Projects in the Pipeline: Australia — a sleeping giant?

By Siobhan Lismore-Scott, Laura Syrett
Published: Tuesday, 02 July 2013

Although somewhat overshadowed by its traditionally-recognised abundance of metallic, precious and fuel minerals, Australia’s importance as an industrial minerals source should not be sniffed at.

The Australia we know today has been largely shaped by its mineral industry: topographically, culturally and economically.

From the feldspar-rich sandstone that gives Uluru its distinctive red glow, to the gold-rushes of the 1850s which lured in hopeful settlers from all over the world, to the vast reserves of iron ore and coal staked by mining titans such as Rio Tinto and BHP Billiton, the nation’s mineral wealth has long been its crowning glory.

Although somewhat overshadowed by its traditionally-recognised abundance of metallic, precious and fuel minerals, Australia’s importance as an industrial minerals source should not be sniffed at.

The country hosts huge, though often under-exploited, deposits of graphite, silica sand, ilmenite, zircon, lithium, rare earths, kaolin, bentonite, phosphate and salt, to name but a few.

While many of these resources are yet to be commercially extracted, inroads have been made in certain sectors (see table).

Belgium’s Sibelco Group has a large-scale silica sand mining operation on North Stradbroke Island off the coast of Queensland, and Australia Minerals and Mining Group Ltd (AMMG) is exploring for mineral sands and kaolin in Western Australia’s Perth Basin.

In rare earths, Lynas Corp. has succeeded in becoming one of the only suppliers of the minerals outside China with production from its Mount Weld mine in Western Australia, and South Australia’s Eyre Peninsula is reputed to be on the cusp of reviving its historic graphite industry.

But since IM last ran a feature on Australia’s industrial mineral resources (April 2010, Land of Plenty), the country’s mining industry has waved goodbye to the resource boom that lent credence to its contemporary optimism.



Counting the cost of the boom

Like much of the rest of the world, Australia has seen the prosperity of its resource operations decline sharply since 2011, hit by falling mineral prices, dwindling ore grades and a loss of investor confidence.

This has been compounded by a raft of tax measures which have saddled the industry with an unwanted handicap in what is already a fiercely competitive international business.

According to Stephen Reid, an Australia-based partner with the global professional services firm Deloitte, Australia’s mining industry is still paying the price of previous bullish behaviour which contributed to a global commodity supercycle.

The supercycle saw commodity prices and mining investment peak in 2011 at what have since proved to be unsustainable levels. When the inevitable downturn eventually came in 2012, it left many miners with expenditure commitments that they are now unable to meet.

“Capital is in short supply, with the main emphasis now being on the efficiency and effectiveness of existing assets. Most companies are focusing intently on [cutting] costs out of their operations, as well as starting to tackle the much harder challenge of increasing productivity,” Reid told IM.

He added that miners are targeting portfolio returns and rationalisation in order to improve their balance sheets. “Only high-quality, strategic projects [are] proceeding, aside from a few that were committed to over 12 months ago,” he said.

Reid said that a number of projects have been closed over the past year as trading conditions have become more difficult, but noted that most operations have simply been mothballed and could be reopened when conditions improve.

The high value of the Australian dollar has also been a problem, Reid said, particularly given the current weakness in commodity prices. However, recent declines in the currency’s value are beginning to restore the competitiveness of Australian mineral exports.

Community opposition

A further challenge for Australian mining has come in the form of increased community opposition to resource development.

On North Stradbroke Island, a 38km-long sand island off the coast of Queensland near Brisbane, mining has been the subject of controversy since the second half of the 20th century, when ecological protection groups began to campaign against habitat depletion caused by industrial development of the area.

At Sibelco’s silica sand mine on North Stradbroke, local action groups have accused Sibelco of mining sand illegally.

Environmentalists, backed by the group Friends of Stradbroke Island, have obtained legal opinions that Sibelco and its predecessor companies, including Consolidated Rutile Ltd and Iluka Resources Plc, have stolen an estimated A$80m ($74.1m*)-worth of sand from North Stradbroke during their years of operation.

