Australian mining: Down but not under

By Laura Syrett
Published: Thursday, 22 October 2015

The Australian resources sector is adjusting to lower commodity prices, which have necessitated a revision of cost structures and spending plans. IM gets a feel for the industry’s sentiments and looks at how the country’s miners are making plans to do business in a post-supercycle environment.

The notion that the Australian mining industry is digging itself out of a hole has become something of a cliché over the last few years. Although it is a convenient expression for describing a country that lost its shirt after the collapse of the global resources boom, it is not an altogether accurate depiction of what Australia’s resource sector is trying to do.

"People aren’t talking about recovery anymore, so much as stability," Ian Chalmers, managing director of diversified miner, Alkane Resources Ltd, told IM.

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Long road ahead: Commentators on the Australian mining sector believe 
the industry may struggle for some time yet. (Source: Island Home)

Alkane is developing the Dubbo zirconia project (DZP) in New South Wales (NSW), from which it expects to produce rare earths and hafnium as well as zirconia. It also operates the Tomingley gold project, from which a modest but steady stream of revenue help keeps its other activities afloat.

Like many seasoned Australian explorers, Chalmers is an indomitable optimist. "I think the mining industry is in good shape," he said. "We’ve come out of a construction boom, which is what caught everyone’s attention (…) but a lot of companies are working their way through it – we haven’t seen many company failures."

This point is difficult to argue with. Although headlines in the Australian and global media tend to fixate on the decline in iron ore prices, asset sell-offs and idle drilling rigs since fallout from the collapse of the commodities supercycle, the Australian Securities Exchange (ASX) has seen fewer mining company de-listings (or threatened de-listings) than Canada’s Toronto Venture Exchange (TSX-V) in the last two years. Most juniors seem to be lying low, rather than throwing in the towel.

Furthermore, the nosedive in the cycle has yielded some positives for Australia’s mining sector. The low value of the Australian dollar benefits companies signing sales contracts denominated in US dollars and the abandonment of mining projects has freed up labour, expertise and drill rigs for others. The country is also regaining control of its cost structures, which many believe climbed to unsustainable levels at the height of the mining boom.

Politically, the country has had yet another change in its leadership in the last year, however few are concerned about the stability of Australia’s governance.

"We’ve had a change of Prime Minister, not a change of government," said John Atkins, agent general for the Western Australian Government Office in Europe (WAGO). "Broadly speaking we expect policies towards the resource sector to remain fundamentally the same – maybe with some tweaks."

Others are less equivocal. "The latest change of leadership in Australia, with a pro-business focus and desire to positively engage with north and Southeast Asia, has enhanced Australia’s attractiveness to investors," Greg Baynton, managing director of investment advisory group, Orbit Capital, told IM.

As well as his capital raising function, Baynton is also executive director of Graphitecorp Ltd, a young exploration company involved in the development of the Mount Dromedary graphite deposit in Queensland. At the time IM went to press, the company was on the cusp of its initial public offering (IPO) on the ASX. 

Like Chalmers, Baynton points to the fact that the cool-down in construction has deepened and cheapened the pool of equipment and skills for those that remain in the resources business.

"There is a greater availability of labour and expert consulting services than at any time in the past three years, plus an abundance of idle drilling rigs and a reduction in exploration costs," he said.

Bringing costs down

When the last Australian mining boom was in its ascendancy, average wage growth in the country stood at more than 4% per annum. This figure is reputed to have been even higher in the mining sector, since wage inflation on the service industry-led east coast rose a lot less rapidly, bringing down the average.

Other costs, such as contracting and equipment, also increased exponentially and miners committed themselves to expenditure levels that were perilously vulnerable to a drop in mineral prices.

According to Australian government figures released in August this year, the pace of wage growth in the country has fallen back to 2.3%. For the mining sector, this softening of labour costs is vital if the industry is to adapt to lower sales revenues.

"Industry is getting used to $50-$60/tonne as a price for iron ore," Atkins told IM. "These prices are aligning with historical levels and companies are having to work out how to run their businesses on this basis."

Atkins admits that the readjustment to more moderate commodity prices has been painful for miners, but notes costs are now coming down and that there has been a real and necessary reining in of spending. 

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Liberal Party MP Malcom Turnbull (far left) replaced 
Tony Abbot as Australia’s Prime Minister in September 
2015, in a political coup of the kind that has become 
a characteristic of Australian politics. 
Malcolm Turnbull MP 

Although few dispute that mining and related support jobs were shed fairly liberally soon after commodity prices came off the boil, overall, employment in Australia has remained reasonably steady. Government figures for unemployment in September showed that the jobless rate stood at 6.2%, unchanged from the previous month, and up by more than 230,000 jobs on a year ago.

