Melbourne Mining Club Being lucky is not enough. Don Argus, Chairman 22 October PDF Free Download

Melbourne Mining Club Being lucky is not enough Don Argus, Chairman 22 October 2009

Economic Activity Contracted in All Countries Global GDP Growth (%, Quarter-Over-Quarter, Annualised) 9 7 5 3 1 (1) (3) World Advanced Economies Emerging and Developing Economies (5) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2005 2006 2007 2008 2009 Source: IMF World Economic Outlook Update October 2009. Melbourne Mining Club, 22 October 2009 Slide 2

Natural resources have and will continue to be central to Australia s growth Australia s GDP Percent 1 Australia s GDP growth 2006-09; Percent 3 100% = 1,095 Billion 4.0% 18 Mining 2 2.4% All other sectors 82 All other sectors Mining 1 1 Reference year for chain volume measures has been taken as 2007-08 2 Includes direct contribution of $85 billion and indirect contribution of $117 billion; includes oil and gas 3 Compounding annual growth rate SOURCE: Australian Bureau of Statistics 5204.0 Australian System of National Accounts, 2007 08, Table Gross Value Added (GVA) by Industry Australian Bureau of Statistics 5209.0 Australian National Accounts Input-Output Tables 1998 99; team analysis Melbourne Mining Club, 22 October 2009 Slide 3

Australia is facing a number of important issues right now Disputes double under new IR laws Employers warn of rising costs 20 October 2009 30 June 2009 Henry Taxation Review 6 June 2009 3 August 2009 Economic stimulus packages 20 October 2009 Carbon Pollution Reduction Scheme (CPRS) debate 5 August 2009 Renewable Energy Targets Source: Press and web search. Melbourne Mining Club, 22 October 2009 Slide 4

Size of economic stimuli varies greatly by country OECD average: 3.6% of GDP Total size of discretionary fiscal stimulus measures announced (a) % of GDP, G-20 countries (~80% of global GDP) IMF ESTIMATES (March 09) <1% 1% - 3% > 3% 2.8% 1.5% 3.9% Size of stimulus package depends on 4.9% 1.5% 3.5% 1.4% 4.2% 0.3% 9.2% 1.2% 6.3% 4.7% 2.2% Actual and anticipated severity of recession Size of automatic stabilizers 1.9% Degree of dependence on internal versus external demand 1.3% 0.6% 2.9% G-20 PPP-GDP weighted average Overall: 3.6% EU G-20: 1.9% 4.5% Public debt level Political will (a) Includes only new measures announced and not pre-budgeted expenditure. Source: IMF (March 2009) -The State of Public Finances; IMF (March 2009) Staff Note for Group of Twenty. Melbourne Mining Club, 22 October 2009 Slide 5

Government spending Federal Government GFC response Announced in the last 12 months, A$ Billion Australia s debt obligations will rise Net debt as proportion of GDP, Percent 100 89.5 16 4.5 14 80 17.5 12 10 8 Pre-crisis estimate Post-crisis estimate 60 6 41.5 4 40 2 0 20 15.2-2 -4 10.4-6 0 Economic Stimulus 1 State Govt Support Economic Stimulus 2 Additional Infrastructure Clean Energy Initiative Total -8 2007 2008 2009 2010 2011 2012 2013 2014 Source: Infrastructure Partnerships Australia, Financing Infrastructure in the Global Financial Crisis, March 2009; Australian Treasury, Australia s response to the global financial crisis, Dr Steven Kennedy; Federal Budget, 2009-10, Overview; IMF World Economic Outlook, October, 2007 and July 2009 Melbourne Mining Club, 22 October 2009 Slide 6

Melbourne Mining Club Being lucky is not enough Don Argus, Chairman 22 October 2009

Australia has abundant natural resources Australia s ranking of natural resource reserves by size Bauxite 1 Uranium 1 Nickel 1 Gold 2 Iron Ore 3 Coal 6 Oil and gas 20 Source: OECD Economic Survey of Australia 2006, table 1.1; BP Statistical Review of World Energy 2009. Melbourne Mining Club, 22 October 2009 Slide 8

The natural resources sector is now our largest source of export revenues Total export revenues (a) (A$bn) 150 120 90 60 30 0 Mining 31 66 (b) Manufacturing 29 62 41 67 58 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 21% 20% 25% 29% 29% 32% 42% Difference between mining (b) and manufacturing export revenues (A$bn) 75 63 85 74 89 % Mining proportion of total Australian exports 118 93 30 26 10 (10) (30) (50) (35) (33) (26) (17) FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 (a) Free on-board value. (b) Includes oil and gas. Source: Australian Bureau of Statistics; 8417.0 Mining Indicators (released Aug 2009); 8229.0 Manufacturing Indicators (released Aug 2009); 5368.0 International Trade in Goods and Services (released Aug 2009). (23) (15) Melbourne Mining Club, 22 October 2009 Slide 9

