firstly, the royalty would only be payable once the mine achieved a positive cash flow. Secondly, the royalty would be payable on the annual cash flow and not on the cumulative cash flow as shown on Mr Herdman's spreadsheet which was tendered. Thirdly, the calculation in the annexed spreadsheet is based upon the actual figure set out in the evidence, rather than some of the rounded figures."

Ground 2 of the appeal

The Valuer-General's principal ground of appeal was ground 2, which was in these terms:
"Having accepted that the capital sum for which the fee simple of the land might be expected to realise within the meaning of s 6A(1) was to be determined by the present value of the royalties to be paid to the owner of the fee simple by the operator of a mine on the land and for the life of the mine his Honour erred on a question of law:
(a) in failing to take into consideration that by reason of s 6A(1) the capital value of the fee simple of the land included the title to the minerals in the land (which was conceded by the respondent); and
(b) in failing to take into account the fact that by reason of the combined operation of s 284 of the Mining Act 1992 and clause 44(1)(b) of the Mining Regulation 2003 the owner of the land would receive royalties of 3.5% of the value of the minerals recovered from the land by the operator of the mine."
At all material times, Perilya held a number of mining leases and consolidated mining leases, all granted under the Mining Act 1973. Each was taken to have been granted under the Mining Act: Schedule 6, clauses 4(2) and 9(2). The litigation has proceeded on the basis that Perilya's entitlement to mine zinc, lead and silver was pursuant to those leases. As noted above, early in the course of the trial Perilya conceded that the minerals were privately owned, but threatened to withdraw that concession if the Valuer-General were permitted to advance a claim that the s 284 royalty stream be brought to account. And it is true that nowhere on the face of the judgment was reference made to the proposition that the title to the fee simple included title to the minerals, or to the 3.5% royalties for which s 284(2) provided.
That absence is explained by two considerations. The first is an acceptance of Perilya's submission that it was not open to the Valuer-General to advance that argument. The second is the fact that notwithstanding both parties' "statements of valuation methodology", neither party had advanced a basis for valuation which included the s 284(2) royalty stream. To recapitulate, Perilya had purported to do so, but its calculations had been exposed to be wrong and had been withdrawn, and the Valuer-General had never done so.
The royalties paid by Perilya in the financial years ended 30 June 2005, 2006 and 2007, which were ultimately reflected in the calculation of the hypothetical mine operator's margin, were substantial, and were reflected in the valuation adopted by the Court below in the following way.
Both valuers had proceeded on the basis that they ought to identify a margin on which to calculate profitability. Mr Hopcraft used a margin of 35%. Although he did not expressly state that the operational expenses used to derive that margin included royalty payments, the Valuer-General submitted in the appeal to this Court that it was implicit in his methodology, and that submission may be accepted in light of the materials in evidence. Mr Hopcraft referred to the $82.5 million NPAT (net profit after tax) in Perilya's 2007 financial statements, and revenue of $378 million. It seems likely that he obtained $378 million by starting with $386.89 million revenue in the consolidated income statement, and subtracting a $13 million profit on the disposal of listed investments, and adding a $4.6 million pre-tax write-down of an asset. The $82.5 million allows for the payment of royalty of $10.72 million, and it is clear that that amount must be a total amount paid, and does not include any significant return of seven-eighths for any privately owned minerals.
On the other hand, Mr Herdman proffered a margin of 28.69% based on the same figures ultimately relied on by the judge, save that he took the average margin over the previous four years.
To that extent, both valuers were conforming with what was required by s 6A. The cashflow whose discounted present value would reflect the s 6A land value had to reflect the royalty to be paid to the Minister.
The margin of 38.26% used by the primary judge was apparently derived from Perilya's annual accounts for the financial years ended 30 June 2005, 2006 and 2007. In those years, the "Broken Hill EBIT" (earnings before interest and tax) was $9.6 million, $126.4 million and $127.6 million, and the "Product Sales" were $22.8 million, $323 million and $355.5 million respectively. The margin for those three years was 42.11%, 39.13% and 35.89%. Averaging those margins and giving double weight to 2007 resulted in the margin applied to the hypothetical mine of 38.26%.
