KordaMentha's Behind Business podcast discusses the most pressing commercial, financial and operational issues facing business today.
In the latest episode of Behind Business, we are talking about Australia's most lucrative export industry, and one which defines our economy to the rest of the world, Mining.
Transcript
Sean
Welcome to Behind Business, the podcast where KordaMentha experts
discuss the most pressing issues facing business today. I'm
your host, Sean Aylmer an economist and journalist for 25 years and
the voice of the Fear and Greed daily podcast. Today, we're
talking about Australia's most lucrative industry, at least in
terms of exports, and an industry which defines our economy to the
rest of the world, mining. Iron ore, coal and LNG captured the
headlines. But Australia is among the world's leading producers
of bauxite, alumina, uranium, lead, zircon, lithium, and zinc. Our
history is littered with gold rushes, but Australia is only the
fourth largest producer of the precious metal. It invests huge
amounts of money over long periods of time and has a laser focus on
safety. And it's a vital part of so many communities around the
country. It's also an industry struggling with its social
license to operate and its impact on the environment.
Sean
To talk to us about the history, the present and the future of
mining in Australia, we have KordaMentha Partner, Richard Tucker
joining me from the Perth office, and Julian Derrick Executive
Director Restructuring joining me from Sydney. Welcome to Behind
Business.
Sean
Now let's begin by getting a sense of the size of our mining
industry. Richard, how many businesses, employees, dollars,
directly involved in mining in Australia?
Richard
I'm based in Western Australia where ultimately you either dig
it, build it or crop it. And mining would be the biggest
contributor to the WA economy, approximately 35 to 40% of the WA
economy and very material for Australia as a whole. But from a pure
mining related basis, revenue from mining companies is
approximately $285 billion, is approximately 8,000 businesses and
about 170,000 Australians employed in those operations, equating to
about $28 billion of wages. So very, very significant. Separate to
that there's a number of other service providers and companies
that hang off these businesses such as catering, transport, and
machine shops, just to name a few. Which highlights the importance
of the mining industry in Australia.
Sean
So Julian, it's not just the miners themselves, it's also
the ecosystem of services and companies around mining that's
impacted as well.
Julian
That's right. This is a sector that provides 68% of Australian
exports. There's roughly 10 billion of revenue for businesses
that directly support mines, but you could roll that down to the
second tier and the third tier suppliers right the way down to
transport. And you have an enormous infrastructure that sits around
the mining sector that is impacted each time the commodity prices
go up and down because often these more discretionary spends are
the first to be cut or first to be brought on each time there is a
movement up or down in a commodity price.
Sean
Richard, in terms of the process of mining, do all miners find it,
dig it and ship it?
Richard
Look, I mean, ultimately each commodity and each oil body has a
slightly different process. The reality is over the past probably
10 to 15 years, and it has come off recently, but there has been a
very significant investment in capital expenditure. You've seen
the mega projects in the LNG space off West Australia. You've
seen very significant ramp up sort of pre 2014 in the iron ore
space. And so along with that, you've seen differing degrees of
infrastructure, which can include onshore processing in some
commodities and, or it's just simply we dig it, we crush it and
it's shipped to be processed off shore.
Sean
Richard, staying with you is iron ore the biggest commodity?
Richard
That's right. I mean, certainly from a West Australia
perspective, iron ore is key, it is the number one export commodity
from the whole of Australia with coal accounting for about 23%, so
iron ore is about 31%. Beyond that, it's the sort of oil and
gas. There's been a significant amount of funds spent in that
space, developing projects, the mega projects, obviously all that
happened pre the wash out that's come as a result of COVID and
what that means for oil prices going forward. But yes, I know is
the critical commodity for Australia with nearly all of it coming
out of Western Australia. Australia is very fortunate at the
quality and the grade of the iron ore that it has available. And
what we've seen over the last 10 or 20 years is just a
significant demand out of China. And for anyone who's been to
China, it is quite mind blowing to just see the level of
development that's occurred in that country over the last 20
years. It's something that we'll probably never see ever
again, and ultimately fueled the fire for the demand for iron
ore.