Earlier this year, a local magistrate found that Sibelco had a case to answer on two charges of illegal sand mining, and ordered the company to pay more than A$250,000 in legal costs.

Sibelco has launched a Supreme Court challenge to the prosecution, and said that it is “committed to long-term sustainable operations on North Stradbroke Island,” a stance which is backed by Queensland’s Premier, Campbell Newman, who has pledged to allow mining on the island to continue until 2027.

Elsewhere, attempts to restart operations at the mothballed Hillgrove gold-antimony mine in New South Wales have been repeatedly scuppered by obstacles including community resistance on environmental and social grounds.

Although the mine does now look set to reopen under its new owner, Bracken Resources, earlier plans to restart Hillgrove failed partly because local councils highlighted the risk of antimony-run off into the Macleay River catchment, which includes national parks and agricultural land.

Other concerns have centred on the disruptive impact mining has had on the local community of Armidale. Past operators of Hillgrove have brought staff in on a short-term basis to work the mine in so-called FIFO/DIDO (fly in, fly out/ drive in, drive out) arrangements, disrupting the lives of residents while failing to create jobs in the area.

Bracken, which purchased Hillgrove earlier this year from Straits Resources, has sought to allay fears on both environmental and social fronts, with its CEO, Roger Jackson, promising to operate the mine responsibly.

“We’re cleaning up the site to ensure there are none of the older [environmental] legacies that caused problems in the past,” said Jackson, addressing concerns about the mine’s history of pollution.

Jackson also assured Armidale residents: “We aren’t looking at a fly-in, fly-out operation. This means some people will move to Armidale, while we’ll locally source other positions”.

The FIFO/DIDO debate

FIFO/DIDO arrangements are not uncommon in Australia, and are often seen as the only workable solution where remote locations and harsh terrain make mine sites unattractive or even impossible places for workers to settle.

“In many cases, it just isn’t practical for people to live out at mine sites,” John Clout, a Perth-based independent iron ore processing specialist who has lived and worked at several isolated projects in the Pilbara, and other parts of Western Australia, told IM.

Aside from meteorological extremes of working in a remote desert landscape like the Pilbara, which can see temperatures consistently over 40¡C for months at a time, Clout said that settlements in the Pilbara and Australian mid-west are often ill-suited to family life.

“Usually, only one spouse [who is employed on the mining project] can work,” Clout explained, “and the educational services for mine-workers’ children, if there are any, tend to be elementary at best.”

Although commonly seen as the most practical option, the negative impacts of FIFO/DIDO include high labour costs for mining companies, disruption to the communities where they operate, and the failure to bring in sustainable infrastructure development that would benefit long-term residents.

While individual mining companies are under pressure to promise social benefits in mining areas, Australia’s government is also taking the issue of transient mining communities seriously.

In a parliamentary report released in January entitled Cancer of the Bush or Salvation of Our Cities, The Standing Committee on Regional Australia recommended the removal of tax benefits for mining companies using mobile workforces.

The report was compiled over an 18-month period and made 21 recommendations to government and 14 to industry about how to improve mining operations in remote regions. It focused in on the Pilbara, which has large iron ore and salt depositsoperated by Rio Tinto, and is also home to Altura Mining’s Pilgangoora lithium project (see table).

The findings of the Cancer report received a mixed reaction from the Australian government. Most affirm that FIFO and DIDO arrangements are a necessary way of life in Australia, while others have called for better infrastructure in remote areas, which will make it feasible for more permanent settlements to be established.

Australian costs bite

Australia’s high labour costs have figured largely in firms’ decisions to automate large parts of their operations, or to buy in ore supplies from elsewhere to save on wage costs at their own mine sites.

Over the past few years, Australia has also seen the introduction of a number of controversial resource taxation policies (see pp52-55), including a carbon tax, a diesel tax, and the Minerals Resource Rent Tax (MRRT), which have made the country one of the most expensive jurisdictions for mining companies to operate in.