Australia has also been able to export much of its mining expertise abroad, particularly to Africa, where ASX-listed companies are among the best represented in the continent’s exploration sector.

Western Australia

As Australia’s biggest mining state, Western Australia (WA) tends to hog the column inches when it comes to news, good or bad, about the Australian resources sector.

Its economy has historically been heavily dependent on the commodities it produces and mostly ships out to foreign markets. The state’s economic growth, measured as gross state product (GSP) has been hit hard by falling demand for iron ore in particular. 

WA’s real GSP rose 5.5% in the financial year 2013-14, above both the previous year’s growth of 4.6% and the 10-year average of 4.9%. However, this figure is expected to fall back to 3.25% in the financial year 2014-15 and to 2% the year after – the slowest pace of expansion in decades.

The state was stripped of its AAA+ credit status by ratings agency Standard and Poor’s (S&P) in 2013 and in April this year, it looked like its AA+ status could be under threat. Although WA has since pulled itself off S&P’s "negative watch" list, in mid-October, Moody’s Investor Services issued a report warning that the state’s fiscal performance will be "challenged" by low commodity prices.

"[WA’s] plan to eliminate its budget deficit by 2019 will largely depend on it achieving targeted cost cuts, as a further slowdown in revenues remains a risk," Moody’s said in its report, entitled "Western Australia Confronts a Slowing Resource Sector", highlighting slowing Chinese demand for WA commodities.

Moody’s did however point out that "rising exports of iron ore as new production comes on line will partially offset this weakness over the medium term", adding that WA’s budgetary flexibility on tax and spending will support its plan to move into a surplus by FY2018/19. "WA will need political resolve to hit its fiscal targets. The state’s ability to reduce spending and manage a more volatile revenue base will be critical to achieving its fiscal targets," it said. 

Atkins is stoical about the moderating pace of economic growth and said that the slowdown reflects a settling, following the frenzied pace of expansion in its mining sector up until 2012. "From a WA perspective, we’re just progressing through the cycle. Both iron ore and gas have been through a significant investment phase and we are now at a stage where that cycle is maturing," he says.

"Neither Rio Tinto nor BHP have finished their projects – people keep talking like it’s over, but it’s not over yet. We are shifting from a period of intensive development to long-term production, in iron ore and gas. Once these major projects are complete, we will have 30-40 years of production just from the latest phase of investment."

Most of what WA exports is in crude, bulk form, commanding lower prices than for refined materials. From an industrial minerals perspective, two relatively high profile mining projects with mining sites in WA have chosen to locate their beneficiation capacity abroad.

Rare earths miner Lynas Corp., which operates the Mount Weld Mine south of Laverton in south-central WA, capable of producing up to 66,000 tpa rare earths concentrate, chose to locate is refining facility – the Lynas Advanced Material Plant (LAMP) – in the Malaysian port city of Kuantan.

Altech Chemicals Ltd, which is developing the 65m tonne Meckering aluminous clay deposit 130km to the east of Perth, has likewise opted to locate its further processing operations for producing high purity alumina (HPA) Malaysia, in the city of Johor.

Speaking to IM, Jingyuan Liu, Altech’s general manager of operations, outlined the company’s reasons for building its processing capacity abroad. "Malaysia is a modern and politically stable country, English is the business language and it is close to both Australia and the Asian markets (…) Also, Johor has a broad industrial base, a large pool of skilled workers and overall operating costs are around 40% less than those in Australia," he said.

Although a number of mining companies companies, including leading mineral sands miner Iluka Resources Ltd, which owns a number of deposits in WA’s Perth Basin, do process their material locally prior to exporting it, there is scope for much more of this activity.

Atkins says that the WA government would welcome an increase in beneficiation capacity in the state. "WA would like to see more mineral processing going on locally but that hasn’t happened so far."

Technology and big data

Although processing capacity isn’t taking off in Australia, other types of technology seem to be flourishing in the downturn. These include new laser mineral analysis for enhancing exploration and driverless trucks, as recently touted by Anglo-Australian miner, Rio Tinto Plc, as well as satellites and remote sensing applications developed by mining technology specialists.

Consultancy service PricewaterhouseCoopers (PwC) has been investigating how large amounts of "big data", collected during mining projects can be used more effectively to yield outcomes. 