I have considered carefully whether somehow in the extrapolation from actual revenue and actual expenses any s 284(2) royalty has been brought to account and therefore might be said to be reflected in the margin. As best as I can see, it seems that it is not reflected in a way which could appropriately support what s 6A requires. For example, in the financial statements for the year ended 30 June 2007, Perilya's revenue was some $386,890,000, and it paid "Royalties" of $10,720,000. The income of $386,890,000 included "Royalties" of $500,000. It is unclear from the materials what the $500,000 royalties were (it is perfectly possible that this amount has nothing to do with s 284), but it is clear that they are orders of magnitude less than the seven-eighths to which the owner would be entitled. Moreover, it was not said on behalf of Perilya that the calculations in fact included a return for privately owned minerals.
It may be accepted that there is a deal of leeway in appropriate methodologies which may be used to determine land value for the purposes of s 6A. However, in my opinion, it was not possible consistently with s 6A on the one hand to proceed on the basis that a s 284(1) royalty was to be paid to the State by the holder of the mining lease, but to ignore the s 284(2) royalty that was to be paid by the Minister to the land owner. Both amounts are large, and both bear directly upon the value of the hypothetical fee simple. Ignoring a cashflow which prima facie afforded some evidence of value is an error in law: Melwood Units Ltd v Commissioner of Main Roads [1979] AC 426 at 432, approved Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111 at [8]. Of course, the error must vitiate the decision: Yates Property Corporation Pty Ltd (in liq) v Darling Harbour Authority (1991) 24 NSWLR 156 at 177; Roads and Traffic Authority v Mosca [2006] NSWCA 159; (2006) 146 LGERA 335 at [22]; ISPT Pty Ltd v Valuer General [2009] NSWCA 31; (2009) 165 LGERA 25 at [52], but here both the payments and the receipts are plainly material.
Accordingly, if the minerals were privately owned, and the valuation methodology descended to the detail of allowing for the operating expenses constituted by the royalty payments under s 284(1) to the Minister, then in my opinion the cashflow generated to the owner by s 284(2) was required to be brought to account, either quantitatively in the cashflow, or qualitatively by some other reasoning process within the valuer's expertise. It may be that the minerals were not privately owned (or were not all privately owned), and in my opinion it would be wrong, having regard to the history of this litigation, for that to be determined as a result of concession made on a particular basis at first instance.
On the other hand, if the minerals (or some of them) were publicly owned, then once again in order to comply with s 6A they needed to be treated differently from privately owned minerals and the land value of the land would need to be valued differently to account for the minerals being publicly and not privately owned. For example, although the landholder would not receive any s 284(2) royalty, the landholder would be entitled to compensation for any compensable loss suffered, or likely to be suffered, as a result of the mining of the publicly owned minerals (under Part 13 of the Mining Act). This different valuation exercise was not done, and amounts to error of law for the reasons indicated above.
In my opinion, there was probably also a further error of law. As noted above, the Valuer-General proceeded on the basis that a 4% royalty was appropriate, and Perilya's valuer agreed as to the rate, although disagreeing on whether the profit to which it was applied was calculated before or after tax. The primary judge understandably followed that approach. However, the reason that 4% was chosen was, expressly, because that was the rate of the s 282(1) and s 284(1) royalty payable to the Minister on the mineral recovered. That is quite different from a 4% royalty payable to an owner (whether before or after tax) on profit. There was no reasoning articulated to support why 4% was an appropriate proxy for the notional royalty stream used to calculate the land value. In the absence of any such reasoning, the inference may be available that this did not accord with any appropriate valuation methodology. However, it is not necessary for the purposes of resolving this appeal to express a concluded view on the point.
In my view, contrary to the submissions of the Valuer-General, this appeal is not to be resolved on the basis that the primary judge should have found that Perilya had failed to discharge the onus which it bore to demonstrate error. Acceptance of the Valuer-General's submission entails acceptance of material error in his own methodology - for the same error is made in the approach adopted by Mr Hopcraft as well as in the Manual on which the Valuer-General relied. In Brisbane City Council v Valuer-General for the State of Queensland (1978) 140 CLR 41 at 59, Gibbs J said, with the agreement of the other members of the High Court, that:
"Brisbane City Council had discharged the onus of proving the grounds of its appeal, for it had shown that the Valuer-General had valued on an incorrect basis; the Court therefore could not affirm the valuation appealed against."

