21st Annual Investing in African Mining Indaba
 
Australian Mining in Africa

Presented by Hon Colin Barnett MLA, Premier of Western Australia
5 February 2014

I confess, this is my first visit to Africa. I thank you for the opportunity to be in beautiful Cape Town and to address the 2014 African Mining Indaba, the world’s largest mining investment conference.

I am particularly grateful as it is my understanding that politicians, particularly those from outside Africa, rarely make the speaking list.

My journey to Cape Town has been via Lusaka (Zambia) where I met with ministers and senior officials of the COMESA (Common Market for Eastern and Southern Africa) group of nations.

The discussions at the COMESA meeting centred on how Australia, and more specifically my own state of Western Australia, could assist in the development of mining in each country. It is obvious that there are significant differences between countries in Africa, in terms of the stage of development of their respective mining industries.

If there is one message I have for the governments of African nations, it is… that not a single grain of mineral or a single molecule of gas or oil should leave Africa without being paid for.

A Mining Legacy

There are strong parallels between African and Australian mining. Both have an ancient history of mining dating back through thousands of years. Both have a modern mining industry dating from the nineteenth century.

For Africa, it was diamonds near the Orange River in the 1870s and gold in the Transvaal during the 1880s. For Australia, it was the discovery of gold in Victoria at Ballarat and Bendigo in the 1850s and then in Western Australia in the 1890s.

These parallels in mining history are of interest but that is all. What is significant today is that both Australia and Africa are the custodians of great mineral wealth. We both have a large and growing mining industry. But in Africa, there are great differences to be found in the maturity of the industry from one country to another, the social conditions attached to it and the benefits that flow from it.

With a population of over 1.1 billion people spread across the African continent there is a complexity beyond the reckoning of a single nation Australian continent with just 23 million people. Of the 54 African nations, some 33 are among the world’s least developed economies, with around half the African population living in poverty.

In contrast Australia, the “lucky country”, enjoys a top 20 economy with one of the highest standards of living in the world. Australia has its problems but nothing on the scale facing Africa.

The point of optimism is that mining has been a major part of Australia’s good fortune and it is mining that is strongly contributing to an improving economic outlook for Africa. Over the past decade real income per person has increased by more than 30 per cent. Over the next decade, Africa’s gross domestic product is expected to rise by an average of six per cent a year.

Mining has great potential to further improve economic and social conditions across Africa. That would be a worthy legacy.

Mining in Western Australia

Today, the Australian mining industry, with the exception of coal, is centred in Western Australia. Along with agriculture, it is the export base for a prosperous and highly specialised economy. Perth has a global reputation in mining and energy, and is increasingly seen as Australia’s west coast capital.

Perth and Cape Town are separated only by 8,700 kilometres of water. Your sun rises over Australia and our sun sets over Africa. Our shared position on the Indian Ocean Rim will be increasingly important through this century.

The history of mining in Western Australia is a fortunate mix of discovery and global events. As mentioned, the finding of gold in Kalgoorlie sparked the 1890s gold rush. For the first time, Western Australia was important. Then in the 1960s, the post-war reconstruction of Japan brought on iron ore and natural gas in the remote Pilbara region. And now, a third period of rapid growth is directly tied to the emergence of modern China and its seemingly insatiable demand for mineral and energy resources.

Western Australia covers a large area of over 2.5 million square kilometres. Only nine countries in the world have a bigger land area. The state also has a large and diverse mining industry with continuing high prospectivity. There are over 500 mining and petroleum projects spread over 1,000 individual sites. These are sophisticated operations. They are fully commercial projects, deploying the latest technology and regarded as some of the best mining operations in the world.

The total value of mining and petroleum production in 2012-13 was $102 billion. Last year, the State Government collected $4.4 billion in mining royalties. The state produces over 50 different mineral and petroleum products and enjoys a significant share of world production in key commodities.

Western Australia produces 27 per cent of the world’s total iron ore production and accounts for some 42 per cent of internationally traded iron ore. Other world production shares include 14 per cent of nickel, 14 per cent of alumina, six per cent of gold, six per cent of liquefied natural gas (LNG) and between seven and 15 per cent of various mineral sands products.

In an Australian context, Western Australia accounts for 60 per cent of all mining and energy production8 and some 51 per cent of investment in the mining and energy sector. The state also accounts for 73 per cent of Australia’s oil production and 65 per cent of gas production. There are currently $146 billion of resources projects either under construction or committed to go into construction. Over the course of this decade, iron ore production will double and LNG production will treble. This is a great period of industry expansion. In my opinion, investment over the next decade will take the Western Australian mining industry close to its long term and mature levels of production.