"The key process with big data is one of turning data into information and ultimately into actionable insights, rather than just collecting and storing data for its own sake," says Chris Stevens, WA Consulting Mining leader for PwC.

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Australia is a famous mining nation, home to sites 
such as the Kalgoorlie-Boulder Superpit gold mine. 
(Source: Matthew Perkins)

"The main difference between traditional data and big data is what we often refer to as the 'three Vs’, namely the volume, velocity and variety of data. For example, a modern haul truck may have in excess of 200 IP addresses each transmitting information constantly to a remote operations centre. When extrapolated over a large mining operation with tens of haul trucks, this alone creates a powerful data challenge."

Productivity, especially heavy mining equipment fleets, is one of the chief areas where miners have been focusing on the insights generated by big data. A recent PwC study indicated that of miners surveyed, 92% of companies operating in the top quartile of mine fleet productivity use, analyse and communicate their fleet productivity data on a daily basis. 

Although such sophisticated big data and data analytics systems sound expensive, Stevens says that PwC has seen many cases where a data strategy can be developed in ways that have a significant return on investment at a cost affordable to small mining operations. 

"Mining companies have traditionally been very willing to adopt new technologies, but often these technologies have been developed by individuals within the industry to solve very narrow problems," said Stevens. "Excellent examples of these technologies would be the software used in resource and reserve estimation and mine design and planning. Adoption of technologies developed outside of the mining industry has been hit and miss, because they are often poorly suited to the inherent complexities of the mining industry or they have failed to adequately convey benefits to potential mining customers."

Industrial minerals

For a long time, Australia’s industrial mineral industry has been the poor relation of its iron ore, coal, gold and natural gas sectors.

The country hosts an array of high quality non-metallic mineral deposits, including aluminous clay, barite (barytes), graphite, lithium, mineral sands, rare earths and silica. However, to date, many of these resources have been unexploited, despite having been identified, owing to their relatively low value and a greater emphasis on metallic minerals.

Given the current dip in the resource economy and fragile investor sentiment towards mining, it might seem a risky time to launch new mining ventures – particularly ones aimed at niche markets.

Orbit Capital’s Baynton however believes that the time is opportune for a new industrial mineral project. "There are investors, governments, farmers and environmental lobby groups who are fed-up with energy projects – such as coal, unconventional and conventional gas. In relation to industrial minerals projects, I am hearing government representatives and investors say 'at least it’s not coal or petroleum – we’re interested,’" he told IM.

He also pointed out that state governments are generally keen to encourage new projects that will pay royalties and create employment in their jurisdictions. "I think there are improving opportunities and support for new boutique industrial minerals projects, particularly supplying niche markets. Now is an unusually favourable time to be starting a new project, given the adjusted cost structure, availability of drilling rigs, labour, services and favourable governments."

Chalmers however believes that the success of Alkane, to date, lies in the fact that the company has a polymetallic project, capable of yielding a diverse revenue stream, and because it has been in the business for some time. "We did the feasibility study [for the DZP] back in 2002, when rare earths prices were even worse than they were now," he said. Alkane has been running a pilot plant on Dubbo ore for the last seven years, enabling it to ship samples to customers and take its time about exacting improvements.

Even though Alkane is well ahead of many of its peers, Chalmers does not expect the DZP to reach full production until 2020, with project financing due to be settled over the course of the next year or so. He is not relying on a return to 2011 spike level prices for rare earths either, and commentators on other commodities are beginning to present similarly conservative outlooks.

"In the iron ore market, while demand side increases could lead to increased prices, given the increase in supply that has come online in the past two-to-three years, any effects of say, a stimulus in China, would likely be significantly more muted than the highs seen in 2011-2012," said PwC’s Stevens.

While buoyant about Mount Dromedary, Baynton is also sober about the prospects for Australian minerals on the whole. "Even with the falling costs of production here, because of supply-demand imbalances and sentiment towards major energy and resources projects, almost everything else in the mining and energy sectors looks very difficult for at least the next year," he said. 