Logistics and energy are also expensive in Australia, with miners either having to limit their choice of project sites according to available infrastructure, or stump up the cash to build roads and power sources to serve their operations.

Sometimes these costs can prove a tipping point for mining projects. This year, two industrial mineral companies have mothballed projects in Australia, citing operating financial pressures.

In January, Penrice Soda Holdings Ltd announced it would be closing its Adelaide soda ash facility and would instead import feed for its Australian operations.

Several factors, including the strength of the Australian dollar, lower international shipping costs, increased energy and labour costs and increasing taxes, made the import of soda ash more than 40% cheaper than producing domestically, Penrice said in a statement.

“These same pressures are also playing out across Penrice’s soda ash customer base (...). Penrice does not see any significant change to these factors occurring in the foreseeable future,” the company said.

Penrice’s decision was followed by lithium producer Galaxy Resources in March, when it revealed that it had signed a three year agreement with Talison Lithium, which owns lithium projects in Western Australia and Chile, to supply its Jiangsu lithium carbonate mine in China.

“Given the current exchange rate and the adverse impact on local operating costs, it is financially a better option to purchase external spodumene today instead of resuming operations at Mt Cattlin,” the then managing director of Galaxy, Iggy Tan, said.

The mothballing of projects has been viewed by some as the start of a worrying trend for the Australian mining industry, and concern is mounting that a country that has rested comfortably on its mineral reserves for more than a century is beginning to price itself out of the supply market.

“With respect to the future of mining in Australia it is fair to say that the industry here has been badly impacted by the rising cost of doing business in terms of wages, power, and transport, as well as the continued threat of new taxes by the current government,” David Fox, study manager for kaolin, base metals and gypsum miner, Minotaur Exploration, told IM earlier this year.

Attracting investment

One of the ways that the Australian government is looking to overcome problems facing mining is by attracting investment in the industry, which it hopes will kick-start a fresh wave of mineral development and confirm Australia’s mining service sector as one of the best in the world.

Two jurisdictions that have taken the lead in this area are Western Australia and the city of Brisbane in Queensland.

Western Australia

In Western Australia, steps are being taken to encourage resource investment in underdeveloped areas through the introduction of the Western Australia Exploration Incentive Scheme (EIS).

This scheme uses royalties collected from established mining companies to help prospective miners develop their projects, and consists of six programmes, which are managed by the state’s Department of Mines and Petroleum (DMP).

These involve improving the tenement application process; awarding drilling grants; making available new resource data from airborne surveys; providing customised reports and maps online; hiring researchers for exploration teams; and working with indigenous communities.

By making Western Australia an easier place to do business, the EIS, which is slated to cost A$80m to implement, is expected to stimulate private sector investment in greenfield exploration projects.

Brisbane

On the other side of the country, the Economic Development Board for the City of Brisbane is also stepping up efforts to draw cash into the resource and energy sectors.

“Our aim is to encourage mining companies to set up their offices in Brisbane, and also to focus on lubricating the supply chain that these companies rely on,” Steven Silvester, director of investment attraction for the board, told IM.

“We want to build up Brisbane as a resource and energy hub by encouraging technology and service firms to establish themselves in the city. We have first class institutions in Brisbane, including the University of Queensland and the Co-operative Research Centre for Mining, so there are great opportunities for companies to engage with these centres to develop the next generation of technology and services,” he added.

Unlike the EIS in Western Australia, Silvester explained that Brisbane’s investment drive would not offer any cash incentives to private firms, but said that the Queensland government was funding work on a state geological survey to map resources in the state, which could then be cherry picked by prospective miners.

Silvester said that Brisbane represents a unique opportunity for resource companies to establish themselves in a fast developing mining and technology centre at the gateway to Asia. “We are hoping to attract technology investment from all over the world, not just Australia,” he said.

*Conversions made June 2013