What is often overlooked is that mining has given Western Australia a standing in Asia way beyond what could be expected of a regional economy. With just over 10 per cent of the national population, the state accounts for 47 per cent of Australia’s merchandise exports. This figure will be more than half of all exports by the end of the decade.

For our oldest Asian trading partner, Japan, Western Australia accounts for 46 per cent of all of Australia’s exports to that country.

The penetration into the China market is even more dramatic, and especially so, as China is Australia’s top trading partner. Western Australia provides 70 per cent of Australia’s merchandise exports to China and attracts about 80 per cent of inward investment by China’s state-owned enterprises (SOEs). Half of China’s total iron ore imports come from the state. If you have a liking for particularly ‘quirky’ statistics then, the value of Western Australia’s merchandise exports to China are just under half of all of the United States of America’s exports to China. That makes the point.

It is because of the importance of Western Australia as a supplier of essential raw materials to Asia that the state has a direct and almost independent relationship with Beijing and Tokyo. This extends to high levels in both politics and industry. It includes special relationships with China’s National Development and Reform Commission, the China Development Bank, and the Japan Bank for International Co-operation. This also gives us a unique insight into Asia’s place in the global resources industry, which is as relevant to Africa as it is to Australia.

The prosperity and high economic growth of Western Australia is in large part due to the mining industry. The gross state product is $243 billion. I am conscious this is in excess of the economies of many African nations. Similarly, the gross state product per person is around $100,000. This does not necessarily translate directly into wages or living standards, but it is evidence of the powerful impact mining can have. For Africa, this is the glittering prize.

In to Africa

It is hardly surprising that the Australian mining industry has found its way to Africa. After all, Africa is home to some 30 per cent of the world’s mineral reserves.

Australian mining is genuinely entrepreneurial with a “can do” attitude and a preparedness to take a risk. Venturing into Africa is entirely consistent. It is of great credit that industry, rather than government, has led the way. In saying that, I do acknowledge that the Africa Down Under Conference, held annually in Perth, has been an important support. As has the on-going work by Australian diplomats and trade representatives in Africa.

The long history and scale of our mining industry, coupled with its isolation, has come with a world leading expertise in mining and mining services. Both have been equally important to Australia’s involvement in Africa.

Those outside the mining industry are sometimes guilty of dismissing it as being Australia’s ‘old economy’ or nothing more than a ‘dig it up and ship it out’ activity. Nothing could be further from the truth.

The iron ore mines in Western Australia are impressive, the associated infrastructure is even more so. Heavy haulage railways extend over 300 kilometres and industrial train sets are over three kilometres in length. The mines, railways and ports are highly automated and capable of being operated remotely from Perth, 1,500 kilometres away. Port Hedland is the largest bulk export commodity port in the world.

It is also often overlooked that much of the success of Australian mining has been the ability to commercialise large but low grade mineral deposits. The skill has been in the application of science and technology such as the Bayer process for converting bauxite to alumina, the carbon in pulp process for gold extraction and the high pressure acid leach method of treating lateritic nickel. In many projects, the mine itself is almost incidental. For example, a lateritic nickel project may be 20 per cent mine and 80 per cent chemical plant. That is not the common understanding of mining.

Mining services have developed from the local mining industry to an export industry in its own right. As many of you can attest, Western Australian engineering and geological surveying firms have brought to Africa their expertise in exploration and mine construction and operation.

While they are not alone, Australian companies have been true pioneers in the discovery and development of African mining deposits.

The use of Australian exploration and mining software in these discoveries and in on-going mine operations in Africa has also been important. Some 60 per cent of the world’s exploration and mining software has been developed in Australia, with the majority being developed in Western Australia. This sector generates $600 million a year of mining related revenues, more than $240 million of exports and directly employs more than 2,500 people.

Australian involvement in mining in Africa really took-off in the 1980s and 1990s and was mainly to do with gold. Early projects include gold processing in Ghana, gold mines in Tanzania, and copper/cobalt in the Democratic Republic of the Congo.

Today there are some 236 Australian mining companies operating in Africa. Of these, 168 (or over 70 per cent) are Western Australian. These Western Australian companies are active in 807 projects spread across 33 of the 54 African countries. The range of minerals is extensive covering iron ore, gold, uranium, other base metals, and rare earths, mineral sands and coal.

Australian mining companies are significant employers in Africa, with the majority of projects mainly staffed by locals, providing secure and well paid jobs for thousands of Africans. Many Australian companies involved in African mining projects actually have more African employees than Australian. An example is Ausdrill, which has 2,600 employees in Africa, 2,400 of which are local, while it has 1,900 employees in Australia.