Sean
Among all the challenges of COVID-19, it seems that mining has
somehow found a way to keep trading. You're both actively
involved in working with clients in the sector. Julian, how has
mining been operating during the past six months?
Julian
Well, I think it's been an enormous success story for the
sector. The fact there's been no onsite outbreak of COVID 19
seemed amazing. Looking back now, it's been a real achievement
for Australia to keep this crucial sector working. I know that the
thought processes that have gone into making sure COVID stays off
the work sites has been, right down to the granular level of making
sure that food that's served on the planes that go out to the
fly in fly out sites has been prepared in a safe environment or
simply not providing it at all. I mean, they really have gone down
to that granular level to make sure everything worked.
Sean
I suppose when you think about mining, it brings about images of
brave entrepreneurs taking massive bets, winning, losing. The real
story though seems to be much more about safety being the first
priority, risk management, cost discipline, kind of more process
driven. Julian, is that right?
Julian
Yeah absolutely. The most important thing with safety culture is
that it isn't lip service. Every day when each mine manager
arrives at site, he says, how am I going to keep my people safe
today? And that is very much part of the Australian mining
culture.
Sean
Richard, do you agree that safety is the first priority for
mining?
Richard
From a mining perspective, employees are such a critical piece of
the puzzle in ensuring a successful outcome. And ultimately any
project when it first is getting ready for production or starting
to come into production, there is inevitably going to be processing
or other issues. And having continuity of employees who have been
through that learning process or able to go through that learning
process from the start of ramp up to actually delivering ramp up is
absolutely critically important in our view. And so if you treat
the employees poorly, if their wellbeing and safety isn't well
looked after, you're just not going to hold on to those key
staff.
Sean
Mine is such a capital intensive industry. Richard, what are the
capital constraints like at the moment?
Richard
Yeah, it is clearly a very capital intensive business and sector.
We certainly seeing it's a tale of what commodity you're
in. So for example, gold is extremely hot at the moment. And if you
look back 18 months ago, a junior gold miner was unable to raise
capital in any significant form, whereas you sort of fast forward
and there is just a wall of money from global sources and locally
chasing investment in the gold sector. So what you're seeing is
these explorers trying to transition into a development assets, so
transitioning from the exploration into development and then
ultimately into production, have actually been able to access
capital. I think the challenges that that brings is that the
reality is it takes a special kind of management team to take a
project from concept into production. And it's going to be
interesting how a number of these management teams deliver those
projects within the budgets and within the constraints of the cash
flows, because that's what investors will be expecting.
Iron ore another commodity which is clearly running hot. It went through a cycle, it came off a cliff in 2014, which was largely expected. The reality is in that period of 2012 to 2014, you saw a number of smaller operators coming online and ultimately you saw prices come off and come off significantly. And those projects were the first to fall over. Interestingly, you are now seeing some of those projects come back online, but the people that are bringing them back online are trying to keep them to be nimble, such that in the event the price does come off, they're able to shut those operations down.
So look from an iron ore and gold perspective, we are seeing a lot of interest, a lot of money chasing home but then there are other commodities which are facing challenges. So two years, three years ago, lithium was the hottest commodity in Western Australia. You literally had to just put out an ASX announcement as a junior explorer and saying that you found some lithium and your share price would potentially double.
Now the world suddenly turned and turned quite aggressively. It was always expected that the prices would retreat, but it fell and fell very rapidly, which reflects a couple of issues. Number one is that they had challenges with processing clients predominantly in China because that's where it's predominantly processed. And number two is you just had a significant amount of supply coming online all at the same time. So you're seeing some challenges in the lithium space. I expect those challenges will continue, but lithium will recover because it is one of those niche commodities where there is a real opportunity for it down the track.
Sean
Julian, do you have any more on that in terms of specific
commodities?
