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

Land and Environment Court New South Wales

Medium Neutral Citation: Perilya Broken Hill Limited v Valuer-General [2012] NSWLEC 235 Hearing dates: 10 - 12 October 2012 Decision date: 19 October 2012 Jurisdiction: Class 3 Before: Lloyd AJ Decision: The Court makes the following orders: 1. The appeal is allowed. 2. The determination of the Valuer-General is revoked. 3. The value of the property described as ID3448162 as at 1 July 2007 is determined as $4,900,000. 4. The exhibits may be returned. Catchwords: VALUATION OF LAND - unimproved value - mines - valuation based on business model - discounted cash flow - depreciation - royalty based on after tax calculation Legislation Cited: Valuation of Land Act 1916 s 4, s 6A Category: Principal judgment Parties: Perilya Broken Hill Llimited (applicant) Valuer-General (respondent) Representation: R P L Lancaster SC (applicant) T S Hale SC with J B Maston (respondent) Sparke Helmore (applicant) I V Knight, Crown Solicitor (respondent) File Number(s): 30076 of 2011

Judgment 1The property described as ID 3498162 comprises a number of parcels of land with mining leases known as North, South and Potosi Mines and other land at Broken Hill, covering an area of 3,033 ha. The property is used for the production of lead, zinc and silver. 2On 13 September 2007 the Valuer-General determined the land value as at 1 July 2007 as $20.9 million. The owner of the land, Perilya Broken Hill Limited, lodged an objection to the valuation, which the Valuer-General disallowed. Perilya now appeals to the Court against the disallowance of the objection, contending for a value of $5.25 million, although during the hearing it contended for a lower sum. 3The question for determination is: what is the value of the land for the purpose of the Valuation of Land Act 1916? 4A valuation under the Act is an artificial value. It is the unimproved land value but must include "land improvements". The artificial nature of the exercise is shown by the following provisions of the Act. 5Section 6A(1) states: The land value of land is the capital sum which 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, 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. 6The reference to "land improvements" requires recourse to the definition of that term in s 4: Land improvements means: (a) the clearing of land by the removal or thinning out of timber, scrub or other vegetable growths, (b) the picking up and removal of stone, (c) the improvement of soil fertility or the structure of soil, (d) the restoration or improvement of land surface by excavation, filling, grading or levelling, not being works of irrigation or conservation, (d1) without limiting paragraph (d), any excavation, filling, grading or levelling of land (otherwise than for the purpose of irrigation or conservation) that is associated with: (i) the erection of any building or structure, or (ii) the carrying out of any work, or (iii) the operations of any mine or extractive industry, (e) the reclamation of land by draining or filling together with any retaining walls or other works appurtenant to the reclamation, and (f) underground drains. 7The parties agree that the highest and best use of the land is mining. Because the mines already exist, the reference to land improvements means that the unimproved value must include all excavations, filling, levelling or grading, roads, mine shafts, ventilation and service shafts and associated retaining structures. All mining and processing equipment associated with the existing mining operations and other structures are assumed to be not present. 8The parties and their respective expert witnesses agree that the price which the fee simple of the land might be expected to realise in the hypothetical sale referred to in s 6A of the Act is the present value of the royalties to be paid to the owner of the fee simple by the operator of the mine and for the life of the mine. The parties also agree upon a royalty rate of four per cent of the profit to be derived from the mining operations. There is a dispute as to what that profit is and how it is to be calculated. There are no comparable sales. The value must thus be based on the business model of the mine to determine the amount of profit from which the royalty is to be paid. 9Evidence was given on behalf of Perilya by Mr D Herdman, a mineral valuer, and on behalf of the Valuer-General by Mr M Hopcraft, a property valuer. As the mining operator lessee would have to spend close to $200 million to re-establish the mining operations, which will have annual sales of about $164 million and a mine life of five to seven years (including start up time), the theoretical lessee would utilise a discounted cash flow computation to calculate the royalty. A discounted cash flow requires the input of many variables, and both valuers used discounted cash flow computations of varying complexities. 10The parties agree that the reserves in the ground as at 1 July 2007 were 11,198,000 tonnes, rounded to (say) 11.2 million tonnes, the payable recovery from various minerals being: zinc 83 percent lead 95 per cent silver 95 per cent 11The parties also agree that the estimated life of the mine as at 1 July 2007 was 5.5 years against the annual rate of extraction of 2.1 million tonnes. The parties also agree that the cost of purchasing and installing the improvements, plant and machinery necessary to operate the mine as at 1 July 2007 would be $195 million. 12The parties do not agree on the following: (i)the cost of pre-production development, including the setting-up and commissioning of the plant, equipment and buildings; (ii)the set-up period to be allowed for pre-production development; (iii)the estimates of anticipated mineral prices for the end products; (iv)mining costs, as a proportion of earnings; (v)the accounting for the security to be lodged for remediation; (vi)the depreciation of the plant and equipment (vii)whether the royalty to be paid to the landowner is to be based on before or after-tax profit.