Bankwest Future of Business: Focus on Mining Services

Bankwest Future of Business: Focus on Mining Services 2018

2

Contents Key insights Focus on mining services Industry overview What s driving industry growth? Spotlight on Australia Spotlight on Western Australia What does the future hold? Where do the opportunities lie? Forecasted industry growth 4 5 6 7 8 9 10 11 12 3

Key insights Foreword Understanding factors impacting your industry, and how other businesses in your industry are performing, can be a great gauge for how your business is tracking. The Bankwest Future of Business: Focus on Mining Services Report is designed to give you a snapshot of the current and expected future state of your industry, which could help you plan and spark ideas. The report covers Australia s mining and support services sector, summarising trends based on statistics from IBIS World, the Australian Bureau of Statistics and other reputable sources. Rising commodity prices across the resources sector in the latter half of 2017 has been a boon for employment with a 66.7% 1 increase in mining job vacancies in the year to November 2017. Coupled with the falling exchange rate, Australian exports have become more attractive to international buyers, bolstering mining exports and industry revenue. Although 2017 marked an uptick in industry performance, figures are still subdued compared to heights reached in 2012. Furthermore, the long-term trend of declining iron ore prices has seen exploration investment pivot towards gold as commodity prices are expected to hold around USD$50 or (AUD$65) for the next 15 years. Gold mining recorded the largest rise in direct Western Australian employment across the sector, increasing by 15.1% in the year to June 2017. The recovering sector s huge shift in focus towards productivity and innovation magnified in 2017. Rising costs and slowing returns have created a need for businesses to cut costs by leveraging new technologies to improve bottom lines. Technological advances such as self-driving vehicles and drones have bolstered productivity and reduced errors from manual inspection. Western Australia s 15-year marriage between iron ore prices and interstate migration could be coming to an end, with recent activity suggesting a divergence between the two. In the 2016-17 financial year, some 39,419 people migrated interstate from WA, yet the iron ore price rose from $69 to $92 per tonne 2. While prices have risen, production and exploration has continued to fall, likely accounting for the inverse relationship. WA s mining story could be starting a new chapter, however, with prelude and icthys large-scale LNG projects and Kalgoorlie s planned Super Pit extension likely to be a drawcard for people in the sector moving back to the state. 4 1 ABS 6354.0 2 http://bcec.edu.au/assets/bcec-quarterly-economic-commentary-dec-2017.pdf

Focus on Mining Services The mining sector boasts $214.7 billion in total revenue, and is the second biggest sector in the nation in terms of trade volume. What makes up the mining sector? $59.7 bn $63.3 bn Mining support services employees The mining industry includes many employees with diverse roles. These include miners, kitchen staff, cleaners, occupational health and safety officers, nurses, employee relations, legal advice, workers compensation, IT support, occupational hygiene (testing air quality, gases, water quality) and security. $16.1 bn $34.0 bn Mining services businesses 2017: 7,102 2016: 7,293 Mining support services businesses 2017: 1,641 2016: 1,680 $1.8 bn $5.7 bn Iron ore Black coal Nickel ore Gold ore Copper ore Oil and gas extraction Source: IBIS 2017 $1.4 bn Petroleum exploration Mining support services recorded an additional $10.2 billion in revenue, while contract mining services contributed a slightly lower $9.9 billion. Mining services employees 2017: 177,630 2016: 163,480 Mining support services employees 2017: 38,710 2016: 37,582 Source: IBIS 2017 5

Mining sales and service income Billion ($) Industry overview The mining services sector includes coal, copper, gold, iron ore, nickel ore, oil and gas extraction, petroleum and lithium as well as mining support and contract services. 44.1 Coal mining Mining services businesses entries and exits, Australia, 2015-2016 34.6 54.9 Oil and gas extraction Iron ore mining Coal mining Operating at the start of the financial year 387 Operating at the end of the financial year 353 Percentage change -8.8% 5.4 Copper ore mining Oil and gas extraction 387 366-5.4% 15.0 2.6 Gold ore mining Mineral sand mining Iron ore mining Copper ore mining Gold ore mining 129 63 588 110 59 573-14.7% -6.3% -2.6% 6 4.9 7.3 90.4 188.9 Silver/Lead/Zinc ore mining Total metal ore mining Exploration and other mining support services Total mining Mining output represented 6.9% of Australia s GDP in 2015-2016 at $114.9 billion 3. Nickel ore mining Other nickel ore mining Petroleum exploration Mineral exploration Source: ABS 8165 38 125 581 2,117 Mineral exploration and mining support services saw the largest fall in establishments in 2016, likely due to the industry shift from exploration to production. 3 ABS 5204 34 120 556 2,082-10.5% -4.0% -4.3% -1.7%