Julian
Yeah. The one commodity that stands out as perhaps not fitting the
same classes is thermal coal. Whilst coking coal, iron ore, and
others always will have I think access to capital, there is a
different view I think starting to emerge on thermal coal. The
social license for new mines is now difficult to garner from the
Australian public. I don't think the fact that the banks are
pulling out is a big issue for miners generally. I think there are
other sources of capital. But just the rationale for a new coal
mine, thermal coal mine in Australia is getting harder and harder
to put up. And that's a sector that's in long-term decline,
all be it it'll be a glacier pace that it declines at, and
it'll be a very slow and structured decline. But that is a one
commodity that really sticks out as being slightly out of step with
the others.
Sean
Mining needs a license to operate, and with the right to mine comes
a responsibility to the community and to the environment.
There've been some industry challenges recently, we all know
about that. And a social license to operate seems to be
increasingly important. Julian, do you agree?
Julian
Yeah. Critical now for minors. And I think the large end of town
have certainly gotten the message, even if they haven't fully
implemented it yet. You need to operate within a community. If
you're a minor, you need the employees. And often, this is a
mutual process because the communities often are reliant on the
mine as well. So there has to be a good level of understanding and
it has to be a good level of respect between the miner and the
community they operate in. Richard, perhaps you can talk about why
Whyalla and how critical the operations in Whyalla were to that
community.
Richard
Yes, thanks Julian. So Whyalla is a small town in South Australia.
We were involved in the restructure of Arrium Limited, which had a
iron ore mines and a steel processing plant down there. Ultimately
the entire town relied on that steel works and` mining operations.
So without the Arrium operations being there, it would have very,
very significant socioeconomic issues that would flow through the
community. And that becomes multi-generational. And it was very
interesting that when we arrived at that town on sort of day one,
it only took a couple of days to realize that that engagement was
not about saving a company, it was really about saving a town. And
the community were naturally cautious when we first arrived, but
through various initiatives we managed to get them behind us. And
that was a critical piece in the puzzle in ensuring the successful
outcome of that.
Richard
I think at the end, they even did a ticker tape parade and invited
us and Mr Mentha to be at the head of that parade and he got
presented with a key to the city. Which just shows how communities
can really add so much to these operations.
Sean
Fantastic story.
Richard
Look just in relation to the social license aspects. It's
really interesting. What we've seen is really a shift and
it's probably a shift across business more broadly, and
it's starting to cascade from sector to sector. And probably
the first sector that saw this shift in what the public really
expects of a corporate entity in how they operate and engage with
their community was in relation to the banking sector, where
we've had a banking royal commission that ultimately has led to
a complete shift in the way that the banks operate and the way they
engage with the community and their customers. And I believe what
we're starting to see is the beginning of that occurring in the
mining space. And that not only do you need to satisfy your
environmental obligations, but how you engage with your community
and what the public expects of you is becoming a higher bar. And so
you're going to start to see, I think, an ongoing shift away
from purely profit based reporting to softer metrics around how
does the community view you and how do you engage with that
community?
Sean
Yeah. So as part of that, Richard, the environment presumably plays
a huge role. And we're not just talking about starting a new
mine, but actually finishing a mine as well.
Richard
That's correct. I mean, environmental issues are nothing new.
And the standards in Australia, ultimately companies are held to a
high standard. Often when we get involved, the reality is the
company has been through a period where it has been cash
constrained and potentially there have been environmental breaches.
The one thing I'd say is that the different departments of mine
across the different states are actually relatively pragmatic and
commercial. They want to see operations continue, but they want to
see them continue in a safe manner and with appropriate
environmental controls in place. But environmental in terms of
operating within appropriate environmental regulations is an
absolute critical cornerstone of any mining operation and should
continue to be so going forward. I think the public is going to
hold mining companies to a higher bar beyond just meeting the
environmental obligations.
Sean
Julian, do you agree with that?
Julian
Yeah, I think that's right. And I think there's been a real
change in the mindset of state governments around what they're
willing to accept from minors. I mean, we're seeing some
legislation changes in WA to stop some of them past practices where
bonds were completely insufficient to meet liabilities and
effectively the make good on the mine sites wasn't completed. I
think we've seen, hopefully we've seen an end to a lot of
those bad practices. I mean, my first trip out to Kalgoorlie, it
was very noticeable that the rehabilitation only happened on the
side of the road that was facing the mine. And when you kind of
drove around the back, no rehabilitation had been done at all.
