Western Australian miners have emerged from the latest downturn and recent change of government with a cautions sense of optimism as activity revives and the new government’s policies become clearer.

BY Lindsay Davis

New WA Government Takes the Reigns at the Brink of the Mining Upturn

April 03, 2017

On Saturday 11th March, Western Australians took to their local polling booths to cast their vote for parliamentary representation in an election for which the full implications to the mining sector are not yet clear. Amid three years of running a budget deficit that the Treasury projects will result in a debt level of A$41 billion in another three years, Western Australia (WA) overwhelmingly voted to put the Australian Labor Party back at the helm of the state parliament for the first time in nearly a decade.

Led by premier-elect Mark McGowan, the new Labor government will undoubtedly need to hit the ground running in order to recognize its campaign promise to reverse that trend and bring the state back into black by 2019-20. The fiscal agenda that the mining sector can expect from a government preparing to tackle this challenging economic backdrop largely remains to be guessed at. Traditionally, the incumbent Liberal party has been viewed as the champion of the industry. However, in a region where mining is deeply embedded not just as a vital economic institution, but a cultural one, there seems to be a shared belief that the landscape will remain relatively undisturbed by the shuffling in government, despite political posturing throughout the campaign.

Perhaps the most incendiary campaign topic with relevance to mining arose from a proposal by WA National Party leader and incumbent MP for the mineral rich Pilbara region, Brendon Grylls. Grylls introduced a highly controversial mining tax that, if passed, would hit majors Rio Tinto and BHP Billiton with a A$5 levy for every tonne (mt) of iron ore mined, relieving the deficit by raising an additional A$1.5 billion a year. Originally introduced in the 1960s at 25¢/mt, this “mining lease” fee only applies to projects that have been in operation for more than 15 years, hence why — initially at least — the tax would only impact major producers Rio and BHP. However, many in the industry maintain that the tax would be detrimental to the region.

Reg Howard-Smith, chief executive of The Chamber of Minerals and Energy of Western Australia (CME), explained that the tax has raised concerns both nationally and internationally. “Chinese and Japanese companies have spoken out for the first time regarding the proposal because it goes to the heart of our sovereign risk. We are regarded as a low-risk location when it comes to the protection of investment funds. But if we make a unilateral change, which is not by agreement, this creates a major issue within the sector,” he said.

He further expounded the risk to juniors within the industry: “Smaller and mid-cap companies often need to raise funds internationally, and would be affected. These funds could dry-up, given that international finance is very fluid, and it could easily flow into other jurisdictions very quickly.”

Grylls’ proposal was met with swift and targeted action from the CME, which led a A$2 million media campaign countering the National Party’s message. Citing a model produced by Deloitte financial analysts, the CME posits an eventual loss of 3,000 jobs in the Pilbara region as one of the core arguments against the tax. Neither Labor nor the National’s traditional Liberal allies offered their support of the tax, which has been deemed potentially unconstitutional. The general expectation going forward is that proposed alterations to the mining tax do not pose an eminent threat, and the resource-wealthy WA will continue to focus its energies on what it knows best: resources.

Political uncertainty aside, the industry as a whole seems finally to be turning the corner from its most recent downturn. Prompted by a resurgence in gold and iron ore prices, as well as a growing interest in lithium and rare earths, a cautious optimism has spurred confidence in exploration projects across WA.  “It has been a long time since a tier 1 deposit was found in Australia and we believe that there will be a renaissance in greenfield exploration in the country,” said Will Robinson, managing director at Encounter Resources.

Data from the Australian Bureau of Statistics supports the notion that greenfield exploration is indeed on the rise, particularly in gold exploration, which saw a 14.6% (A$23.2m) increase in expenditure during the December 2016 quarter. In the same period, the Bureau reported growth of exploration on existing deposits by 2.5% (A$6.7m), while expenditure on areas of new deposits rose an impressive 15.0% (A$17.1m). In drilling terms, meters drilled saw an overall increase of 2.6%, augmented by a rise of 22.3% in areas of new deposits, while drilling in areas of existing deposits fell 5.9%. “The Australian drilling industry has been through a very difficult time since the end of the boom, but there is a lot of resilience in the companies who are still operating,” said Peter Hall, CEO of the Australian Drilling Industry Association (ADIA).  “The ADIA can name about 150 drilling companies that have gone into liquidation over the last few years, resulting in a lot of stress in the sector,” he added.

The Association of Mining and Exploration Companies (AMEC)’s Exploration Incentive Scheme aids in mitigating the prohibitive costs of drilling by offering companies up to 50% of the funding for their direct drilling costs into the ground. “It takes a lot of money to find these deposits and we can certainly make really good use of these schemes that are in place […] Given that drilling is the most expensive part of the exploration business, the support is incredible for drillers, clients and shareholders,” said Richard Bennet, managing director at Strike Drilling.

Sheldon Burt, general manager at Easternwell Minerals, pointed to small exploration companies as the signpost by which to monitor the industry’s progress. “In my experience, the kick-off of the cycle starts in the junior sector,” he said. “It starts with the money being generated by junior explorers that get in the field. This is what is giving an uplift to the industry at the moment.”

Steve Coughlan, executive chairman at the Byrnecut Group, speculated as to why this might be: “Smaller mid-cap companies have been aggressively pursuing opportunities, for example, Northern Star and St Barbara Mines. These smaller companies are more nimble. We are also seeing private equity entering the market. They see opportunities in, arguably, neglected assets owned by larger companies.”

Indeed, ‘nimble’ seems to be the buzzword that defines the zeitgeist of what is arguably a new era in the WA mining industry — an industry that has seen enough booms and busts to maintain a steady strategic head while recognizing the need to forge ahead in terms of exploration and innovation.

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