What s driving industry growth? Industry growth is being driven by commodity prices (iron ore, gold and bauxite), demand from overseas buyers and the exchange rate, which impacts the price foreign countries pay for Australian commodities. Overseas demand remains strong (Australia s commodities exports) Performance drivers Increase in commodity price of iron ore USD$71.76/ tonne (AUD$88.74), annual return up 22.8% however down compared to 2012 4 Rise in commodity price of gold USD $1,257.56/ ounce (AUD $1555.48), annual return up 1.0% 5 China South Korea AUD increased against the USD, up 5 cents to 0.77 during 2017 6 Japan India Other Source: IBIS 2017 4 http://www.worldbank.org/en/research/commodity-markets 5 http://www.worldbank.org/en/research/commodity-markets 6 https://www.exchange-rates.org/rate/aud/usd/12-30-2016 7 7

Spotlight on Australia Iron ore and gold production continued to rise in 2017, likely due to growing international demand and exports. Base metals and bulk commodities price index 2007-2017 300.0 250.0 200.0 150.0 100.0 50.0 Bulk commodities price** Base metals price* 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: RBA 2017 Bulk commodity prices (i.e. iron ore) shows greater volatility than base metal prices and therefore has greater impact on industry performance. Australian commodity prices for base metals increased by 15.3% in the 2017 calendar year while bulk metal prices declined by 14.7%. 8 Mining commodity prices declined in 2017 however prices recovered in the latter half of the year, showing an uptick from July to December 2017 of 8.8% 7. * Base metals refers to aluminium, lead, copper, zinc and nickel **Bulk commodities refers to iron ore, metallurgical coal and thermal coal +35% +64% +33% +41% Capital expenditure Debt repayments Operating cash flow Dividend repayments Across Australia s largest 50 ASX listed companies with a market capitalisation less than $5 billion, cash flow generated from operations increased by 33% in the year to June 2017. Higher operating cash flow allowed mid-tier mining businesses to increase capital expenditure by 35%, increase dividend repayments by 41%, as well as pay down 64% more debt relative to the previous year. 7 RBA I2 Commodity Prices

Spotlight on Western Australia Western Australia remains a large global player in mining services, accounting for: world iron ore 37.5% production 6.0% world gold production 9.0% world liquid natural gas WA mining exports by country UK 3.8% Germany 1.3% India 1.5% China 49.7% Hong Kong 8.0% Sth Korea 5.5% Japan 13.0% Taiwan 1.5% Singapore 2.2% Indonesia 2.0% *Other 11.4% Source: WA Department of Mines, Industry Regulation and Safety Despite mining investment continuing to fall, WA recorded 8 : 4.0% 18.1% rise in mining employment rise in exploration expenditure 15.1% rise in gold employment 8 Government of Western Australia: Department of Mines, Industry Regulation and Safety 2017 9

What challenges does the industry face? Mining for efficiency: Falling revenue in some sectors What does the future hold? In the future, we are likely to see an increased industry focus on 9 : Production Efficiency through automation Outsourcing Artificial intelligence Forecast low iron ore prices until 2031 reinforces the need for increased productivity Potential rising interest rates may weaken international demand for mining exports Environmental sustainability - increased need to comply with government regulations Robotic technology and the internet-of-things is expected to impact employment, accident rates and digging costs in the mining industry over the next three years, with robots predicted to replace more than 50.0% of miners by the year 2020 10. According to consultancy BDO, half of the miners affected will be retrained to run the technology controlling the robots. While global economic growth is expected to improve, concerns remain about China s GDP with revised forecasts in 2018 0.4 percentage points lower than previously estimated as the government tries to curb soaring house prices and risky borrowing - therefore pushing up lending costs. Weak capital raising environment will create greater barriers to entry Technology is set to birth a new era of mining with jobs in remote operations, maintenance, software development, data processing and data analytics expected to curb labour costs while bolstering efficiency and decision-making capabilities. 10 9 IBIS 2017 10 BDO Energy 2020 Vision Report

