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Tuesday, 15 June 2010
Page: 3348

Senator ADAMS (7:44 PM) —I rise to speak tonight with a good news story that could perhaps become a bad news story about Australia’s small- and mid-cap miners, the industries that support them and the communities, particularly those in rural Western Australia, that rely on the resources industry for their survival. It is these companies, these industries and these communities that have the most to lose from the widespread uncertainty caused by the government’s resources super profits tax.

Last Thursday I attended the opening of the Western Australian nickel company’s Western Areas Tim King open-pit mine and the stage 2 expansion of the Cosmic Boy nickel concentrator at Forrestania 350 kilometres west of Perth. I joined the member for O’Connor, Wilson Tuckey, Senator Mathias Cormann and WA Mines and Petroleum Minister, Norman Moore, in witnessing an historic event for the company. During the past 10 years Western Areas NL has spent a total of $400 million of investors’ money on exploration, building and mine development to get it to the stage of having two mines open, repaying the faith of its shareholders through its first dividend payment earlier this year. It has taken 10 years for those shareholders to receive a payment from their investment.

The new facility was funded and built in the midst of the global financial crisis yet the company not only was able to retain all of its existing staff and contractors but was also able to employ an additional 100 people for the expansion. This was done through very astute planning and being able to employ very skilled workers. Western Areas NL has grown from the drilling of the first discovery hole at its Flying Fox mine in September 2003 to the development of two of the highest grade nickel mines in the world.

The Forrestania Project represents an excellent example of what has been achieved in Western Australia under the stable tax regime that businesses enjoyed under the Howard government. It is a stellar achievement by the company, and I congratulate Managing Director, Julian Hanna, Finance Director, Craig Oliver, the chairman of the board, board members and all of the staff involved in establishing the project.

Today, Western Areas is in a strong position, but if the government’s proposals are passed, other companies that are not so far advanced will not get the chance to enhance their projects. Mr Oliver said the new 40 per cent profits tax would increase the company’s total tax rate to around 57 per cent. Already Western Areas has been forced to review its third mine, which was forecast to cost $100 million in capital and create 100 new jobs. It is are now considering looking overseas for project finance to carry out this mining project. Mr Hanna said:

As anyone in the resource industry knows, this will make it very difficult for banks to finance new projects and companies to provide reasonable returns to long term shareholders.

The only thing guaranteed under the government’s new tax proposals is that bankers will be less willing to take the risk. Western Areas’ main comments to the government’s committee and in subsequent interviews were:

  • The Government appears to have no clear understanding of the potential impact this tax will have on company profits and importantly, shareholder returns
  • Proposed concessions to rebate exploration costs and offset state royalties against the 40% super profits tax will be immaterial to most producers
  • The new tax will impact the ability to fund development of new mines which will result in reduced employment in the industry

Western Areas is one of five companies to sell their nickel products to Nickel West, a subsidiary of BHP Billiton. While those opposite criticise the larger companies, their survival ultimately ensures the survival of many smaller companies. Nickel from 11 different mines is processed at the Kambalda nickel concentrator facility, with some material later shipped to Kalgoorlie for further processing throughout the region. Any tax that could threaten the existence of this facility creates uncertainty that is costly for small communities that could lose hundreds of residents.

David Moore, the CEO of one of the parties to the concentrator, Mincor Resources, says the tax would rule out a lot of nearby deposits that would otherwise have been profitable to mine. He told the Australian Financial Review:

Every time you raise the bar as to what is a profitable ore body, you cut out an awful lot of ore bodies, not just a few but a lot.

Mr Hanna from Western Areas has provided data from 11 mid-cap mining companies in a similar position to his own, with projects in gold, iron ore, nickel and phosphate. Eight companies are well-established or recent producers and three are developing their first projects. The 11 companies directly employ 3,155 staff and contractors and employ numerous other part-time contractors. There are a total of 172,158 shareholders who have lost an average 18 per cent of the value of their investments since the tax was announced. Estimated total capital expenditure for future projects is $4.176 billion. Current and future projects are expected to employ an additional 5,837 people and generate an estimated $34 billion in revenue over the next 10 years.

The projects I have mentioned are largely based in the Goldfields regions of Western Australia, but the impact of this tax will stretch to the mid-west region of Western Australia as well, hurting its iron ore industry. Iron ore comes in two varieties—hematite ores that have a higher iron content, and magnetite ore, which requires more processing before it can be exported as a product for steelmaking. For there to be more processing there must be more capital expenditure, but more capital expenditure means more loans. These taxes would make obtaining finance even more difficult for the magnetite miners.

One company in particular, Gindalbie Metals, has told its shareholders that its major Karara project would be caught midstream by the proposed tax. Company chairman Geoff Wedlock told shareholders that the changes would reduce returns for the project and put expansions at risk. The company has signed an agreement with Chinese firm Ansteel, which needs the concentrates produced at Karara for its steel mills. Mr Wedlock said

We are fortunate that Karara is such an exceptional long term project. There are many others which may not proceed under the new tax arrangements.

He said that Karara:

… will have an additional tax impost but fails to receive any real benefits through accelerated depreciation, Government-provided infrastructure or the exploration subsidy.

The Oakajee port is the new port proposed for the mid-west. Its chairman, John Langoulant, says that at present the three main miners planning to use the Oakajee port facility are confident in their investments. He told the Geraldton Guardian that he had many reasons to be optimistic, as there could be scope for modifications in the region. But it is the future of these projects, and the need to firmly secure finance and investor support, that puts the port at risk. Geraldton Iron Ore Alliance chairman Giulio Casello told the ABC’s Inside Business that the region needed to raise about $17 billion worth of capital in the next four years, with $5 billion of that to go to rail and port facilities. He said:

The issue of the RSPT is that … it’s created uncertainty, so therefore it’s created a lot of issues in actually raising the capital which’ll happen over the next few years … it reduces the cash flow from each of the projects, but we need all of the projects to be successful to get a successful infrastructure solution… Financiers hate uncertainty.

I ask: can the resources industry trust a government that has done nothing but create uncertainty? I do not think so.