Hopefully those kinds of practices are long gone and we can see
much better behavior from miners going forward. But I think
it's important to say that this is something that has to be led
from state government.
Sean
Richard, do you think that institutions, banks and investors will
also force miners to do more?
Richard
I think ultimately banks and investors are going to be part of the
solution that drives change and drives accountability. I think you
have seen a significant shift in the way that people who invest
with some of these funds who ultimately then invest in the
corporates, want their money to be used. And it's not purely
for profit. They want to know that the companies that are receiving
their funds are good corporate citizens.
Sean
Julian, what's yours outlook on the mining sector over the next
five years?
Julian
I think it's a relatively stable outlook for mining in the next
five to 10 years. There will be this forever process of cost down,
which means generally speaking, greater scale and more automation.
They are trends that have been with us now in the mining sector for
a very long time. And equipment will get bigger and more powerful
and there'll be a greater automation with that equipment. But
generally speaking, I think it's a relatively stable outlook
for commodities, not withstanding volatility and commodity
prices.
Sean
Which is part and parcel of running a mine?
Julian
Exactly.
Sean
Yeah. And to you Richard?
Richard
Yeah. I tend to agree with Julian. I expect there will be a period
of stability where certain commodities will become the sort of next
hot thing and others might drop off further or drop off from their
current highs.
Sean
Will China continue over the next decade to be our main buyer or do
you think we will diversify into other, India, Southeast Asian
countries? Particularly for our iron ore I suppose I'm talking
about.
Richard
Yeah. I fully expect that there will be a decrease in reliance on
China. I mean, China will still be a key trade partner in relation
to commodities, but probably the next key growth economy is India.
And there are significant opportunities for our commodities in
those jurisdictions.
Sean
Julian, do you have any more on that one?
Julian
Yeah. I echo Richard's points about diversification from a coal
perspective at least. There's a lot of really strong
infrastructure on the eastern seaboard of Australia, which opens up
other markets other than just China. There's scope to do more
in Korea and Vietnam and other Asian economies.
Sean
So Julian, what are the key points for mining operators to remember
right now to best set themselves up for success, given everything
we've discussed?
Julian
I think I'd always come back to focus on safety and making sure
you've got those safety fundamentals in place, is the absolute
number one goal. And then it's all about having a long-term
look. You have to look through the commodity cycle and make sure
the fundamentals of grade recovery and waste or ratio stack up. And
ultimately those are the critical factors.
Sean
Richard?
Yeah, for me, there's probably two things and they're interlinked. The first is discipline. We sometimes say to go fast, you need to go slowly first. It's all about discipline in my view. And then also cost control. So understand your costs and have control over them because the commodity prices can turn and will turn. And if you're on the wrong side of the cost curve, there is nothing you can do. You are merely a passenger in a global game.
Sean
Richard and Julian, thanks for talking to Behind Business.
Richard
Thank you, Sean.
Julian
Thank you.
Sean
That brings us to the end of today's episode of Behind
Business, the podcast where KordaMentha experts discuss the most
pressing issues facing business today. It's clear that mining
is critical to Australia's prosperity and position as a middle
economic power. It's a diverse industry in terms of both metals
and minerals and geographies. And it has huge flow on effects to
many other businesses that rely on mining.
Iron ore is king, but coal and LNG are certainly part of the royal family. The industry is hugely capital-intensive, has long time horizons and in many respects is at the whim of global markets and prices. The best operators think about safety and processes first. They understand their license to operate and their responsibility to the community and to the environment. It's evolved into the powerhouse of the local economy and will continue to grow over the next decade, reaping the rewards of strong management and a clear focus. It's an industry Australia should be proud of.
In the next edition of Behind Business, we'll talk to KordaMentha about one of the most critical and contentious industries, aged care. I'm Sean Aylmer and that was Behind Business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.