Similar reasoning applies in the present appeal, for the obligation of the Court below in determining Perilya's appeal was to review the matter on the merits, in light of all of the material before it: LEC Act, s 39.
The conclusions I have reached will come as no surprise to the Valuer-General. Senior counsel for the Valuer-General did not dispute that "Both parties seem to have gone off the rails in dealing with [the statutory royalty]", and ultimately said:
"HALE: In defence of the position of the Valuer General what has occurred for practical reasons, there has been an instruction for simplicity and uniformity which might or might not have been the subject of some negotiation with industry or otherwise, and that was sought to be the basis of the valuation. If all that Perilya had done was to challenge some of the inputs into the valuation methodology as distinct from the methodology itself, that is to say spot price, risk and matters of that sought, this problem would never have arisen because the Perilya has attacked the methodology in the Valuer General's instruction, root and branch. It has brought home the weakness of the Valuer General's approach which the Valuer General's instruction accepts that.
PRESTON CJ of LEC: Does that mean that you now accept that if there is an error the proper course would be to remit, not to uphold the appeal and dismiss the appeal below?
HALE: Yes. We would accept that."

Perilya's notice of contention

Against the possibility that legal error might be found in the approach adopted by the primary judge, Perilya advanced by notice of contention the position that the judgment should be affirmed because:
"(a) the calculation of value of the land by reference to the operation of s 284 of the Mining Act 1992 and clause 44(1)(b) of the Mining Regulation 2003 was inconsistent with the agreed methodology of the parties and inconsistent with the way the Valuer-General and the applicant prepared and argued its case at trial;
(b) the expert evidence and documentary evidence at trial did not address facts of central importance to a proper application of a valuation methodology based on, or including, the amount of the "Crown royalty" including in particular evidence about the reservations in the title of the land and the quantification of the amounts necessary to determine the amount of Crown royalty in respect of the land. Accordingly, it would have been unfair to the applicant and inconsistent with efficient and just case management to allow the Valuer-General to make that claim or to determine the applicant's claim on that basis;
(c) To the extent that the Respondent made any concession in respect of the private ownership of the relevant minerals (as asserted by the Appellant in Ground 2(a) of the Notice of Appeal) such concession was limited and was only for the purpose of the application of the agreed methodology for the determination of the value of the land, to which such fact was not relevant."
Although it is a contestable proposition as to whether there was an "agreed methodology", there is force in the factual propositions in Perilya's notice of contention. In particular, it will be plain from what has already been said in these reasons that the s 284(2) royalty stream played no part in either party's methodology as advanced by their experts, notwithstanding that both parties referred to it in their "statements of valuation methodology".
In my opinion, substantially based on the matters in its notice of contention, Perilya is entitled to feel some grievance arising out of what has happened. Ordinarily, a party challenging the decision of the government is entitled to seek to have the issues refined in the course of preparation for trial, and during the trial. Ordinarily, parties are bound by the way they conduct themselves in litigation. Why should the Valuer-General be able now, on appeal, to raise an argument which undermined his own Manual and his own methodology, which in truth goes further than was ever put below (it will be recalled that before the primary judge, the s 284(2) royalty stream was only referred to in order to reinforce the conservatism of the 35% margin)?
However, in my opinion, there are two separate issues: does the impugned decision disclose error falling within the scope of s 57 of the LEC Act, and, if so, how did that error come about? In my opinion, there is error on a question of law, in determining the value of the hypothetical fee simple by proceeding on the assumption that the minerals are privately owned, and having regard to the s 284(1) payments but not the s 284(2) receipts. On one view, s 6A requires the valuation to proceed on the basis that the minerals are privately owned, but this Court has been asked not to determine this and I do not do so. If so, then there is the error as above, and the error is undoubtedly material, for the s 284(2) royalty stream enjoyed by the owner would amount to millions of dollars each year of production. Alternatively, if s 6A does not require the valuation to proceed on that basis, and in fact some or all of the minerals are not privately owned, then again in my opinion the decision discloses error of law, because there has not been a finding as to the ownership of the minerals or a valuation of the land on the basis that the minerals are not privately owned, and indeed Perilya has not had an adequate opportunity to be heard on the point.
That said, Perilya chose to defend a methodology that embraced the proposition that regard ought to be had to the one-eighth of the royalty payable on privately owned minerals which the owner would never recover. Its expert purported to advance a methodology which reflected that, but it was flawed and quite properly abandoned. The difficulty Perilya faces is that its chosen approach following that abandonment was one which, so far as the evidence discloses, does not have regard to the royalty received on privately owned minerals.
The valuation therefore discloses material error of law. The valuation is not some private dispute between parties, who are free to frame the issues between them, and indeed to proceed on an assumed and false basis. The valuation has direct effects on third parties (notably, the rating and taxing authorities who are bound by what is in the Register).
The appeal must in my opinion be allowed and remitted for determination in accordance with law. It is convenient to deal with the Valuer-General's other grounds of appeal, all of which fail, below, before addressing the question of costs.