Australia’s industrial mineral mines and exploration projects

Mineral

Company

Project name (exploration project [EP] or mine [M])

State/Territory

Aluminous clay

Altech Chemicals Ltd

Meckering (EP)

WA

Antimony

Anchor Resources Ltd

Bielsdown (M)

NSW

Antimony

Artemis Resources Ltd

Eastern Hills (EP)

WA

Antimony

Bracken Resources Ltd

Hillgrove (M)

NSW

Antimony

Mandalay Resources Ltd

Costerfield (M)

VIC

Antimony

Northwest Resources Ltd

Blue Spec (EP)

WA

Antimony

Precious Metal Resources Ltd

Halls Peak (M)

NSW

Barite (barytes)

Unimin Australia Ltd

Oraparinna (M)

SA

Bauxite/mineral sands

Metallica Minerals Ltd

Cape York (EP)

QLD

Bentonite

Australia Pacific Coal Ltd

Mantuan Downs (EP)

QLD

Bentonite

Arumpo Bentonite Pty Ltd

Arumpo (M)

NSW

Bentonite

Minerals Technologies Inc./AMCOL

Gurulmundi (M)

QLD

Bentonite

Sibelco

Gurulmundi (M)

QLD

Fluorspar

Niuminco Group/TNT Mines Ltd

Moina (EP)

TAS

Graphite/barite/magnesite/phosphate

Archer Exploration Ltd

Campoona/Sugarloaf/Edicara/Eudunda/Leigh Creek/Worlds End/Australia Plains (EP)

SA

Graphite

Buxton Resources Ltd

Yalbra (EP)

WA

Graphite

GBM Resources Ltd

Mt Margaret (EP)

TAS

Graphite

Graphitecorp. Ltd

Mt Dromedary (EP)

QLD

Graphite

Lamboo Resources Ltd

McIntosh (EP)

WA

Graphite

Lincoln Minerals Ltd

Kookaburra Gully (EP)

SA

Graphite

Lithex Resources Ltd

Plumbago/Munglinup/Moolyella/Shaw River/Pilangoora/Furniss East/Eyre Point (EP)

NSW/WA/SA

Graphite

Sayona Mining Ltd

East Kimberley (EP)

WA

Graphite

Valence Industries Ltd

Uley (M)

SA

Lithium

Galaxy Resources Ltd (Sichuan Tianqi Lithium Industries Inc.)

Mt Cattlin (M)

WA

Lithium

Lithium Australia

Pilangoora/Yilgarn Craton (EP)

WA

Lithium/mineral sands

Neometals Ltd

Mt Marion/Barrambie (EP)

WA

Lithium

Pilbara Minerals Ltd

Pilangoora (EP)

WA

Lithium

Talison Lithium Ltd (Sichuan Tianqi Lithium Industries Inc./Albemarle Corp.)

Greenbushes (M)

WA

Magnesite

Beacon Hill Resources Plc

Arthur River (EP)

TAS

Magnesite

Causmag International Ltd

Thuddungra (M)

NSW

Magnesite

Queensland Magnesia Ltd (Sibelco)

Kunwarara (M)

QLD

Magnesite

Thesally Resources Pty Ltd

Rum Jungle (EP)

NT

Mineral sands/rare earths

Alkane Resources Ltd

Dubbo Zirconia Project (EP)

NSW

Mineral sands

Cristal Mining Australia Ltd

Atlas-Campaspe/Kemerton/Australind (EP/M)

NSW

Mineral sands 

Diatreme Resources Ltd

Cyclone (EP)

WA

Mineral sands

Gunson Resources Ltd

Coburn (EP)

WA

Mineral sands

Iluka Resources Ltd

Balranald/Tuntup/Cataby/Yoganup/Jacinth Ambrosia/Atacama/Sonoran/Tripitaka/Typhoon (M/EP)

NSW/WA/SA

Mineral sands

Image Resources Ltd

Boonararring/Atlas/Eucla Basin/Chandala/Woolka/Winooka

WA

Mineral sands

MZI Resources Ltd

Keysbrook/Tiwi Islands

WA/NT

Mineral sands

Sheffield Resources

Dampier/Thunderbird (EP)

WA

Mineral sands

Sibelco

North Stradbroke Island (M)

QLD

Rare earths

Arafura Resources

Nolans (EP)

NT

Rare earths

Hastings Rare Metals Ltd

Yangibana (EP)

WA

Rare earths

Jaguar Minerals Ltd

Mt Jukes (EP)

Rare earths

Lynas Corp

Mt Weld (M)

WA

Rare earths

Northern Minerals Ltd

Browns Range (EP)

WA

Rare earths

Spectrum Rare Earths

Skyfall (EP)

NT

Silica/HPQ

Creswick Quartz Ltd

Creswick (M)

VIC

Silica

Tasmanian Advanced Minerals Ltd

Wynyard (M)

TAS