In an article in the "West", Luke Tonkin (SLR), said that he sent letters to his employees warning about the negative impact that the 3.75% gold royalty would have. He has a history of slashing costs, so I don't think they're empty threats. Companies like SLR and WGX really need an upsurge in the AUD POG or some of their marginal operations could be headed for "Mothballs", IMO.
Companies like these ones, reacted in many different ways between the stressful years of 2013-15, in particular. NST picked up great asset after great asset and conversely, SLR offloaded a large portion of its portfolio (some of which SAU is grateful for). The reaction that I want to focus on here ; is the one known as "High Grading".
High Grading generally occurs as a result of lower metal prices, however, significant rises in costs can motivate companies in this direction too. I believe that companies like SLR and WGX would be thinking reducing costs by slashing the mining of marginal orebodies (usually lower grade) and focusing again on the higher margin deposits.
Wait a minute - they've already been doing this for quite some time, and those higher margin gals like Daisy Milano have already seen their best days for producing high margin gold. There's still some left, but not nearly as much as a couple of years ago.
So - what's the impact for SAU with the royalty hike? Well it's obviously not good and will shave some end profit away! However, I think we can thank our lucky stars that Cannon and even the small prospective open pits are enough high grade and relatively high margin. They're the sort of mines that probably wouldn't be mothballed by the mid caps, and if anything, the sort of operations they might target to replace less profitable ones. A new focus on profits instead of ounces for ounces sake.
The WA Government has made a really dumbass move with the royalty increase, IMO. Companies like WGX and SLR would have been considering closing marginal operations without the royalty increase. With, negligible margins squeezed by a gold tax, they have the perfect "patsy" in the WA government to squarely and fairly (I might add) lay blame for the layoffs.
SAU will probably have to pay taxes on the next round of production in any case. The previous year's tax loss offsets will be exhausted at some stage. The first 2500 ounces will be royalty free (or 2.5% - not sure which), another slight advantage to a small player. However, it shouldn't affect the overall viability of these projects at all. Profitability will be slightly reduced, however, options for mining, milling, contractors and bargaining power might just be to SAU's advantage.