It is my observation that Australian companies are ethical and responsible investors in the African mining industry. They have also demonstrated a high level of social responsibility in supporting local communities through the building of infrastructure such as schools, hospitals, orphanages, agricultural projects and roads, and providing training opportunities. I am proud that Australian companies have often led the way in this regard.

A Balancing Act

In mining, investment will go to where the return is the best and minerals, wherever they are from, will go into the same global market at the same price. Host governments are all subject to the vagaries of the world economy, whether they are rich or poor. There is not much that can be done about that.

We all seek investment, we all want a well-managed industry, we all look for local business opportunities, we all dream of value adding and we all expect a fair return for what are finite resources. For any government this is the balancing act. The issues we face are remarkably similar.

I have always found it odd that the mining industry, which quite properly promotes shareholder interest, often fails to distinguish between the public policy and commercial interest of government. The policy role of encouraging the industry and seeking wider community benefits is obvious. What is less obvious is that as the owner of the natural resources, governments also have a responsibility and a direct commercial interest in how these resources are developed. An example in Western Australia was the proposed merger by BHP and Rio Tinto of their iron ore operations in the Pilbara in 1999. The Western Australian Government in which I was Resources Development Minister, objected to this because it would have put the massive Pilbara iron ore resources in the hands of just one company, which was not in the long term interests of Western Australia.

Unfortunately, mineral and petroleum resources have a habit of being located in remote and hostile environments. Greenfield projects have high costs which can be compounded by issues of personal safety, political instability and doubts over the reliability of the legal system. This is the area of sovereign risk. It can act as an absolute barrier to investment and at a minimum weaken the ability of a host government to strike a good deal.

Sovereign risk is not confined to developing nations. Australia has had a recent experience of a Mineral Resource Rent Tax being imposed by the national government on top of existing state royalties. This new tax applies only to iron ore and coal. As China is the major buyer of these commodities, the Chinese saw it as a tax imposed on them. In my more than 20 years in the resources sector, it is the first time I have heard the term “sovereign risk”, used in Asia in relation to Australia. Fortunately, the newly elected national government is committed to repealing the tax.

Competing objectives and the sheer scale of major resource projects can place immense pressure on developing nations. Again, developed economies are not immune. A major gas project off the Western Australian coast (the Browse project) is currently in dispute. The proponents want to use a floating production facility built outside of Australia with all the gas exported. The Western Australian Government wants to see an on-shore LNG plant with at least some of the gas delivered to the domestic market. Time will tell how this will turn out.

I note with interest that Tanzania has recently insisted that its offshore gas reserves be developed through an onshore LNG plant rather than by an offshore floating plant. Further away, Indonesia has adopted a policy position of restricting the export of raw mineral ore in an effort to encourage domestic value adding through mineral processing. In Israel,

50 per cent of the gas from the Leviathan gas field has been reserved for domestic use. As I have said, we all face similar issues.

Mining Law and Administration

A robust mining industry requires a soundly based system of law and administration. Done well, this can also be a safeguard against sovereign risk, vested interests and corrupt conduct.

In Western Australia, the first consolidated regulation was the Mining Act of 1904. This has been superseded by the Mining Act of 1978, which is itself subject to continuous updates.

Central to the legislation is a system of mineral titles or tenements that are administered by the State Government.

Mining tenements generally fall into two broad categories, exploration tenements and production tenements. The most common forms of tenure are exploration and prospecting licences, and mining leases.

Exploration tenements are issued on the basis of a ‘first in time’ principle, subject to complying with conditions such as paying rent and minimum expenditure requirements each year. It is not possible to have a tenement and do nothing with it. These exploration tenements are granted for five years and while there is the possibility of extension, part of the tenement must be surrendered if the term is renewed.

If the holder of the exploration tenement gets lucky and there is an indication of a mineral deposit, they have priority to apply for a mining lease.

In Western Australia, a mining lease can only be assigned under authorisation of the Mining Act. The longest lease term is 21 years, with the right of renewal. A mining lease gives the holder exclusive rights to conduct mining activity on the property. Like exploration tenements, mining leases are usually granted subject to a range of conditions.

Currently, there are over 22,000 mining titles on issue in Western Australia, covering some 54 million hectares. Accurate mapping is obviously essential as is overall title management through an electronic database. All of this complexity is necessary for an efficient mining system with integrity.

As the mining industry develops, so does the regulatory regime. As the industry further develops, so does the capacity for a greater degree of self-regulation. This is the stage of the Western Australian mining industry. Reforms underway include processing tenements online, the online tracking of project approvals, an industry wide fund for the rehabilitation of old mine sites, and improvements to environmental regulation.

