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Economics Legislation Committee

BENNISON, Mr Simon, Chief Executive Officer, Association of Mining and Exploration Companies

HUMPHRY, Mr Derek, Chief Financial Officer, Brockman Resources Ltd

MURRAY, Mr John, Director, Corporate Tax, BDO Corporate Tax (WA) Pty Ltd

RICHARDSON, Mr David Antony, Chief Financial Officer, Gindalbie Metals

SHORT, Mr Graham, National Policy Manager, Association of Mining and Exploration Companies

Evidence from Mr Humphry and Mr Richardson was taken via teleconference


CHAIR: Does your organisation want to make a brief opening commentary to us?

Mr Bennison : It is very fortunate that we do have two companies that are very crucial to AMEC’s representation in this space available today. I ask you to take advantage of that. I think a lot of the questioning that happened this morning in particular emphasises the need to, if I may put it crudely, hear from the horse’s mouth. I think it is incumbent on all of us to be right across what this tax actually means on the ground to these companies. These gentlemen on the phone today are going to provide that.

As you might be aware, AMEC represents over 360 companies in the mid-tier production and junior exploration space in particular. We have a wide variety of service industries that are also members of AMEC. As you know, we continue to oppose the MRRT not only because of the way it is being conceived but also because of its unfairness, its discriminatory nature and, as has already been outlined, the complexity of the administration of this tax and the inefficiencies and costs in doing so.

There are significant points of difference between small and emerging miners and large mature miners. These points of difference have not been adequately considered during the consultation and parliamentary processes. The current design of the MRRT clearly discriminates against smaller emerging miners. This has been confirmed by independent financial modelling by the University of WA, which shows that the MRRT is anticompetitive. The modelling shows that small emerging miners will pay a higher effective tax rate than large mature miners. The modelling shows that a small emerging miner could be paying an effective tax rate of at least four per cent more than a large mature miner.

This is a direct result of large mature miners having a significant prior asset base that can be used as a tax shield, if you like, for up to 25 years in the form of a starting base deduction. The starting base deduction provides a significant financial advantage to mature miners, which would have already claimed a depreciation allowance on relevant assets. The different effective tax rate and significant points of difference will make it extremely difficult for small emerging miners to compete with large mature miners in the domestic and global markets and does not provide a level playing field. The differential has been likened to a small corner shop competing with large supermarket chains.

Independent members of parliament have recognised the discrimination through an increase in the low profit threshold from $50 million to $75 million, but this amendment does not go far enough. The effective tax rate for iron ore and coal companies post the MRRT will be the top end of the global tax scale, and will put pressure on ability to compete internationally. It should be recognised that Australia is not the only country with mineral resources available for sale, and it is operating in a very competitive market.

In the event that the MRRT is not withdrawn in its entirety, AMEC has made a number of constructive and proactive design recommendations surrounding design and administrative issues associated with the MRRT. Since making that submission, a quarterly default instalment rate of eight per cent has been set for iron ore producers and a default instalment rate of three per cent for coal producers. There appears to be no explanation on how these rates were set. However, they are high and considered to be discriminatory between the two commodities and will severely impact on the cash flows of small emerging miners.

A further issue of concern has been brought to AMEC’s attention in relation to the granting of mining licences and the aggregation of mining project areas in order that the ore reserves can be included in the starting base allowance. This may need to be done much earlier than the mine schedule would require and require a company to spend extra capital earlier to secure the leases and obtain tenure earlier. As large mature companies are generally under state agreements, they already have tenure over all their tenements for the life of the mine. In order to remedy this inequity, ore reserves should be able to be included in the starting base allowance irrespective of tenure.

Reducing commodity prices, fluctuating exchange rates, individual company business models and the overall complexity of the tax make the Treasury forward revenue predictions extremely uncertain. In summary, with the uncertainty that creates expanded right across the industry, particularly to the mid-tier emerging sector, there are still serious questions being raised about the capacity to raise capital. There is no doubt that as the tax regime increases on these smaller companies, the investment sentiment by a lot of the institutions will be to look for better options.

CHAIR: Do our witnesses via teleconference have any introductory remarks they wish to make?

Mr DA Richardson : No.

CHAIR: How many small miners are currently making an annual profit of more than $75 million a year?

Mr Bennison : I would have to take that on notice. Are you looking across all commodities?

CHAIR: No, across those covered by this bill.