Future demand for our minerals is strong Crude steel intensity Kg/capita (solid lines) 1200 China/India steel intensity Other steel intensity 1000 South Korea (1970 2006) Taiwan (1970 2006) 800 600 Japan (1955 2006) 400 200 China China and India account for 38% of world s population US (1900 2006) 0 India 0 5000 10000 15000 20000 25000 30000 35000 40000 GDP at 2000 PPP/capita US$/capita SOURCE: Global Insight; IMF; OECD; IISI; USGS; JFK Melbourne Mining Club, 22 October 2009 Slide 10

Ensuring international competitiveness 1. Funding for large scale growth opportunities 2. Flexible and responsive labour market 3. Supportive policy and regulatory environment 4. Tax system Melbourne Mining Club, 22 October 2009 Slide 11

Australian corporate bond market is small compared with US and UK Debt Capital Market (DCM) (a) corporate deals as proportion of GDP Percent of real GDP (2005 base year) 6.0 5.0 4.0 3.0 United States United Kingdom US and UK average 3.3% 2.0 1.0 Australia Australia average 1.5% 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 (a) Includes corporate bond and other notes, that is, excludes asset and mortgage backed securities; for non-bank, non-government deals Source: Dealogic; Global Insight (World Market Monitor) Melbourne Mining Club, 22 October 2009 Slide 13

Foreign direct investment is a crucial growth enabler FDI in Australian mining (A$bn) Canada case example (Controlling ownership of mining assets, %) 100 100 C$67b C$131b 80 +17% p.a. 80 48 Locally owned 60 60 89 40 81 92 40 20 37 40 45 49 63 20 52 Foreign owned 0 2001 2002 2003 2004 2005 2006 2007 0 11 1999 2008 (a) (a) 2008 figure extrapolated from published 2006 data to include Alcan acquisition. Source: ABS Catalogue 5352 Supplementary Statistics 2007 (released on Jan 30 2009), table 15a; Statistics Canada; Corporations Returns Act CANSIM 179-0004. Melbourne Mining Club, 22 October 2009 Slide 14

Melbourne Mining Club Being lucky is not enough Don Argus, Chairman 22 October 2009

Mining jobs are of high value to the economy Jobs created, 2001 07 Thousands Gross value added to the economy per employee (A$ thousand, FY2007) Average annual income per employee (A$ Thousands, FY2006) 60 56.7 550 515.5 100 45 440 80 85.4 30 15 330 60 47.9 0 220 40 (15) (30) Mining (17.2) 0 Manufacturing 110 93.2 20 (a) (a) (a) Mining Manufacturing 0 Mining Manufacturing (a) Manufacturing subsectors per the Australian Bureau of Statistics include food, beverage and tobacco; textile, clothing and footwear; wood and paper products; printing, publishing and recorded media; petroleum, coal, chemical, etc; non-metallic mineral products; metal products; machinery and equipment; and other manufacturing. Source: Australian Bureau of Statistics; 5204.0 Australian System of National Accounts, 2006 07; 6291.0 Labour Force, Australia; Aug 2007, 8415.0 Mining Operations; Australia, 2005 06, 8221.0 Manufacturing Industry, Australia, 2005 06 Melbourne Mining Club, 22 October 2009 Slide 17

Australia s labour market is less flexible than that of many other countries Cooperation in labouremployer relations (a) (Survey rank) 10 24 25 26 UK 31 Canada 40 43 60 75 87 121 131 Japan Germany US India Australia China Mexico Brazil South Africa Korea Flexibility in wage determination (b) (Survey rank) 11 14 18 29 Japan US UK Canada 38 Korea 44 53 88 90 110 123 130 India China Mexico Australia Brazil South Africa Germany Non-wage labour costs (c) (Survey rank) 4 26 35 46 69 80 85 89 123 126 South Africa US UK Canada 46 Japan 46 Korea India Germany Australia Mexico Brazil China (a) Countries labour-employer relations were scored on a scale of 1 to 7 (where 1 = relations are generally confrontational and 7 = relations are generally cooperative), then ranked in descending order of score (b) Countries flexibility of wage determination were scored on a scale of 1 to 7 (where 1 = wages are set by a centralised bargaining process and 7 = wages are up to each individual company), then ranked in descending order of score (c) Countries non-wage labour costs were estimated by adding the social security payments and payroll taxes associated with hiring an employee in fiscal year 2005 and expressing this sum as a percentage of the worker s salary, then ranked in ascending order of quotient. Note, this data from 2008-09 report. Source: Source: World Economic Forum, The Global Competitiveness Report, 2008-09 and 2009-10. Melbourne Mining Club, 22 October 2009 Slide 18

Increasing legislation and regulation increases complexity of doing business in Australia Total pages of legislation passed 60,000 60 Federal regulators and national standards bodies 50,000 40 Ministerial councils 40,000 30,000 20,000 10,000 0 1900s 1920s 1940s 1960s 1980s 2000s 1,300 35 18 28 56 Regulators across all 3 levels of government Areas of state/state overlap in regulation Areas of federal/state overlap in regulation Taxes administered by more than 1 government Business taxes administered in Australia Source: Banks Regulation Taskforce 2006, citing BCA submission; BCA Towards a seamless economy, 2008 Melbourne Mining Club, 22 October 2009 Slide 20

