Infrastructure is often one of the most capital intensive elements of any mining or resources project. Opportunities to develop resources projects may be delayed or missed altogether due to a lack of funding for infrastructure or a simple lack of economic viability given the significant capital investment required to move to the construction phase. An emerging solution to this problem is the increasing use of infrastructure sharing arrangements – a solution yet to be widely utilised in Australia. The types of infrastructure that can be shared is not limited to traditional categories such as rail and port infrastructure, but can extend to shared use of processing plants, train load outs, power, water treatment facilities and information communication technologies.
This article will briefly discuss the rationale behind infrastructure sharing, the interests of stakeholders that must be considered and the risks and opportunities which infrastructure sharing can create.
Stakeholders, risks and opportunities
The central driver behind infrastructure sharing is the economies of scale and lower marginal costs that come with shared use. Lowering costs for existing producers may result in higher profit margins and increased cashflows – or in the current environment, allow a producer to break even. Another key driver is the support that infrastructure sharing provides for junior miners, allowing them to enter the market where the capital investment required may have previously presented as a barrier to entry. The benefits for government are obvious as new projects are likely to create employment and drive growth in GDP leading to greater royalties and tax revenue as a result.
When analysing any potential infrastructure sharing arrangements it is important to consider the interplay between the various stakeholders. The major stakeholders in this type of arrangement will typically include government (local, state and federal), major mining companies, junior mining companies, financiers and other third party users of the shared infrastructure.
Major mining companies
The primary focus of a major mining company (i.e. owns operating mines) is ordinarily the maximisation of profits to create value for shareholders. These larger companies are the incumbents in the industry who have large market power and control. When considering infrastructure issues, a major mining company’s main concern has traditionally been ensuring that there is sufficient infrastructure to meet its long-term capacity needs. Further, they typically seek to implement vertically integrated operations to ensure certainty for the full production chain through control over their infrastructure.
The fall in commodity prices and the resulting pressure to reduce costs and find additional sources of revenue has forced major mining companies to consider infrastructure sharing in order to prop up the bottom line. However, by entering into infrastructure sharing arrangements, major mining companies run the risk of losing operational control and priority of access when the market improves again. Where a company may previously have had sole use of infrastructure, the introduction of third party users may jeopardise the mining company’s access to its required capacity in the future. Any major mining company considering sharing infrastructure with a third party will need to undertake an analysis of the benefits of reducing per unit costs or obtaining an additional revenue stream against the reduced flexibility to utilise spare capacity in the future.
Timing can be a strategic issue when parties are considering new shared infrastructure. If two parties are considering a new infrastructure development, one mining company may not be ready to use the infrastructure as soon as the infrastructure is ready for use, meaning that the early user may pay disproportionately high costs until the other users are also ready to use it. A solution to this issue is possible through effective contracting – for example, take or pay arrangements for access rights or charging tariffs regardless of whether the user is ready to access the infrastructure to ensure equal sharing of costs.
A major contributing factor to the current lack of infrastructure sharing arrangements is the lack of incentives they have historically provided for major miners. As discussed, major miners face significant risks when entering into such arrangements. While their interests can be protected to a certain extent by flexible contracting, the government may need to take measures to incentivise major miners to participate in shared infrastructure arrangements. The mining companies themselves now need to seriously consider infrastructure sharing as providing the platform for a sustained lower cost environment which will ensure the industry prospers once more.
Junior mining companies
Junior mining companies are usually faced with serious funding issues when considering the viability of resources projects. A significant benefit posed by infrastructure sharing is the reduction in capital expenditure needed when developing a greenfields project site (e.g. two companies jointly funding a CHPP). This enables junior mining companies to pursue projects that may not otherwise have been viable.
Third party users
Third party users of mining infrastructure may involve passengers, agricultural companies, companies with forestry projects and industrial projects. In this case, the infrastructure that would primarily be shared is transport infrastructure, though certain users may also require power capacity and water storage capabilities. By sharing infrastructure, sectors other than mining may become economically attractive. As is the case with junior miners, third party users often lack the funding to develop infrastructure themselves. They are also at a similarly low position of bargaining power in relation to the major mining companies who would likely control the infrastructure (although this will depend on the third party involved).
Although Australian Governments at various levels have, in limited circumstances, taken steps to encourage the use of shared infrastructure by the mining and resources industry, to date they have not been willing to take an active role to encourage its widespread adoption. Given the benefits which flow to government as a result of new projects becoming economically viable as a result of shared infrastructure arrangements, the government should be encouraged to adopt policies which encourage take up from industry.
Factors influencing infrastructure sharing
There are a number of factors that companies need to consider in determining whether sharing infrastructure is a viable option.
Location is usually the most important factor to take into account. The company seeking to share existing infrastructure needs to consider whether any alternative infrastructure already exists in the same area or calculate the additional costs which may be associated with sharing infrastructure which is not in the immediate vicinity. Additionally, they will need to consider whether there is any demand for the shared use of any new infrastructure implemented, otherwise they may not be able to recover their costs.
As already mentioned, there is also the tension between cost reduction and control.
Ultimately, whether infrastructure sharing is a viable option will require an in-depth understanding of the industry, the interests of the stakeholders involved and the ways to protect those interests.