Mr Bennison : I would say that it depends on what you define as ‘small’. We call them more in the emerging context. There are companies like BC Iron and Atlas that are certainly in that capacity. Our two colleagues online through Gindalbie and Brockman will be moving into that space. I think it is fair to say that we have tried to introduce a threshold around the 10 million tonne per annum production capacity, which we believe demarks a company transitioning from an emerging status into a larger operation where the economies of scale start shifting and the capacity for them to start investing in their own infrastructure becomes a reality.

CHAIR: Yes, but can you give me any specific information on the number of companies who are currently—

Mr Bennison : BC and Atlas would be two that come to mind. Obviously, BC has just recently gone in production and has just announced its quarterly financials. I think Atlas is heading up around the three to four or five million tonne per annum mark.

Senator CORMANN: The way the question was asked it sounds as if it is a question about company profits. For MRRT purposes the $75 million threshold does not actually relate to company profits. It relates to an artificial construct of profit from the extraction of iron ore, coal—

CHAIR: I take that point.

Senator CORMANN: It is actually an important clarification.

CHAIR: I take that point from Senator Cormann. That was the context of my question. I am really asking, how many small miners will the MRRT apply to when it comes into effect? My suggestion is, perilously few.

Mr Bennison : I do not think anyone is going to argue that at this stage, as of 1 July, there will only be a handful of so-called smaller miners, or emerging miners as we prefer to call them, in that category. As we know, there are probably about 360 companies listed on the Australian Stock Exchange that do have iron ore endorsements on their tenements. As we have seen recently, that number has whittled down to 30-odd companies in the current design of the tax.

Mr Short : There are also not only mining companies, but also exploration companies that have an interest in iron ore.

CHAIR: But exploration companies do not really—

Mr Short : They do.

CHAIR: Not to that level of earnings under the bill.

Mr Short : Definitely not, but they certainly have an interest in the MRRT.

CHAIR: They do going forward.

Mr Short : And going forward.

Mr Bennison : I think what everyone has to appreciate is that no matter what size you are, you have to start putting the systems in place—and I would invite Mr Richardson and Mr Humphry to come in—to monitor every component of your operations in the context of this tax. It does not matter whether you are still way behind the eight ball; as of 1 July you now have to have everything in play ready to roll.

Mr DA Richardson : I agree with Mr Bennison. The issue here is that this is a very complex tax and it is going to be difficult to administer. Whilst our particular company, Gindalbie Metals, mines magnetite iron ore as opposed to haematite, magnetite iron ore is a low iron content, low-grade ore so it requires a significant beneficiation process to produce a product that you can sell. It has significant, what they call, downstream transformational costs associated with that. There is a lot of subjectivity as to how you calculate those in terms of a netback calculation, returns on assets and everything else. We have to go through the process of putting systems in place so that we can comply with the law even though at this stage we certainly do not expect to have a particularly high MRRT liability or possibly even no MRRT liability in the first couple of years. But that does not mean that we are not going to incur significant costs in terms of compliance. That is the biggest issue. Rather than a fundamental argument over MRRT, if you are a small company with limited resources, like we are, you do not want to spend tens or even hundreds of thousands of dollars a year on compliance to prove that we do not have a liability for the tax.

CHAIR: As to the question I raised about the $75 million MRRT profit threshold, in your submission you suggest a group production tonnage threshold of $10 million per annum as a sort of safe harbour. You suggest that is a more equitable shield for new and small emerging miners.

Mr Short : That was tonnes.

CHAIR: I am sorry. You are correct. Elsewhere you state that the $75 million MRRT profit threshold equates to production of approximately one to five million tonnes per annum. Would it be correct to say that what you are proposing is effectively a profit threshold for small or emerging miners of somewhere between $150 million and $750 million, converting the figure to a dollar?

Mr Bennison : There is a very dangerous exercise in extrapolating the tonnes out to the dollars. We have looked at this in the context of economic viability particularly as it relates to infrastructure investment. As Mr Richardson can attest, when you look at a magnetite model you are obviously going to be at the very bottom end of the scale. But if you look at a BC Iron you are going to be further at the very top end of that scale. Apart from the commodities, those mines are very different. That is the difficulty in trying to set a threshold, even at the dollar value that Treasury and the PTG have done—or the heads of agreement did—we still believe that given the negligible impact on revenue the 10 million tonne per annum provides that threshold by which companies transitioning into economies of scale that gives them the capacity to invest in their own infrastructure will enable them to put any profits at that stage, which all companies of that size do, back into building their business rather than paying the tax. When you look at that $75 million, taking an Atlas-type iron company as an example, with a $3 billion capitalisation you are talking about two per cent of that. When you come back to extrapolate those numbers over the capital, they are extremely small. We believe that this offers probably a far better opportunity for companies to minimise the impact of compliance and also put themselves in a position where they can reinvest working capital back into their operations.

