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The year 2018–2019 has seen continued success for the Australian mining sector across a range of commodities, with sustained increases in commodity prices (particularly for coking coal, higher grade thermal coal and iron ore) and productivity improvements, the combination of which has allowed the sector to realise significant economic gains, driven by structural change and improvements to industry-wide productivity during the difficult economic climate of previous years.

These increased economic returns have supported repayment of debt and returns to shareholders (both through dividends and share buy-backs), and new capital investment in the sector, with construction of BHP's US$3.4 billion South Flank iron ore expansion project (Western Australia) and Fortescue Metals Group's Eliwana mine and rail project (US$1.275 billion) commencing and Rio Tinto obtaining environmental approvals and awarding key contracts for its Koodaideri project (US$2.2 billion).

Significant investments were also made in the battery minerals sector, including construction of Ablemarle and Tianqi's lithium hydroxide conversion plants in Western Australia and related expansion of the Greenbushes lithium project. The 300,000 ounces per annum Gruyere Gold Mine commenced production in Western Australia in June 2019, less than six years after discovery of the deposit.

Government policy is generally geared towards fostering a framework in which growth in the mining sector can be encouraged, recognising the critical role mining plays in Australia's overall economic growth and the fact that Australia holds some of the world's largest resources of gold, iron ore, lead, nickel, uranium and zinc. Australia also has a significant mining equipment, technology and services (METS) sector, supporting the local mining industry.

i Constitutional framework

Australia is a federal constitutional monarchy under a parliamentary democracy, formed in 1901 as a result of an agreement among six self-governing British colonies, which became the six states (and which later included three self-governing territories). The head of state is Queen Elizabeth II, who is represented by the Governor-General. The Queen appoints the Governor-General on the advice of the Prime Minister of Australia, but has no active role in the day-to-day operations of government. Australia's Constitution establishes a centralised federal government (known as the Commonwealth government) and various state and territory governments. The Constitution also reserves exclusive responsibility for certain matters (i.e., trade, commerce and defence) to the Commonwealth government, and allocates law-making responsibilities among the Commonwealth and the states and territories.

In relation to minerals ownership, the default legal position is that all title to minerals is vested in the state or territory in which they are located. The legal framework around the development of mining projects is, therefore, generally governed by the mining laws of the various states and territories; however, the commissioning of a mining project will require compliance with a range of Commonwealth laws (environmental, employment, foreign ownership and native title) and certain state and territory laws (i.e., resource royalty obligations and stamp duty).

ii Government policy

The current federal government, led by a Liberal-National party coalition, was re-elected in May 2019 for a third consecutive term of government. Federal governments in Australia have three-year maximum terms before another election must occur, meaning the next federal election must occur no later than May 2022. Government policy at all levels aims to provide a relatively well-defined system of laws and procedures governing the development of mining projects, and a proactive foreign investment regime. Regardless of political persuasion, all governments are aware that a favourable foreign investment culture provides impetus for the funding of large-scale mining projects. In this regard, Australia consistently ranks in the top echelon of leading 'inward-investment' destinations according to Behre-Dolbear, which ranked Australia second only to Canada.

Outlook and trends

i Competitiveness and productivity

Australia is considered an attractive environment for domestic and foreign investment, benefiting from a climate of relatively low interest rates, low inflation, a competitive currency relative to other global currencies and geographical proximity to key Asian markets. For the year ended 31 December 2018, foreign direct investment in Australia across all sectors increased by 6 per cent to A$3,514.4 billion, drawing on capital inflows from major trading partners such as the United States, the United Kingdom, Belgium, Japan, Hong Kong and Singapore.

A combination of productivity improvement, cost reduction and investment in output has started delivering economic benefits to the mining sector thanks to a sustained increase in demand for Australia's premium seaborne commodities (principally iron ore, metallurgical coal and thermal coal), resulting in a stabilisation of prices and a corresponding increase in economic returns to industry participants. Exploration expenditure has also increased, with the seasonally adjusted estimate for mineral exploration expenditure increasing by 3.9 per cent (A$21.7 million) to A$581.7 million in the March 2019 quarter, an increase of 11.9 per cent from the March 2018 quarter estimate.

ii Innovation and technological change

There is a growing awareness among mining companies that technological innovation, which can enable mining companies to streamline production, reduce bottlenecks and reduce labour costs, will be critical in keeping rising operational costs in check and increasing productivity. Automation, in the form of remote operations technologies, is already an increasing feature of larger mining operations, with Rio Tinto recently completing its first delivery of iron ore using its 'Autohaul' autonomous train system. In 2018, Rio Tinto proposed to double its autonomous drilling systems at its mines in Western Australia. We expect this trend to continue and that the use of mining technology will become more widespread as costs decrease over time. Willingness to innovate and embrace new technology to enhance productivity and operational efficiency has given a competitive advantage to early adopters.