Grounds 1 and 3

Most of these grounds overlapped with what has already been addressed above. The Valuer-General accepted that the remaining aspect of these grounds was a complaint that the primary judge had failed "to give reasons or proper reasons" for finding that the agreed 4% royalty rate was to be based on the notional after tax, rather than pre-tax profits (step (g) in the summary of the reasoning of the primary judge above). The reasons of the primary judge on this issue were as follows (at [29]-[31]):
"Mr Herdman's evidence is that in his experience a percentage royalty is always calculated on an after-tax basis, this being the actual cash which is available for payment.
Mr Hopcraft's evidence, based mainly on his expertise in valuing quarries, is that royalties are frequently based on a rate per tonne.
I prefer the evidence of Mr Herdman, who has had extensive experience as a mineral valuer in the operation of underground mines and of the practice generally adopted in such enterprises. I thus accept that the royalty should be based on an after-tax calculation."
The Valuer-General's criticism invoked what Sheller JA had said in Archibald v Byron Shire Council [2003] NSWCA 292; (2003) 129 LGERA 311 at [54] and the authorities considered by Beazley JA in Taupau v HVAC Constructions (Queensland) Pty Ltd [2012] NSWCA 293 at [133]-[134] that:
"Where a dispute...involves something in the nature of an intellectual exchange with reasons and analysis advanced on either side, the parties are entitled to have the judge enter into the issues canvassed before the Court and to an explanation by the judge as to why the judge prefers one case over the other. This is particularly so where there is disputed expert evidence."
In my opinion, that criticism is misplaced. The issue dividing the experts in no way resembled an "intellectual exchange" with reasons and analysis advanced on either side. Mr Hopcraft, said, on the basis of his experience, that:
"I can't accept that somebody would enter into agreement on an after tax basis with a quarry or mine operator, it doesn't, I don't believe it happens".
However, it was established that much of Mr Hopcraft's experience was in other extractive industries. Mr Herdman gave evidence to the contrary:
"...I've been in the privileged position of acting on behalf of both mine operators and landowners in terms of striking deals on royalty payments. Whilst I concur with Mr Hopcraft's view that in certain instances extractive industries which is a completely different industry will look at gearing royalty mechanism to percentages of ex-bin as they are known or selling price. Having the benefit of acting on behalf of both a mining operator and an extractive industry operator and the landowner please rest assured that whatever royalty is agreed if it is ex-bin there will always be a calculation made as to the implications of that royalty on a net after tax basis in terms of its impact on the margin, always, you will not find an extractive industry operator or a mining operator that will not have a good understanding as to the impact it will have, that royalty payment will have, on his net margin and that's - that's fact."
This was quintessentially a question of practice, as to which the primary judge was entitled to give short reasons indicating his preference for the greater experience of Perilya's expert. That conclusion is strengthened by the consideration that the proceedings below in Class 3 of the jurisdiction of the Land and Environment Court were not subject to the rules of evidence and were required by the LEC Act, s 38 to:
"be conducted with as little formality and technicality, and with as much expedition, as the requirements of this Act and of every other relevant enactment and as the proper consideration of the matters before the Court permit."
As McHugh JA pointed out in Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 at 280-281, the obligation to give reasons is related to the functions those reasons are to serve. His Honour said at 281:
"In a case where a right of appeal is given only in respect of a question of law, different considerations apply from the case where there is a full appeal. An ultimate finding of fact, which is not subject to appeal and which is in no way dependent upon the application of a legal standard, can be treated less elaborately than an issue involving a question of law or mixed fact and law. If
no right of appeal is given against findings of fact, a failure to state the basis of even a crucial finding of fact, if it involves no legal standard, will only constitute an error of law if the failure can be characterised as a breach of the principle that justice must be seen to be done."
In Yates Property Corporation Pty Ltd (in liq) v Darling Harbour Authority, another valuation case where complaint was made of the adequacy of the trial judge's reasons, Soulemezis was applied. Mahoney JA said (at 171) that there could be "no more compelling reason for arriving at a particular sum than that, taking into account all of the evidence, the judge was 'doing the best I can'". Kirby P in substance agreed (at 160-161) and Handley JA wrote to similar effect (at 182-183). In Roads and Traffic Authority v Hurstville City Council [2001] NSWCA 11; (2001) 112 LGERA 223 at [50], Mason P said, with the agreement of Sheller and Powell JJA:
"In the field of judicial valuations, the task is ultimately evaluative. Within limits, courts do not require every step to be separately justified".
In my opinion there was no need for any longer explanation to be given. It is not necessary to address the application of these decisions to other types of trials where there is an appeal by way of rehearing; cf Resource Pacific Pty Ltd v Wilkinson [2013] NSWCA 33 at [54]-[58]. This ground of appeal should be dismissed.