Senator THISTLETHWAITE: When you say 10 million tonnes, is that the refined product or just the ore?

Mr Bennison : That is the ore, haematite.

Senator THISTLETHWAITE: Is that prior to any processing?

Mr Bennison : From a magnetite point of view, that is right.

Mr Humphry : I would just like to support what Mr Bennison was saying. I am a little bit concerned about the focus on this $75 million threshold, simply because the way the profit is calculated at the mine, at the ROM pad, it does not recognise the investment that is being made downstream. A company that makes a $75 million profit at the mine gate but is required to invest $1 billion in downstream infrastructure is going to be incurring an interest bill in the order of $80 million. The very fact that they make $75 million profit on their mining operation really does not reflect the true cost of their getting that product to market. I think that is one of our concerns. One of our major concerns is that the alternative method has no recognition of the investment that various parties are going to be required to make to secure their infrastructure.

CHAIR: That is the argument that Mr Bennison has been putting for some considerable period. Downstream costs associated with infrastructure remote from the actual project itself are not included in the costs for the purposes of this bill. We understand that. Your submission to the committee included modelling by the University of Western Australia that showed that a miner starting after 1 July this year would pay a tax level of 44.7 per cent whereas a miner in existence before 2 May 2010 would pay a tax level of 40.5 per cent. So, prima facie there is a significant difference. In commenting on that modelling to the house committee inquiry into these bills, Mr Sedgley from Treasury stated:

On the points that AMEC made they noted that they had had discussions with us about some modelling that had been done for them by the University of Western Australia. We had a look at that modelling. To us it was fine in terms of the arithmetic and it sort of demonstrated the effect of the starting base, but to us did not shed any light on the relative treatment of small versus large mines. It certainly did not demonstrate that there was any bias against small miners.

Have Treasury missed the point of your argument or are they incorrect in their response?

Mr Bennison : I think they are incorrect—and let me qualify that—in the sense that when you take the raw data, as the University of WA did, from the companies that are in this space at the moment, like the Atlases and the BCs, and plug that into that model they clearly demonstrated that those companies would be paying a higher effective tax rate. I do not think there is any argument about that. The thing that concerns me with Treasury is that the design of this tax creates bias. That has been quoted elsewhere in previous Hansards and so forth. The bottom line of this for us is that that bias favours a very significant component of the industry, those three large companies, who negotiated this deal.

Our concern is that that discriminatory factor needs to be corrected and that there needs to be a level playing field. No-one, not even Treasury, is arguing the level of tax payable. They will argue about the assumptions that get plugged into the model to give you the end result. That might be the commodity price, the exchange rate or whatever aspect of that may be. But they agree with the model. As a consequence, because we are using real-time data, we are very comfortable about the effective tax rate discrepancies, what we are getting between one end of the town and the other. You just cannot refute that. I think it is just an injustice that those emerging companies are going to be paying an extra four per cent to six per cent over the larger companies. That is what we have argued to have corrected.

Mr Short : We appeared before the House of Representatives Standing Committee on Economics. That was on 9 November. We had Morgan Ball, who is the chief finance officer for BC Iron, on the phone and the transcript on page 27 will show:

Our effective tax rate, I imagine, based on our current modelling will be higher than the majors . I expect my effective tax rate to go from roughly 39 per cent to potentially 46 to 48 per cent subject to commodity prices.

CHAIR: I accept that you put that proposition. I accept that you put that argument that you put in that submission. I am really taking it one step further, because Treasury have received the information. They have considered it. Has Treasury provided to you, Mr Bennison, any detailed explanation of why it states the modelling fails to shed any light on the relative treatment of small versus large mines when that is what it seems to do?

Mr Bennison : Yes, I spoke to Patrick Sedgley at the time. He indicated to me that with the design of this tax deliberately—and it is in Hansard—there is a clear, deliberate attempt with the starting base and all the retrospectivity that was talked about this morning to seriously advantage those large companies that made that investment. We are not arguing that. That is fair enough. You get the advantage of bringing that investment into your starting base at market valuation. But it is does create this unlevel playing field, because those post May 10 do not get the opportunity to bring that asset base into their starting base and consequently get similar benefits out of reducing their MRRT liability. We just think that is—

CHAIR: Inequitable?

