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Australia is regarded as “the lucky country” because it has the minerals in the ground to extract. From a national perspective, there is some truth to the view. Soaring iron ore and coal prices, triggered by heavy demand out of China, have greatly contributed to Australia’s relative economic health at a time when the global financial crisis was laying low most developed economies.
But in other ways, the claim is misleading. The mining industry is globalised and Australia has the capacity to be a world leader irrespective of where the resources are located. Moreover, the industry is not a low-technology sector. Mining involves complex service provision and manufacturing. If Australia wishes to become “the clever country” the way to do so already exists. Yet this is poorly appreciated.
That is the view of Owen Hegarty, non-executive director of iron ore miner Fortescue Metals Group, chairman of new international mining company, Tiger Realm Minerals, and executive chairman of gold miner G-Resources Group. He was the founder and chief executive of base metals miner Oxiana, which merged with Zinifex to create OZ Minerals.
“We have a wonderful opportunity to be very much a leader (in the global mining industry),” Hegarty tells LeadingCompany. “Whether it is technical capability, technology, investment, social licence, and capability generally. All the way from financing, social licence, engineering, design to construction. “
Hegarty cites, by way of example, mines in Laos and Indonesia. The engineering and design is undertaken out of Brisbane or Perth. Financing comes from the big banks or the equities market in Australia. Australian expatriates train up the locals. Equipment is made in Perth or Brisbane. Supplies, especially cyanide, come from the Australian manufacturer Orica.
“Our project up in Russia (with Tiger Realm) is managed from here where we do all the site engineering. You need coal washeries and the best place to design them is in Australia. When it comes to infrastructure, you would do your design and construction here, but you would get it [construction] done out of China because it is closer. We have got a really fabulous opportunity to be intimately engaged and that is why I bang on about that stuff all the time.”
An example of the globalised nature of the mining industry is the locally-listed company China Yunnan Copper Australia, which is 21% owned by China Yunnan Copper (Australia) Investment Development Company, a subsidiary of the Chinese aluminium giant Chinalco. Jason Beckton, managing director of China Yunnan Copper, says the Chinese are attracted to Australian expertise. The company has international operations, with sites in Chile, Laos and Queensland.
“The Chinese are interested in the long term, especially when it comes to exploration,” says Beckton. “With this company they are involved, in effect, with the research and development and business. Historically, they have never done that. They have always had mines.”
The Chinese are also attracted to working in Australia, says Beckton. “The thing about the Chinese is that they love it here; they love living here, they love the transparency. The main thing that worries them is changes of tax law without notice. Things such as a tax on options before they are in the money. We have lost a lot of people to Canadian companies because of that one. They are also jarred by the cost structures in Australia, but you have to pay to play. Plus the tax has to be seen in perspective. In Mongolia they have a 68% windfall tax.”
Hegarty is also critical of tax policy in Australia, which he says harms Australia’s development of a global mining industry. “We need to recognise that we have a very strong and powerful competitive advantage and we have and nurture it and grow it and support it,” he says.
“We shouldn’t milk it as per the resources tax phase one. When you have got an industry that is very good and providing strong growth for the country don’t want to stuff it up with things like the minerals resources rent tax, increased labour costs, or a government that’s is a bit intransigent in terms of allowing you to import labour. (Although) they are not too bad. You can get people in; we have had them in our little operation up in Lady Annie there (a Queensland copper mine held by CST Mining). Geologists from Zambia. It is just a little bit slow.”
The rise of the developing world means that the global mining industry is likely to experience strong demand for many years. Hegarty sees it in terms of decades. “Our long-term view is that we are in for multi-decade growth in demand for commodities including base and precious metals. The growth from China and India and all the rest of the developing world (is creating) strong waves of demand. There are bound to be ups and downs and we are going through a bit of a pause at the moment with China, but it is the law of big numbers.”
The short-term orientation of the markets is at odds with the long-term nature of mining investment, creating many frustrations. “In our industry we are long-term planners and investors. Decisions go out there for 10, 20, 30 years so you have got to be sure that you have got that sort of scenario coming at you for that length of time. Yet you look at the equity market now, trying to raise money for doing anything is problematic.
“It is alright if you are the bigger guys in production. But when you have a project or suite of projects that is a little bit out there in terms of time, it is a fair way from production, then it is difficult. If it is in Australia you are probably a little bit better off, but if it is in Asia it is harder. So where the hell do you go? All the stocks have been smashed up – you can’t raise money. The Canadian market is a bit the same. The London A market for the smaller guys is the same also. It is very, very difficult.”
There is growing interest from Asian investors and private equity players but this comes with conditions. Private equity tends to take a large slice and Asian investors tend to have a background in areas like property or plantations. He says Australia’s long history of mining is an advantage when raising money from such sources. “What we are obviously very good at is having a long, strong resource base.”
What are the prospects for the different base metals markets? Hegarty says copper is a 20 million market with multiple useage in electricity, infrastructure and information technology. Despite weakening growth figures the price has remained stable at about $3.70. Beckton also expects the copper price to remain stable.
Zinc is about a 10 million tonne a year market. Hegarty says demand is strong but there is also strong supply out of China. Supply of lead is about four to five million tonnes a year. “They have been trying to kill off lead for years. It was dead when I was trying to peddle it around in Asia 20-30 years ago. But it keeps on keeping on simply because there hasn’t been a serious substitute. Nickel is even more specialised in the sense that it is used for stainless steel. So therefore you get these wild swings. There is a lot of nickel about.”