As mining companies embrace these changes, they will need to be alive to the cyber and data protection risks that accompany the use of new technologies. Inadequate cybersecurity exposes mining companies to a number of potential outcomes, including damage to a company's reputation, equipment or profits, production and workforce challenges or delays to change, as well as serious safety and security problems. Large companies are particularly vulnerable targets owing to their significant role in global supply chains and national economies. Many mining companies have adopted vigilant cybersecurity policies and, in response, have educated staff on managing risks to enhance cybersafety.

iii Commodity prices and demand

The markets for Australia's key mineral exports, coal and iron ore have recovered from previous historic lows and, combined with sustained increases in gold prices, have generated greater market activity. This is particularly the case for Australia's production of seaborne coal and iron ore, which are generally of a high grade and quality, allowing producers to realise a price premium and meet the requirements of customers seeking higher grade products to achieve productivity and environmental targets in their own operations (and a corresponding decrease in demand for lower grade iron ore and thermal coal products). Demand for lithium and other battery minerals, of which Australia is one of the world's major suppliers, continues to be driven by investment and research and development by battery producers and carmakers seeking to secure supply for future developments.

iv Access to capital

Increases in commodity prices and commercial returns from mining operations have increased the attractiveness of mining stocks, with the daily net asset value of the VanEck Vectors Australian Resources Exchange Traded Fund increasing from A$26.38 to A$29.77 in the past 12 months. However, the increase in the prices of mining stocks is yet to translate into a corresponding increase in equity capital markets activity for the sector.

Debt funding for greenfield mining projects continues to be challenging, although there have been a number of successful project financings for Australian gold and lithium developments. As a result, the smaller miners continue to assess the viability of non-traditional financing arrangements, such as metals streaming, private royalties and other forms of innovative financing. Offtake partners have also been a source of debt and equity funding for greenfield development projects (particularly in the lithium space).

For major miners, increased cash flow from existing operations has allowed capital expenditure to be funded from retained earnings, although those miners have also had to navigate competing demands from shareholders for available cash to be returned to shareholders via dividends and share buy-backs.

Private equity funds continue to show interest in the Australian mining sector and have been linked to a number of potential M&A transactions within the sector, although the number of mining projects acquired or funded by specialist mining private equity funds has increased, particularly in the coal and gold sectors.

v Corporate consolidation in the mining sector

Two key trends in mining M&As continued during 2018, namely offshore investment and consolidation in gold and rare metals (principally lithium), and major multinational miners looking for opportunities to divest assets that are considered 'non-core' to their global portfolio (principally in relation to thermal and metallurgical coal). Significant mining M&A transactions in the Australian mining sector during 2018 and 2019 included Wesfarmers' acquisition of Kidman Resources Ltd (A$800 million), Rio Tinto's divestment of its Queensland coal assets to Glencore (US$1.7 billion), EMR Capital/Adaro Energy (US$2.25 billion) and Whitehaven Coal (US$200 million), Wesfarmers' divestment of its 40 per cent interest in the Bengalla Joint Venture to New Hope Corporation (A$860 million) and South32's acquisition of a 50 per cent interest in the Eagle Downs Joint Venture. In addition, Coronado Coal listed on the Australian Securities Exchange (ASX) in September 2018. Herbert Smith Freehills acted for either the buyer, the seller, a potential buyer or key stakeholder in relation to each of these transactions.

vi Sustainability and community

As automated technologies and lean business models are introduced to reduce costs and improve productivity, access to capital becomes limited and the market adjusts to lower commodity prices, which will affect the communities built around mining.

Stakeholders are calling for increased transparency in the way mining companies work with communities and manage the environmental effects of operations. Mining companies withdrawing from communities and scaling down operations will need to manage potential reputational damage and how this affects local economies, including social dislocation. Activist organisations are increasingly litigious and savvy with their use of social media and other corporate accountability mechanisms, such the complaints investigation processes through the National Contact Point for the OECD Guidelines for Multinational Enterprises. To meet increased expectations, mining companies will need to maintain open communication, proactively seek to minimise adverse outcomes and collaborate with a range of stakeholders.