Mr Bennison : Inequitable, yes. It is discriminatory. There is every opportunity without major change to the legislation to correct that in amendments that would actually try to level out that playing field. In our arguments in those amendments we have attempted to do that. We think it does do that. That has not only come from the companies, that has come from a very expertise based group that advises AMEC and their tax committee across all the major accounting firms, who are probably closer to this than anybody else, who helped us design those amendments in a way that would level out the playing field.

Senator CORMANN: As an opening high-level question, in the context of what we were told the Henry tax review would deliver, which was root and branch reform of our tax system and a simpler and fairer tax system, am I right in summarising your presentation by saying that in your view what is on the table is more complex and less fair?

Mr Bennison : That is correct. I do not want to repeat myself. As to the simpler component—I think you have heard all the commentary this morning that clearly identifies this as enormously complex and tragically for the smaller operators enormously expensive in compliance. Fairer? I have just outlined the major discrepancy in the fairness of this tax. Again, I do not want to repeat myself, but AMEC is very firm in that view and so are its membership.

Senator CORMANN: I am just trying to get a sense of where the $10.6 billion in MRRT revenue is supposed to come from. You and others have argued that larger miners will have a significant upfront tax deduction, which means that they will not pay any or hardly any tax at all for some time. You are saying that the smaller miners will face compliance burdens but most of them will not pay any tax for some time even though they have to incur all the costs while proving that they remain outside the scope of it. Where is the revenue going to come from?

Mr Bennison : I think you are going to have to ask Treasury that in the next session, because we are not privy to the detail.

Senator CORMANN: But you are an expert in the industry. The mining tax has now been debated for the last 18 months. You have heard all of the arguments. You have been the beneficiary of advice from accountants and so on. Can you see $10.6 billion in mining tax revenue being generated from the mining tax over the current forward estimates?

Mr Bennison : On the face of the information that is in front of us at the moment, it looks like it is going to be a challenge.

Senator CORMANN: You are being very cautious there.

Mr Bennison : I am only doing so in the context that, without the assumptions that you have to plug into the model obviously to get to the bottom line, without knowing what the starting base is of all the big three in particular, which are meant to be providing eighty per cent of the revenue, and all of the other parameters, we would be speculating.

Senator CORMANN: You know what iron ore prices are. You know what the ABARE forecasts are in terms of commodity prices over the short, medium and long term. You might not know the variables that the government has used, but you know the variables that are out in the marketplace. Have you done any analysis to assess that? I assume you have. Do you believe that the government will be able to raise that $10.6 billion from the MRRT if the legislation passes in its current form?

Mr Bennison : The only analysis we have done has effectively been within the University of WA modelling, for example, to give us an indication of the large versus small in that context. The numbers are all there in that model as to the assumptions that have been used. Outside of that, as you can appreciate, when you start trying to look at how these companies are going to assess their assets and put a value on them and then go through all the other machinations around the parameters of the tax, we are just not in a position to be able, unfortunately, to identify exactly what these companies will pay. But I think there is enough speculation out in the marketplace at the moment to say that there is anticipated shortfall, particularly in the context of commodity prices going down at the moment.

Mr Murray : At a public forum held in Perth last year a tax manager from one of the mature companies advised that if prices were to get back to where they were at or around 1 May the government will meet its revenue objective.

Senator CORMANN: That is 1 May 2010? But they are not where they were on 1 May 2010.

Mr Murray : That is correct.

Senator CORMANN: If that is the conclusion, the government will not meet its revenue objectives. I will get to that with Treasury. I do not want to get bogged down here. The MRRT is a tax that is imposed at the point of extraction. Of course, at the point of extraction what is the value of the commodity without the capacity to bring it to market?

Mr Murray : Nominal, low.

Senator CORMANN: At the point of extraction what is the profit—

Mr Murray : Therein lies one of the tough calculations that companies need to perform. Without getting into the science of it all, the legislation requires us to look at the end price and then net back to an artificially calculated value as at the valuation point.

Senator CORMANN: The end price, though, assumes that you are able to take the product from the point of extraction, put it on the railway, get it on a ship and get it to market, yet none of the cost of getting it to market is part of the deduction, is it?

Mr Murray : That is correct. There is an artificial calculation that requires a company to in effect break itself into two, become an upstream company and a downstream company, and assumptions are made to assist companies in calculating the value netting back to the valuation point. But you get no benefit or nor credit recognition under the calculation for any downstream costs and value add.

