If 2009 was in fact the ‘Great Recession’ then someone forgot to tell Australian mining companies who appear to have, by-and-large, escaped the worst effects of the recent global financial crisis. As the recovery of the world economy begins, Australian mining companies are well positioned to take advantage of an expected surge in mining investment, which Reserve Bank Deputy Governor Ric Battellino recently observed is expected to continue for an extended period.
We have set out below our top 10 trends expected to dominate the Australian mining industry in 2010.
1 Continuing and strengthening Chinese investment
If Australia has one country to thank for being the only OECD economy to avoid a technical recession during the global financial crisis, it is China. As many commentators have recently observed, China’s demand for raw materials almost singlehandedly helped to shield the Australian economy from the dire economic consequences that crippled many advanced economies.
In 2010, we expect to see overall foreign investment levels from emerging economies continue to rise, especially from China. Whilst investment is likely to continue in traditional areas such as bulk commodities and base metals, investment directly or indirectly into infrastructure projects and assets may also start to emerge. This trend is most likely to be focused on addressing infrastructure bottlenecks which remain a critical issue facing the industry. It will also directly impact the engineering and construction industries as Chinese entities seek to diversify their investment portfolios and gain a foothold in the delivery of major infrastructure projects in Australia.
2 Labour markets and mischief
The Australian mining industry has traditionally been the stage on which industrial trends and action have been most visible. This has not changed with the introduction of the Federal Government’s Fair Work Act 2009, much of which came into effect on 1 July 2009.
Australian mining companies used to relatively low levels of industrial strife in recent times must now come to terms with a new industrial landscape which affords unions enhanced right of entry powers to workplaces and requires employers to bargain with unions. One only needs to look at the recent industrial action relating to Woodside’s Pluto LNG project to appreciate the consequences that the legislation is having on the resources industry generally. Mining companies are encouraged to start rethinking their industrial strategies and the potential for industrial action to affect their own projects.
The spectre of labour shortages has also re-emerged as reports continue that a number of mining sector participants are experiencing increased difficulty in sourcing skilled labour. Whilst some attempts are being made to reform Australia’s skilled migration program for workers in high-demand industries, we expect labour shortages to eventually have an effect on the terms and conditions of employment that mining industry workers (and the unions representing them) demand from their employers. In this regard, we have already seen workers on the Gorgon LNG project secure record wages which will no doubt have a trickle down effect into other projects and industries which all compete for scarce labour resources.
3 Increase in mining IPOs
For Australian mining companies, it is expected that life will return to the primary issuance markets in 2010, after their poor performances in 2008 and 2009. Initial public offerings in the Australian mining sector fell to 21 in 2009 and raised just AUD$120.1 million. These figures represent a decrease of:
- 53% against the number of mining floats in 2008 (44)
- 75% against the capital raised from mining floats in 2008 (AUD$487.2 million)
- 85% against the number of mining floats in 2007 (135), and
- 89% against the capital raised from mining floats in 2007 (AUD$1.1 billion).
Given the expected reopening of primary capital markets, it is also expected that the number of secondary equity issues will fall in 2010 from the levels seen in 2009 where Australian mining companies raised significant capital through equity offerings in order to strengthen balance sheets, reduce gearing by repaying debt and fund future acquisitions or expansions.
4 Taxing times ahead
It is clear that the Federal Government is seeking to raise additional revenue in order to fund and repay stimulus spending initiatives undertaken since the onset of the global financial crisis. It is expected that the Australian mining industry will be in the Federal Treasury’s crosshairs when proposed tax changes are announced later this year as part of the Henry tax review. Just ask the North West Shelf Joint Venturers in Western Australia who were the subject of a $2.5 billion tax grab in 2008 as part of a reversal of a long standing excise duty exemption for condensate from the North West Shelf.
Speculation has recently mounted that a new resource rent tax scheme will be introduced as part of the Henry tax reform package which might replace the existing state royalty regimes. Recent media speculation has also raised the prospect of increases in royalty rates in Western Australia.
5 Rapid expansion and production schedules
As commodity prices recover from the sharp declines that were seen between mid-2008 and early 2009, mining companies are expected to bring forward development and expansion programs and rapidly increase production profiles in order to capitalise on increasing demand and rising prices.
According to recently released figures from the Australian Bureau of Statistics, mining industry investment for this financial year is estimated at just over $41 billion. Current estimates for the 2010/11 financial year are for mining investment to reach $50 billion.