It is in the area of mining law and mining regulation that the Western Australian Government has something to offer to developing African nations. A simple, consistent and easily understood system is what is needed. For Africa, there is an advantage to having similar systems across neighbouring countries. That will make it easier for existing mining companies and more attractive for future investment. That has been part of the discussion with the COMESA group.

Paying a Fair Price

It is a mistake to allow the extraction of a natural resource without a fair return to the host country. No matter what other benefits are on offer, there is no substitute to a direct revenue stream from the mineral or petroleum resource.

It is also a mistake to confuse the taxation of company profits with the price paid to purchase a mineral. One is a tax, the other is a sale price.

In Australia there is a constitutional separation of ownership. Natural resources are owned by state governments if they are on land or within three miles of the coastline. Offshore resources, beyond that limit, are owned by the national government. Other examples of where the mineral is owned and the royalty is collected at the state, provincial or regional level are Canada, Peru, Argentina and India. In the USA, the resources belong to the land owner. I don’t recommend that model. I remember a slightly humorous meeting with an American head of a global resources company who, when discussing a Western Australian project, held the view that the company owned the resource. Needless to say, I promptly corrected him.

For Africa, to the best of my knowledge, mineral and petroleum resources are owned by national governments. There are some variations including South Africa and the Democratic Republic of the Congo, which have a system of state custodianship as the basis for regulatory control over minerals and mining.

For Western Australia, as the owner of the minerals, a royalty is collected at 10 per cent of the mine head value. This is an ad valorem charge that picks up movements in price and volume. It is a sale price that is set by law and is non-negotiable.

The royalty is the price paid for the mineral, though some mining companies continue to incorrectly refer to it as a tax. From their perspective it is a cost of production. The Australian Government then collects a tax on company profits on the same basis as any other business. This system is transparent and makes a clear distinction between a sale price and a tax.

Even if revenues are collected by a single level of government, I strongly recommend a clear distinction between a price and a tax. I am aware of the theoretical case for rent taxes as, after all, I am an economist. The problem is they fail to recognise ownership. If a mining company only pays a tax on profit, then it will pay nothing for the mineral if it makes a loss. It comes down to who has the smartest tax accountants.

The Australian system provides examples of this failure. The offshore oil and natural gas reserves are subject to a petroleum resources rent tax. Because of high up-front capital costs, a large LNG project may not pay anything for the gas itself for a decade or more. That is hardly a good result. It would be far better to have a two part charge based first on the extraction of gas (a royalty) and second on profit (a tax). That is the model I would recommend to African nations.

State Agreements

Mining law should always be the base case for the industry. However, for big projects there are often issues that are unique to the project and therefore not covered by general laws.

This is the case in Western Australia. For major iron ore, bauxite and gas projects the extractive or mine stage may be conventional. The complexity is more likely to come through railway, port and even township construction. This goes beyond mining law.

The solution has been through the passing of special Acts of Parliament known as State Agreements. In Western Australia there are 64 such agreements dating back to the 1960s. Collectively, they cover some 80 per cent of the value of mining and petroleum production. They do not replace the general mining law, though they may amend it by giving greater length of tenure, particular environmental conditions, rights to build, own and manage infrastructure, obligations for further value adding and requirements to supply the domestic market.

A State Agreement is essentially a ‘deal’ struck between government and the mining proponent that is sanctioned by an Act of Parliament. As such, they provide a high level of endorsement for a project including bi-partisan political support. Their status can be fundamental to the raising of finance, the farming-in of joint venture partners and the signing of sales agreements. For that reason, State Agreements are not available simply on request. They are restricted to projects in which the Western Australian Government itself has a high level of confidence.

Conclusion

Africa is at an exciting stage in the development of its mining industry. Many countries are at the very beginning of mining.

There is no doubt that the prospectivity of minerals can be enhanced by a rigorous structure of mining law and administration. A system with integrity, due process and transparency is what is needed.

I do not suggest the Australian system is perfect. Critics will point to unnecessary bureaucracy and delays in project approvals. They do have a point, but from my recent experience, delays are as likely to be due to disputes between projects or within joint venture partnerships.

The point remains that the Australian mining industry has a long and proud history. It has been made welcome in Africa and for that I am appreciative. Much of this comes down to the commitment Australian companies have to the communities in which they operate. They have brought both expertise and ethical standards. It is a matter of pride for many companies that the standards applied in Australia are also applied in Africa.

From a government perspective, I support Australian mining companies and offer our assistance to African nations as their mining industry develops. It is as simple as that.