Senator CORMANN: FMG told us earlier that back in 23 June 2010 or thereabouts Mr Forrest had concluded negotiations on a draft agreement to change the mining tax with the then Prime Minister, Kevin Rudd. Were you aware of those discussions at the time?

Mr Bennison : Not exactly at the time, no.

Senator CORMANN: Have you become aware of them since?

Mr Bennison : Yes.

Senator CORMANN: Including the content of what was on the table at the time?

Mr Bennison : Yes, I have seen the points of discussion.

Senator CORMANN: FMG said to us that the intention was to put that out for open and transparent consultative exposure. By way of process, is that something that you would have supported?

Mr Bennison : Absolutely. We always emphasise the need for broader industry consultation in this process. That does not necessarily mean FMG’s proposition. This is looking at the wider issue of tax reform and going back to square one and designing something that would have been far more effective than what is in front of us at the moment. That could have been very easily done.

Senator CORMANN: The Henry tax review was of course run out of the Treasury portfolio, the Treasury Secretary was heading it, Mr Swan as the Treasurer received the report and then the report was released together with the announcement of the RSPT on the same day. Knowing what you know now about the draft deal—for want of a better word—that Mr Forrest had entered into with the then Prime Minister, Kevin Rudd, would that have been a better basis on which to start the process to negotiate a revised mining tax than what we ended up with out of the deal that was negotiated exclusively and in secret between Prime Minister Gillard and the three big miners?

Mr Bennison : AMEC’s position on this is that we would prefer to go back to square one. We had our own intentions on the design of the RSPT and what could have been, or should have been. To try to pick out FMG’s or any other third party’s proposal on the design of the tax—and there were a number floating around, particularly with some of the accounting firms and some of the other companies necessitates the tax going back to the start.

Senator CORMANN: The reason I am asking the question is to say, if there were a return of Prime Minister Rudd in the future, would you hope to see this whole mining tax issue reopened by a new/old Prime Minister Rudd to bring it on a better footing?

Mr Bennison : Hypothetically speaking, should that actually happen, of course we would be keen to go back to square one and look at other opportunities of doing this without the complexity, the cost and the inefficiency of what is in front of us at the moment. Frankly, I think a lot of politicians would be in the same boat. I think they would dearly love to see this put on the table as a far more fair and equitable arrangement, particularly if it take in the other stakeholders, like the states, into consideration; it is another tax.

Senator CORMANN: So, your view is that the Senate should not pass the current version of the MRRT that is before us?

Mr Bennison : Absolutely, yes.

Senator CORMANN: Should we oppose it?

Mr Bennison : That is correct.

Senator CORMANN: Are you now hoping that a future/former Prime Minister Rudd might deliver you a better outcome than what he gave you the first time around?

CHAIR: That is a speculative question.

Senator CORMANN: Perhaps not.

Mr Bennison : We are always full of hope.

CHAIR: You should make a commitment on behalf of the opposition you will repeal it.

Senator CORMANN: Maybe you should make a commitment as a Labor senator from Western Australia to get a future Prime Minister Rudd to deliver a better deal.

CHAIR: We will worry about that in the future.

Senator EGGLESTON: Part of what AMEC-level companies do is explore, is it not? You are the people who go out and find iron ore bodies or other bodies of minerals?

Mr Bennison : That is one serious component of our membership, yes.

Senator EGGLESTON: What impact on that dimension of your activities could this tax have? Does it affect the financial resources of your companies to the extent that there may be some diminution of their prospecting activities?

Mr Bennison : There is certainly an impact. One of the key factors we track in this whole space is the flow of capital not only within Australia but also outside Australia, as do a number of analytical companies. There is a clear attitude by a number of CEOs who are exploring opportunities offshore rather than within Australia at the moment. I am not saying that is completely the responsibility of the MRRT. There are other taxes that have contributed towards that and other circumstances, particularly in South America and Africa, that have arisen that have made life very attractive for those companies to divert their investments into that region. But it is very important for this government to track capital flow and it has made it even harder, particularly right now. Even though last year was an extremely good year for IPOs, you then have to look at what happened to the capital that was raised by those companies. Where did it go? And look at those smaller emerging companies. Just do not go and look at Wheatstone, BHP and all the rest of it and those that go out 20 years. Actually look at the smaller operators that are in this exploration space.

The corollary is that you then want to break up this exploration spend into brownfields and greenfields, because they are very different. In the times we have just had when prices were high, brownfields exploration goes berserk and dominates metres drilled and dollars spent. Right now we are seeing a real divergence between brownfields and greenfields. Greenfields is 30 per cent of what it used to be, and we are seeing a serious decline. We can show you the data on how greenfields exploration now is going to hit a serious level of diminished activity in the not-too-distant future. That is going to be critical to the discovery of new mines in Australia.