Ensuring international competitiveness 1. Funding for large scale growth opportunities 2. Flexible and responsive labour market 3. Supportive policy and regulatory environment a. Environmental policy 4. Tax system Melbourne Mining Club, 22 October 2009 Slide 21

Carbon prices could be volatile under the CPRS due to the variability of carbon demand Carbon emissions/permits Million tonnes 700 600 These emissions make up the demand for permits. Demand can vary widely depending on external factors; e.g. cold winter increases energy industry s demand for permits 500 400 300 200 Excess demand for permits Unpredictable demand is likely to cause price volatility 100 0 2010-2011 projected emissions Free permits 2010-2011 projected emissions not yet covered by permits 2010-2011 reduction target Permits available Source: Carbon Pollution Reduction Scheme White Paper Melbourne Mining Club, 22 October 2009 Slide 22

Carbon, energy and labour costs will account for almost 75% of future cost base Cost per tonne concentrate (a) (Indexed, 2005 = 100%) 220 200 180 160 140 CO (b) 2 Energy Labour Other Non-energy 122 151 198 120 100 100 80 60 40 20 0 2005 2010 2015 2020 (a) Open cast mine. (b) Assumes carbon cost of 20 Euro/tonne. Source: Infomine; The Economist Intelligence Unit; International Energy Agency. Melbourne Mining Club, 22 October 2009 Slide 23

Ensuring international competitiveness 1. Funding for large scale growth opportunities 2. Flexible and responsive labour market 3. Supportive policy and regulatory environment b. Access regulation 4. Tax system Melbourne Mining Club, 22 October 2009 Slide 24

Our regulatory environment deters investment in infrastructure Access regulation reduces the attractiveness of investment Market outlook Response from 3 rd party Outlook at the start of access contract Outlook at the expiry of access contract Good Bad Good Bad Seek access enjoy positive returns Do not seek access Seek continued access keep profiting Do not renew avoid losses As access contracts are shorter than asset life, the access seeker has an option not to renew access, and so is insured at the expense of the investor Source: BHP Billiton analysis; Jerry Hausman analysis; Economic literature. Melbourne Mining Club, 22 October 2009 Slide 25

Asian players are completing projects at dramatically lower cost and shorter timeframes Average investment (US$/kW, US$m/kbpd) Average timeline (Months) Coal-fired power plant Asia Developed market 500 1,000 33 65% 1,450 30 36 20 50% 45 60 Petroleum refinery Asia Developed market 8 15 15 60% 18 20 30 48 10 50% 54 60 Source: Company websites; Industry interviews; Internal analysis. Melbourne Mining Club, 22 October 2009 Slide 26

Factors perceived to be the most problematic for doing business in Australia Survey of the most problematic factors for doing business in Australia (% of responses) Restrictive labour regulations Access to financing Tax rates Tax regulations Inefficient government bureaucracy Inadequate supply of infrastructure Inadequately educated workforce Poor work ethic in national labor force Policy instability Inflation Foreign currency regulations Government instability/coups Poor public health Crime and theft Corruption 2.9 2.0 1.2 0.5 0.2 0.1 4.0 6.4 8.7 11.8 11.2 10.7 10.5 14.0 15.8 From a list of 16 factors, respondents were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings. Source: The World Economic Forum The Global Competitiveness Report 2009-2010. Melbourne Mining Club, 22 October 2009 Slide 28

A$18b incremental export revenue benefit by holding share in 4 minerals to China & India Chinese and Indian demand by mineral (A$bn) Australia s fair share of future Chinese and Indian demand A$18b in export revenue (a) 1 18 2 120 1 44 77 8 88 30 30 13 14 9 33 29 2008 2015 2008 2015 2008 2015 2008 2015 Seaborne iron ore (c) Alumina Coking coal (b) Copper (c) (a) Assumes current prices, future share based on share of current Chinese imports only. (b) Australia s share calculation based on global share of total coal (thermal and coking) production. (c) Chinese demand only. Source: Internal analysis; EIA; USGS; Metal Bulletin; LME; SBB; Platts; UN Comtrade; ABARE Melbourne Mining Club, 22 October 2009 Slide 29

Other economic and social benefits will be created in Australia Estimated Chinese iron ore demand (Million tonnes) Australia s fair share of future China demand Capturing 33% (Australia s current share of Chinese iron ore imports) of forecasted growth would have significant benefits (a) 2008 383 Additional annual export revenue A$14b Forecast Growth 343 168 Additional annual GDP contribution A$34b Additional annual tax revenue A$8b 2015 894 Additional jobs created 35,000 (a) At current prices. Source: Internal analysis; EIA; USGS; ABS Input-Output multiplier table, employment multiplier table, 5204.0 National Accounts; Federal Budget papers; Oz Forex; ABARE; UN Comtrade; Team analysis. Melbourne Mining Club, 22 October 2009 Slide 30

Melbourne Mining Club Being lucky is not enough Don Argus, Chairman 22 October 2009

Melbourne Mining Club Being lucky is not enough. Don Argus, Chairman 22 October 2009