Ground 4

The Valuer-General contends that there was no probative evidence to support the inclusion of the $10 million initial costs in the discounted cash flow analysis (step (a)(ii) in the summary of the primary judge's methodology referred to above); the lack of any probative evidence disclosing error of law. Despite the elaborate argument advanced on this ground, very little turns on it. In order to apprehend the lack of significance of this ground, it suffices to note that the total initial costs exceeded $200 million, that the operating costs over the 5½ year life of the mine were in the order of $1.4 billion, that removing an upfront expense of $10 million would have the result of increasing the ultimate cash flow on a pre-tax basis by that amount, of increasing the post-tax cash flow by some $7 million, of increasing the notional royalty by some 4% x $7 million or $280,000, which in turn would need to be discounted. The upshot is that, at best, this ground would increase the land value (on which rates and taxes were based) from $4.9 million to some $5.1 or $5.2 million.
At trial, Perilya had contended for an additional $60 million in initial start up costs. That contention was reflected in the spreadsheets attached to its expert reports, and in the joint expert report. It was intended to be supported by evidence, which was served late, and for that reason was rejected by the primary judge. Nevertheless, those amounts of $60 million were in evidence before the primary judge.
During the course of the hearing, the primary judge made it plain that he had formed the view that there were additional costs, and that the Court would attempt to determine them:
"His Honour: There is no evidence. The Court will draw upon its experience and knowledge and come up with a figure but its quite obvious that there must be an allowance for that item.
Hale: And we've accepted that."
It is to be noted that the primary judge was assisted by an expert commissioner, who was a qualified valuer, something which was made clear to the parties no later than when this exchange took place:
"His Honour: ... I mean the commissioner sitting alongside me has in the past valued coal mines. He knows more about this than me."
There was thus no question of a denial of procedural fairness in the Court proceeding in the way that it did (nor, to be fair, was any asserted by the Valuer-General). In my opinion it was open, and appropriate, for the Court to do the best it could in the circumstances, as to a very small (in the scheme of things) item in the discounted cash flow analysis, having indicated that it proposed to take that course, for substantially the reasons given above in relation to ground 3.

Ground 6

The Valuer-General abandoned one ground of appeal relating to depreciation, but leave was granted at the hearing to rely upon a further ground, which became ground 6. It was said that although the reasons of the primary judge stated that the notional royalty would be payable on the annual cash flow, as to part it was calculated on the cumulative cash flow (see step (g) in the summary of the reasoning of the primary judge). It was said that to the extent that the schedule of calculations did not accord with the reasons of the primary judge, there was an error on a question of law.
For my part, I do not think that there is error of law. Suppose the reasons for judgment in favour of a plaintiff made it plain that damages under three heads were to be awarded, but only two were included in the court's judgment, or there was an arithmetic error. The parties would be entitled to have the error corrected pursuant to the slip rule, but in my view that would not amount to error of law. The Valuer-General's complaint is not essentially different.
In any event, in my opinion there is nothing in this ground. It is plain that the spreadsheets annexed to the reasons for judgment form part of the reasons for judgment - indeed, an important part, for much of the methodology is not otherwise disclosed, and (at least to my eyes) the spreadsheets are a much clearer explanation than the text. There is no difficulty in a court taking this course, and it may be noted that the evidence adduced in the course of the trial proceeded by reference to spreadsheets of a similar character. Taken at its highest, there is, perhaps, some ambiguity in the reasons of the trial judge reproduced above. His Honour said that it should be noted that "firstly, the royalty would only be payable once the mine achieved a positive cash flow". Arguably, that could mean either that no royalty was payable until the cumulative cash flow from the mine was positive, or it could mean that the royalty became payable the moment positive cash flow was achieved. The latter seems unlikely; why having spent $228 million in the first two years would a royalty become payable on the first day of year 3 when revenue first commenced to be derived? But on any view, reading the whole of the reasoning in [33] together with the spreadsheets attached to the judgment, it is plain that his Honour intended for royalty only to be payable once the cumulative cash flow was positive. As Lord Hoffmann said in Piglowska v Piglowski [1999] UKHL 27; [1999] 1 WLR 1360 at 1372:
"[The trial judge's] reasons should be read on the assumption that, unless he has demonstrated the contrary, the judge knew how he should perform his functions and which matters he should take into account. ... An appellate court should resist the temptation to subvert the principle that they should not substitute their own discretion for that of the judge by a narrow textual analysis which enables them to claim that he misdirected himself."
This ground is not, in my opinion, made out.