Senator EGGLESTON: If you have that sort of data in some sort of document form could you submit it for the committee to include in the Hansard?

Mr Bennison : No problem at all.

Senator EGGLESTON: You talk about offshore investment. We have heard about Africa. Anecdotally I am told that half of the mines in Africa have their head offices in West Perth. Whether or not that is true, I am not sure. But you also mention South America. Can you give us some sort of feel as to the size of the sorts of investments going offshore to Africa and South America?

Mr Bennison : I have some graphs here. Again, I will put those, if you like, into the information that we can provide to the committee. I might add that most of this data comes off Intierra, which is a very well-known international company that tracks the profiling of each company on a day-to-day basis.

CHAIR: Last year there was a joint house inquiry into inter alia Australian mining interests in South Africa. It had a wealth of submissions from mining companies. It demonstrated there had been a huge investment of Australian capital and personnel all over the continent of Africa in the mining industry. It contains a lot of facts, figures and details as to the scale of that investment. I will just put that on the record so the secretary can have reference to it in addition to your material. It is publicly available.

Senator EGGLESTON: I would also be interested in Mr Bennison’s figures for South America.

Mr Bennison : I am happy to provide those. That is no problem at all.

Senator EGGLESTON: Of course, the introduction of the MRRT is a factor that must be taken into consideration in new investment and perhaps—

Mr Bennison : Absolutely.

Senator EGGLESTON: driving this capital abroad.

Mr Bennison : It is. I think one of the tragedies of the design of this tax is that where Treasury thought it was creating a safe harbour for the junior end of town, if you like, the emerging players, that whole safe harbour design has just absolutely floundered. When people come out and say, ‘Hang on. We have accommodated them’, trust me, when you go to companies—and I would like Mr Richardson and Mr Humphry to comment—and when they look at the simplified method and the alternative valuation method they just say, ‘Forget it.’ You would not even think about it—not twice. Yet it is continually put up as an alternative for our membership. I can categorically tell you that they will not even look at it, because you cannot carry allowances forward. You have to put the same systems in from day one as you do for the MRRT market valuation or book value method.

Mr DA Richardson : I was involved with the resource tax implementation group and consultation between Treasury and industry on these issues. From my own observations and comments that others made, we could not think of a single company in the iron ore space that would benefit. In other words, the threshold is so low that it is unlikely to apply to anyone in the iron ore industry. I cannot speak for the coal industry, but not for the iron ore industry.

Mr Humphry : I support what Mr Richardson and Mr Bennison said. The penalties for entering into the simplified method just outweigh the benefits that they provide. The message that I got from that was that the government was happy to deal with BHP and Rio but did not really want new entrants or growing companies.

Mr DA Richardson : In terms of the penalties, that is a good point. Certain companies may say that they can benefit from this low tax threshold in their first year or two of production when costs tend to be high and production is good so your profits are lower. The problem with that is that, if you elect to take that low profit threshold, you will lose a lot of potential particularly in relation to things like royalties in the future. If you then get to a point where you exceed that threshold, as Mr Humphry said, it is too big a risk. Even for companies that think they might be able to benefit from that low profit threshold for the first couple of years, you would not take the risk because you are potentially going to lose a lot down the track if you are looking to increase production. Pretty much with all small iron ore companies you either get bigger or you get taken out. It is not a business that makes a lot of sense when you are only producing a couple of million tonnes a year.

Senator THISTLETHWAITE: Is it not the case that the exploration costs can form part of premining expenditure and be deducted either as a mining loss or transferred to other projects as a loss?

Mr Murray : It is fair to say that where expenditure qualifies as premining expenditure it will be deductible. I guess the point that needs to be made is drawing a distinction between the starting base allowance, which looks at the value of your interest as at 1 May, and looking at subsequent expenditure that will qualify as exploration expenditure and that will be deductible on the go forward; that is correct.

Mr Short : It is also for that reason that there are so many more exploration companies that have a direct interest in the MRRT even though they are well and truly not even at the stage of making any profit. They have not even discovered an ore body. They are out there exploring. Nevertheless, they will still be subject to the compliance and record-keeping requirements of the MRRT.

CHAIR: Thank you, Mr Bennison and your colleagues and those on the teleconference, for attending and assisting the committee.

Proceedings suspended from 15:21 to 15:34