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Mining in Australia

A broader look at what's happening in commodities...
 
AUSTRALIAN mining companies have been hard hit by falling commodities prices and rising costs. But Petra Capital Analyst Andrew Richards believes his country's resource sector has turned a corner. In this interview with The Metals Report, Richards says that costs are falling and China's need for Australian metals will continue to grow.
 
The Metals Report: A large Australian mining company has announced huge layoffs and capital expenditure cutbacks. Does this signify a crisis in the space?
 
Andrew Richards: "Crisis" is certainly a strong word, but there is definitely a correction occurring in the market. Gold and iron ore in particular have come off their peaks. What we are seeing in Australia is a lot of cost-cutting across the board. That's probably something that needed to happen because labor costs had risen significantly over the last few years due to competition for personnel. The big companies have said that Australia has become relatively uncompetitive because of very high labor and engineering costs.
 
With the fall in some of the commodity prices, companies have had to lay off people where they can and put a stop to some of the planned growth projects. Newcrest was an example of that. Companies are now focusing on cash flow rather than just growth. They want to maintain or improve margins where they can. But I will say I think Australian costs have peaked and are already on their way down.
 
TMR: Australian mining billionaire Gina Rinehart last month accused Prime Minister Julia Gillard of treating the mining industry like an ATM. How much of a threat to the industry is the Labour government's mining tax?
 
Andrew Richards: The mining tax, at this stage, affects only iron ore and coal. And companies need to make a profit of at least $75 million ($75M) before that tax kicks in. It certainly has an impact on big companies. Having said that, the government had estimated significantly higher revenues from the tax than it has received. Maybe that's a reflection of the pullback in commodity prices, particularly iron ore.
 
Moving forward, there is an election in Australia in September, and the polls are saying that the current government will lose. The incoming government, should they win, has said publicly that they would remove this tax. So we'll wait and see what happens in September.
 
TMR: How crucial have offtakes become to companies involved in setting up nonprecious minerals projects?
 
Andrew Richards: They are important; there's no doubt about it. I think there is a window open over the next four to five years for companies to lock in long-term offtakes.
 
TMR: Where do you see iron ore prices going?
 
Andrew Richards: What I've read from some of the larger brokers is that prices are close to the bottom right now. We'll wait and see. Commentators say that stockpiles in China are falling, and there is a real possibility they could look to restock in the second half of 2013, which might help support prices.
 
TMR: What about the Arabian Gulf? Is this region particularly mining friendly?
 
Andrew Richards: It is. Saudi Arabia, obviously, has a long history with oil and gas. However, it is now looking to develop its mining industry to create employment and a more diverse economy. We've seen some companies move into Saudi Arabia in the last five to six years. Saudi Arabia is a good place for investment. Corporate tax for 100% foreign-owned entities is only 20%. There are no royalties. Diesel is just $0.08/liter.
 
Oman has a longer mining history. It is copper rich and has a copper smelter on the coast. Fuel is only slightly more expensive there than it is in Saudi Arabia but is still very cheap.
 
TMR: How much does the economy of Australia depend on Chinese industrial expansion?
 
Andrew Richards: Australia is quite dependent on China because we are still a commodity country, and China now consumes around 40% of metal production across the board. It's a big consumer of our iron ore and coal. There is concern at the moment that China is slowing, but with growth figures of 7–7.5%/year, it still looks pretty healthy. And, of course, China's base is a lot bigger than it was even a few years ago.
 
TMR: How do you stand on the debate over the so-called commodity supercycle? Do you think we can expect it to last for a while longer?
 
Andrew Richards: Yes, I do not think that the cycle is over. Our view remains that China still has a lot of growth ahead of it, and it looks like the US is starting to pick up as well. Hopefully, we'll start to see that come through in the next six to 12 months. Europe still has its issues, but if the US and China continue to grow, then the outlook is pretty positive.
 
TMR: Do you think that the Australian economy's best days are ahead of it?
 
Andrew Richards: Good question. Australia has done well for quite some time. A number of mining companies said that our resource market has become uncompetitive, but we're starting to see improvements. Also, the Australian Dollar had been very strong for a couple of years now, but it's now back down to around $0.94 to the US Dollar. 
 
A weaker currency really positively impacts revenue in the Australian resources industry because commodities are priced in US Dollars. And Australia remains a very attractive place for investment given its low geopolitical risk. Looking ahead, there is a lot to be positive about, and I expect better times from the second half of 2013 onward.
 
I think that investors just have to be a bit more selective. There are a number of projects that are high cost and will struggle, but there are also plenty of attractive projects, including the ones I've mentioned, that will make good money throughout the cycle. And when the cycle picks up again, these projects will do extremely well.

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