Orders

In my view, the decision must therefore be set aside. It was common ground that if the Court reached that view on ground 2 of the appeal, there should be a rehearing. Nothing in these reasons is intended to confine the way in which the parties may advance their positions at that rehearing (and in particular, nothing in these reasons confines Perilya to proceed on the basis that the minerals are privately owned, or prevents Perilya from making submissions as to the approach required by s 6A to any s 284(2) royalty stream).
Perilya submitted that the Valuer-General ought not to be permitted to adduce further evidence at the further hearing. In my opinion, no such restriction is appropriate. It is not by any means clear the extent to which the belated appreciation of the Valuer-General of how interaction of the Valuation Act and the Mining Act will impact upon the material which will be sought to be introduced. Difficulties are apt to be introduced when there is remitter on a limited basis: cf Waterways Authority v Fitzgibbon [2005] HCA 57; (2005) 79 ALJR 1816. However, to the extent that the Valuer-General seeks to introduce new evidence, then Perilya should be free to apply for a special costs order of the hearing at first instance. It is not possible to prejudge any such application at this stage, but it may be that there is a reasonably arguable basis for contending that to the extent that a further hearing is required because of the failure by the Valuer-General to adhere to the basis on which he has succeeded in this Court, the ordinary rule in r 3.7 of the Land and Environment Court Rules 2007 will have been displaced.
In my view, the principal responsibility for what has occurred rests with the Valuer-General. The consequence of success in the Valuer-General's appeal is that his methodology is exposed as inconsistent with s 6A. The need for the appeal was substantially brought about by his own methodology and expert evidence and the way the case was run at first instance, as was illustrated by this exchange at the end of the hearing:
"EMMETT JA: Are you saying that the appropriate methodology is simply to take the present value of the statutory royalty?
....
HALE: What I put then and I put now is that firstly that is the proper methodology. The second point is it must be acknowledged that certainly Mr Hopcraft on behalf of the Valuer General did not undertake such an approach. ..."

There were other unsatisfactory aspects to the appeal, including 22 pages of single-spaced submissions, purportedly in reply but going well beyond any reply, filed without leave, not signed or (so the Court was told) prepared by counsel presenting the appeal.
In my opinion, in the highly unusual circumstances of this appeal, notwithstanding his success on the primary ground, there should be no order as to the costs of the appeal, a course adopted in, for example, Whitehouse Properties Pty Ltd v Bond Brewing (NSW) Ltd (1992) 28 NSWLR 17 at 24-25 (Handley JA, Kirby P and Clarke JA agreeing).
I propose the following orders:
(1)Appeal allowed.
(2)Set aside the orders of the Land and Environment Court of 19 October 2012.
(3)Remit the proceedings to the Land and Environment Court for determination by that Court in accordance with the decision of this Court.
(4)There be no order as to costs of the appeal.
PRESTON CJ OF LEC: I agree with Leeming JA.
**********

