Double whammy for mining growth sector, says Austmine
Australia's vast mining technology and services sector is concerned fallout from continuing uncertainty about the resources super profits tax (RSPT), and the projected heavy toll on mining investment if the tax is implemented, will hit jobs and the recent strong growth in the sector.
"If the miners catch a cold, we're going to get the flu," says Austmine director and CEO of mining consulting firm Optiro, Mark Warren.
Austmine is the leading body promoting Australian mining technology and services exports. It has more than 100 members. The Australian MTS sector directly employs more than 80,000 people and generates sales estimated at more than $A30 billion a year.
"Why I say we'll get the flu is that a large proportion of mining industry spending on plant, equipment, services and technology comes out of capital budgets and this money comes from after-tax profits miners reinvest in projects and expansions.
"Those profits are going to be severely eroded by this RSPT if it becomes a reality.
"Austmine does not typically lobby: it is a promotional body. But we are very concerned about the potential impact of this new tax and our members are already seeing their customers and clients defer capital investment while uncertainty remains about how the RSPT actually works, and because they simply can't finance projects because banks and other investors don't know how to measure the impact of the tax.
"We're [Optiro] at the front end of the mining investment process and our clients are telling us that to international financiers they're off the investment radar at the moment. It's not hard to understand why. Our business is about projects and modeling the financial value of projects and it's pretty hard to get finance when you can't actually tell what the NPV of a project is because you can't model the tax component. Of course when you do make some assumptions and include the tax, many projects are no longer viable. They will not proceed and will be lost to the country – for many decades if not forever"
The Australian mining technology and services sector, which exports an estimated $A6 billion-plus of its wares, is not feted by Australian politicians and financial commentators as an economic pillar as are sectors such as automotive manufacturing, with its estimated (2009) $3.1 billion of exports and 50,000 employees.
But this large and growing sector, which has more than doubled in size in the past decade, was not involved in Australian Government consultations on the RSPT despite the potentially major implications of the new tax regime.
"We've been a very strong sector and we're a strong sector on the basis that we've got good entrepreneurial people, we've got a good academic sector which provides a lot of good ideas, and we've got a good sandpit – an internationally competitive domestic mining industry," Warren said.
"That is clearly now at risk.
"Certainly mining companies that have sunk capital into projects on the basis of an existing tax regime, which now face a different set of rules, are going to have to rethink capital and operating expenditure and that leaves us with the very real possibility that mines are going to be run into the ground. They're not going to spend the money on advanced technology and so-called nice-to-have, locally developed products and equipment like they are now.
"They're not going to invest the same amount of money in mining R&D and technology with a long-dated return – not in a jurisdiction where we're seeing a new level of sovereign risk."
Austmine members have meanwhile expressed widespread concerns about the potential implications of the RSPT for Australia's MTS sector.
Andrew Gray, general manager of Queensland-based Russell Mineral Equipment, said a reduction in mining company net profits would likely reduce their investment in R&D.
"Australian innovators in the MTS sector such as Russell Mineral Equipment rely on strong partnerships with mining companies to identify needs and potential solutions," he said. "A reduction in mining sector R&D will flow through and inhibit the ability of Australian companies in the MTS to continue to be at the cutting edge of technology development that would otherwise result in technology exports that increase the wealth of the nation."
Control Systems Technology's Ian Burrell said the Rudd Government tax announcement was keeping mining industry investment on hold until the next federal election.
"This hold in investment will deprive our economy of billions of dollars of much needed revenue," he said.
"The pause in the mining boom caused by flow on effects from the GFC will now be unnecessarily extended by the proposed new tax – this will cause untold damage to mining suppliers."
Burrell said the nominal rate of return designated in the RSPT as a 'super profit' threshold could not be as low as 6%.
"Viable business investments need to be three times this just to allow for the margin for error which can occur in estimating returns," he said.
"The return in excess of 6% is just a normal reward for investing money in Australia's future. It is a reward for taking a risk and not just putting the money in the bank, it could never be described as super profit. We need to encourage entrepreneurs in Australia. We don't want to be just a nation of low risk investors."
Phil Goode, senior business development manager with Remote Control Technologies, said uncertainty surrounding the RSPT was affecting businesses such as RCT.
"Projects decisions are taking longer as people reconsider the impact of the new tax and financing of mining projects existing and new," Goode said.
"Effort, attention and money is being distracted away from key real industry challenges like downstream processing in Australia, mining-led trade education and immigration, and local manufacture of mining equipment and technology for global export and application."
Runge executive director Christian Larsen said for companies such as the leading Queensland-based mining consulting and technology firm there were immediate and direct impacts stemming from the proposed RSPT.
"The immediate impact comes from the uncertainty that this announcement has created," he said.
"A significant proportion of our business involves reserve assessments and feasibility studies for new mines. As a result of this proposed new tax, our clients are now slowing down or deferring their commitments to such projects and consequently, we have to redeploy our valuable personnel elsewhere throughout the world to accelerate mining projects outside of Australia."
Peter Johnson, general manager of South Australian-based international mining technology firm, Maptek, said Australia's envious position as a technology and efficiency leader in the global mining industry was at risk.
"Australia has a history of technological innovation and delivery of outstanding technical solutions driven by the demands of the mining industry over many decades. Indeed, a significant proportion of the mining software used around the world today originated in Australia," he said.
"The ability and willingness of mining companies to invest in technology development, and thus support Australian technology companies, has been underpinned by a stable investment environment and confidence in the long term viability of projects in Australia.
"It should be clear that the fortunes of the mining industry and those of the mining technology and services industry are inextricably linked.
"While the various media announcements by mining companies about cancelling projects or reviewing expansion plans may be seen as simple political propaganda by the government, they are dire commercial realities for a raft of small technology companies hoping for continued investment in this industry. The confidence in the long term stability of the taxation and economic framework under which Australian mines are operated has been removed without warning.
"This is having an immediate negative effect on the mining technology sector in Australia.
"There is no upside."