Where do the opportunities lie? The evolving car industry is fuelling a lithium boom: Technology paves the way Australia is the world s largest lithium producer Growing use of batteries for portable devices, tools, vehicles, as well as having grid storage applications to fuel the industry Potential to grow other industries such as battery manufacturing as Australia mines all minerals required in battery production There is an opportunity for mining tech support services or start-ups to increase efficiency in the sector. The onus, however, is on these start-ups to communicate their value proposition to the established companies considering adopting these new technologies. Lithium mine production by country (metric tonnes) Australia Chile Argentina China Zimbabwe Portugal Brazil 0 3,000 6,000 9,000 12,000 15,000 Source: Investing News Metric tonnes 11

Forecasted industry growth The total mining sector is forecast to grow by 5.2% in the five years to June 2022 11. Copper, oil and gas will make up a greater share of industry revenue, while revenue from black coal and mining support services is forecast to make up a smaller proportion. Forecast revenue growth by sector, 2017-2022 Iron ore mining Black coal mining Oil and gas extraction Copper ore mining Gold ore mining Nickel ore mining Petroleum exploration Mining support services -21.6% -1.8% -12.4% 2.2% 19.7% 25.2% 22.6% 65.4% There are signs of recovery as the market saw a subtle uptick in growth in the 12 months to November 2017. Oil and gas sits well ahead of the broader industry with the strong forecast likely due to growth in LNG (liquefied natural gas) export volumes to Asia 12. 12 Source: IBIS 2017 Projected commodity prices (USD) Coal Aluminium Copper Iron ore Lead Nickel Tin Zinc Source: World Bank 2017 11 IBIS 2017 12 IBIS 2017 2018 Heading? 2019 Heading? 2020 2025 Heading? 2030 70.0 1,968 6,118 57.0 2,500 10,559 20,426 3,000 60.0 1,987 6,187 50.0 2,483 11,039 20,629 2,945 55.0 2,005 6,257 50.8 2,465 11,541 20,834 2,890 57.4 2,100 6,618 55.2 2,381 14,413 21,890 2,634 60.0 2,200 7,000 60.0 2,300 18,000 23,000 2,400

13

Sources Aravanis, J. Contract Mining Services in Australia, IBISWorld, October 2017 Aravanis, J. Black Coal Mining In Australia, IBISWorld, September 2017 Allday, A. Copper Ore Mining in Australia, IBISWorld, October 2017 Allday, A. Gold Ore Mining in Australia, IBISWorld, July 2017 Allday, A. Iron Ore Mining in Australia, IBISWorld, January 2017 Aravanis, J. Mineral Exploration in Australia, IBISWorld, September 2017 Allday, A. Mining in Australia, IBISWorld, November 2017 Aravanis, J. Mining Support Services in Australia, IBISWorld, November 2017 Allday, A. Oil and Gas Extraction in Australia, IBISWorld, January 2017 Aravanis, J. Petroleum Exploration in Australia, IBISWorld, August 2017 Australian Bureau of Statistics 8165.0 (February 2017), Counts of Australian Businesses including Entries and Exits, Jun 2012 to Jun 2016, Table 1, available at: http://www.abs.gov.au/ausstats/abs@.nsf/ DetailsPage/8165.0Jun%202012%20to%20Jun%202016 Australian Bureau of Statistics 8155.0 (May 2017), Australian Industry, 2015-16, Mining operations, available at: http://www.abs.gov.au/ausstats/abs@.nsf/ DetailsPage/8155.02015-16 Australian Bureau of Statistics 6354.0 (November 2017), Australia, Nov 2016 to Nov 2017, Mining, Table 4, available at: http://www.abs.gov.au/ausstats/abs@.nsf/ DetailsPage/6354.0Nov%202017 Government of Western Australia, Department of Mines, Industry Regulation and safety, Economic Indicators, 2017 McHugh, B. Mining jobs increase across Australia on the back of surging commodity prices, Australian Broadcast commission, July 2015 Reserve Bank of Australia, Index of Commodity prices, January 2017 Padhy, S. 8 Top Lithium-producing Countries, Lithium Investing News, August 2017 PWC, Aussie Mine 2017, 2017 Yao, K. China s economy seen growing 6.8% in 2017 and 6.4% in 2018: Reuters Poll, Reuters, October 2017 World Bank Group, Commodity Markets Outlook, Washington, October 2017 14

At Bankwest, we know that Business Banking is about more than just financial solutions. We provide banking solutions to many of Australia s leading businesses, including those in mining services. Whether you require straightforward banking or a more customised solution, our team of experienced banking specialists can help. Speak with one of our Business Banking Specialists today. Call us on 13 7000. 15

The information contained in this report is of a general nature and is not intended to be nor should be considered as professional advice. You should not act on the basis of anything contained in this report without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this report. 16