Case Title:	Valuer-General v Perilya Broken Hill Ltd
Medium Neutral Citation:	[2013] NSWCA 265
Hearing Date(s):	23 July 2013
Decision Date:	16 August 2013
Before:	Emmett JA at [1]; Leeming JA at [12]; Preston CJ of LEC [110]
Decision:	(1) Appeal allowed. (2) Set aside the orders of the Land and Environment Court of 19 October 2012. (3) Remit the proceedings to the Land and Environment Court for determination by that Court in accordance with the decision of this Court. (4) There be no order as to costs of the appeal. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords:	APPEALS - appeal from valuation decision limited to question of law - scope of appeal - error of law in failure to bring to account cashflow - no error of law in arithmetic error COURTS AND JUDGES - statement of reasons for decision - appeal limited to question of law - extent of duty to give reasons - no error in giving short reasons MINES AND MINERALS - operation and history of mining legislation - nature of rights conferred by mining lease - nature of rights of owner of privately owned minerals VALUATION - methods of valuation - hypothetical fee simple of mine - valuation by discounted cashflow of hypothetical mine - application of royalty provisions in Mining Act 1992 as generally applicable public law - parties' cashflows included royalty payments as expenses but did not include receipts of royalty for privately owned minerals - valuation set aside and proceeding remitted
Legislation Cited:	Land and Environment Court Act 1979 Land and Income Tax Assessment Act 1895 Land Tax Assessment Act 1910 (Cth) Mining Act 1906 Mining Act 1973 Mining Act 1992 Mining on Private Lands Act 1894 Valuation of Land Act 1916
Cases Cited:	AMP Henderson Global Investors v Valuer General [2004] NSWCA 264; (2004) 134 LGERA 426 Archibald v Byron Shire Council [2003] NSWCA 292; (2003) 129 LGERA 311 Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (1999) 74 ALJR 209 Brisbane City Council v Valuer-General for the State of Queensland (1978) 140 CLR 41 Cadia Holdings Pty Ltd v State of New South Wales [2010] HCA 27; (2010) 242 CLR 195 Chief Commissioner of State Revenue v Platinum Investment Management Ltd [2011] NSWCA 48; (2011) 80 NSWLR 240 Colon Peaks Mining Co v Wollondilly Shire Council (1911) 13 CLR 438 Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 Gollan v Randwick Municipal Council [1961] AC 82 ISPT Pty Ltd v Valuer General [2009] NSWCA 31; (2009) 165 LGERA 25 Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111 Melwood Units Ltd v Commissioner of Main Roads [1979] AC 426 Moolarben Coal Mines Pty Ltd v Director-General of the (former) Department of Industry and Investment NSW (Agriculture Division) [2011] NSWLEC 191; (2011) 186 LGERA 342 Perilya Broken Hill Ltd v Valuer-General [2012] NSWLEC 235 Perpetual Trustee Co Ltd v Valuer-General [2008] SASC 169; (2008) 101 SASR 110 Piglowska v Piglowski [1999] UKHL 27; [1999] 1 WLR 1360 Resource Pacific Pty Ltd v Wilkinson [2013] NSWCA 33 Roads and Traffic Authority v Hurstville City Council [2001] NSWCA 11; (2001) 112 LGERA 223 Roads and Traffic Authority v Mosca [2006] NSWCA 159; (2006) 146 LGERA 335 Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610 Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 Taupau v HVAC Constructions (Queensland) Pty Ltd [2012] NSWCA 293 Ulan Coal Mines v Minister for Mineral Resources [2008] NSWCA 174; (2008) 161 LGERA 391 Valuer-General v New South Wales Golf Club [2012] NSWCA 355; (2012) 192 LGERA 105 Wade v New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177 Waterways Authority v Fitzgibbon [2005] HCA 57; (2005) 79 ALJR 1816 Whitehouse Properties Pty Ltd v Bond Brewing (NSW) Ltd (1992) 28 NSWLR 17 Yates Property Corporation Pty Ltd (in liq) v Darling Harbour Authority (1991) 24 NSWLR 156
Category:	Principal judgment
Parties:	Valuer-General (Appellant) Perilya Broken Hill Ltd (Respondent)
Representation
- Counsel:	Counsel: TS Hale SC; M Carpenter (Appellant) R Lancaster SC; L Thomas (Respondent)
- Solicitors:	Solicitors: Crown Solicitor's Office (Appellant) Sparke Helmore Lawyers (Respondent)
File Number(s):	2012/345737
Decision Under Appeal
- Before:	Lloyd AJ
- Date of Decision:	19 October 2012
- Citation:	Perilya Broken Hill Limited v Valuer-General [2012] NSWLEC 235
- Court File Number(s):	2011/30076