It is expected that much of this investment will be centred around capital intensive iron ore and coal projects. Major projects scheduled for completion in 2010 include:
- CITIC Pacific Mining’s US$3.5 billion Sino Iron Project in Cape Preston, Western Australia
- BHP Billiton’s US$5.7 billion Western Australian Iron Ore Rapid Growth Project 5
- Rio Tinto’s US$1.5 billion Hamersley Iron Brockman 4 Project in Western Australia, and
- the Rio Tinto/Robe River Joint Venture Mesa A Project in Western Australia.
Already this year, Newmont has commissioned its US$3 billion redevelopment of the Boddington gold mine near Pinjarra in Western Australia.
6 Fluctuating fortunes for junior and mid-tier miners
Whilst the boardrooms of Australia’s junior and mid-tier mining houses spent most of 2009 focusing on survival, 2010 is likely to see a select number of these companies move to develop projects that were iced during the global financial crisis.
Whilst there are roughly 620 mining companies listed on the ASX, it is interesting to note that only one-fifth of them have a market capitalisation of over $100 million. We expect to see these numbers change over the next 12 months as focus and investment returns to the mining sector. Those companies with strong cash backing and quality assets will be best placed to take advantage of the expected upswing.
7 The climate change genie
2009 was indeed a tumultuous period for the development of climate change responses, both domestically and internationally. Despite the political circus around the Federal Government’s Carbon Pollution Reduction Scheme (CPRS) last year, signs still remain that some form of carbon regulation in Australia is inevitable. What remains unclear is precisely what Australia’s future climate change regulation and carbon pricing system will be.
Whilst the UN climate change conference in Copenhagen delivered a political ‘Accord’, it was well short of many people’s hopes for a legally binding agreement. It should be noted, however, that over 70 nations (both developed and developing) have now declared their emissions reductions intentions under the Accord. Uncertainty remains about the ability of the UN process to deliver an effective global agreement, although there is optimism in some quarters that the Accord heralds a new politically backed approach.
The controversy surrounding these issues is expected to continue into 2010. Already we have seen battlelines drawn at a Federal level with Tony Abbott unveiling the Coalition’s alternative policy which focuses on an Emissions Reduction Fund to finance direct action, particularly soil carbon. Given the Coalition’s current stance, the CPRS legislation currently before Federal Parliament is likely to be rejected again. If reintroduced in three months time and again rejected, the CPRS will provide a trigger for a double dissolution election which, if returned, the government could require a joint sitting of both Houses of Parliament to pass the legislation.
8 Overcoming regulatory obstacles
The mining sector should be alert to risks and opportunities associated with regulatory reforms at state and federal level.
In Western Australia, approvals processes (particularly environmental approvals) have been the subject of review throughout 2009. Administrative and legislative reforms are now on the table. Key aspects of reforms in terms of the Environmental Protection Act 1986 (WA) include:
- a reduction of appeal rights
- the trial of a risk-based approach to environmental impact assessment, and
- an increased focus on strategic assessments.
At a Federal level, the independent review of the Environment Protection and Biodiversity Conservation Act 1999 (Cth) has concluded with 71 recommendations being made. A new Australian Environment Act is proposed. Key Federal reforms include:
- making public litigation easier
- increasing the number of matters of national environmental significance (particularly, inclusion of an ecosystems of national significance trigger for referral)
- expanding the role of the Commonwealth in the strategic assessment/planning space, and
- inclusion of cost recovery and greater enforcement powers.
9 Feeding the boom – ensuring sustainability of supply
Given that Australia’s natural resources are being depleted at a faster rate than new resources are being discovered, it is critical for the sustainability of the Australian mining industry that exploration expenditure remains strong. According to data from the Australian Bureau of Statistics, Australian mineral exploration expenditure fell by 9.7% in 2008–09 from a record $2461 million in expenditure in 2007–08.
Although the decline in exploration expenditure in Australia wasn’t as dramatic as in many other countries, it was underpinned by exploration in the iron ore and coal industries where demand for these commodities remained steady throughout 2009. In 2010, we expect to see:
- total exploration expenditure increase from 2009 levels
- a focus on exploration close to known existing resources, with greenfields exploration likely to be limited to the iron ore, coal and gold sectors, and
- limited base metals exploration, particularly in greenfield areas.
Finally, Australian mining companies should not expect to remain completely shielded from the volatility associated with the global economic recovery. This volatility is expected to manifest itself in three key areas:
- commodity price volatility
- exchange rate volatility, and
- equity market volatility.
A confluence of all of the above factors is likely to mean that 2010 will not necessarily be smooth sailing for all mining companies and that downside risk (however priced) will remain in the short term.