Report from Australia Fundamentals support boom

Gold and platinum group minerals have been the two commodities to excite both mining company management and stock market followers over the past six months. Unlike some earlier booms, the market enthusiasm has been supported by quite encouraging fundamental factors.

A number of new gold mines have recently come into production, and forecasts suggest that Australia’s mined production of gold will rise substantially in the next two years to the region of 100 tonnes of metal annually. Gold exports are now our fourth largest mineral export, increasing from four tonnes worth $68 million in 1981 to an estimated 51 tonnes worth $667 million in 1985.

The gold mining industry has invested $750 million in new projects over the last five years and current exploration expenditure is running at around $200 million annually. There are now over 100 gold producers in Australia although many of these are small (less than 5,000 oz) projects, often treating tailings dumps by carbon- in-pulp or leaching processes.

In recent months producers have enjoyed a rising gold price in Australian dollars as the U.S. gold price has been firming and the Australian dollar exchange rate has been falling. In fact, gold producers have been major beneficiaries of the weakening value of the Australian dollar as the over-all local economic climate has slumped.

The Australian government, after specially commissioning a review of the taxation status of gold production, has decided now to leave the industry’s tax position unchanged. The introduction of a “gold tax” which would have reduced the profitability of mining and probably stemmed the strong flow of risk capital into the industry, has been under review for almost 12 months.

The gold mining industry, many mining communities and many politicians, especially those in marginal electorates in remote areas embracing mining centres, all campaigned strongly against the introduction of a tax on gold. The Australian government’s investigation commissioned from a prominent economist recommended the introduction of a gold tax and its phasing-in over a period of time.

Instead the government heard the arguments of all the opponents to the gold tax and announced that it had concluded “that the importance of encouraging active exploration and development, and of maximizing production and the consequent exploration income generated by the gold mining industry, outweighed the arguments in favor of removing the industry’s long standing tax exemption.”

Consequently, profits earned from gold mining and dividends paid solely from gold mining profits remain tax free. Over-all the decision is regarded as being politically expedient, rather than a rational economic decision.

In a paper on tax reform proposed in 1985, the government estimated that a gold tax could produce revenue of $90 million in its first full year and at least $100 million thereafter.

After the announcement of the retention of the tax-free status, it was forecast that new capital investment of $500 million(A) spread over two years would proceed in the state of Western Australia alone. This figure embraces projects either on a holding basis or which were awaiting the outcome of the gold tax decision.

As a result, the gold sector has been the most active area of the Australian share market with numerous new gold exploration and development companies floated in 1986 and many more in the wings this year.

The annual review of the Australian mining sector, prepared by the Australian Mining Industry Council and major chartered accounting firm Coopers & Lybrand, sees a relatively optimistic outlook for 1987. Expectations are for higher mineral exports, increased capital investment and a turnaround in exploration spending despite continued low profitability for most producers.

Exports are forecast to increase 21% over the 1986 figure to reach $15,500 million.

Profits of 129 companies in the survey showed a fall from $640 million to $535 million in 1986, after absorbing more than $400 million in losses on foreign exchange amounts (mainly reflecting the fall in the Australian dollar as mentioned above). The analysis of the profitability of the industry shows that the smelting and refining sector was the most troubled, incurring a loss for the year of $209 million.

The industry’s rate of return on shareholders’ funds slipped from 5.7% to 4.9% which is less than half the average of 10.3% for all companies listed on Australian stock exchanges.

The AMIC study also reveals that governments at all levels regarded the mining industry as a “milch cow.” Company tax, royalties, duties and other charges contributed $4,456 million to the government coffers for the year.

However, one small bright spot was the expectation that exploration spending commitments would rise to over $250 million in 1987 to reverse a 5-year decline in this area.

AMIC president, Sir Bruce Watson, summarized the latest financial study of the mining industry’s performance by saying “an optimist could see a number of positive signs emerging from the unrelieved gloom of the last few years.”

Despite the less-than-joyous economic climate of recent years, innovation continues ina number of areas of the Australian mining industry. The Mount Isa Mines’ group company, Copper Refineries, which operates a major copper refinery at Townsville in Queensland, is well down the track on the feasibility of producing a special high technology copper.

The idea is to make Townsville a major international centre for the production of a specialized form of copper known as OFHC. This stands for Oxygen Free High Conductivity Copper which is used in applications which require excellent thermal or electrical conductivity, weldability, resi stance to hydrogen embrittlement, high ductibility and formation of gas-tight seals with glass.

End products which would use such properties include electronic components, motor and transformer windings, semi-conductor components, copper plating electrodes and submarine optical fibre cable protection.

The company has engaged the services of a West German design company, Stolberg Ingenieurberatung GmbH, a subsidiary of Metallgesellschaft AG, to assist in the investigation. If the project gets the go-ahead Townsville will be one of very few plants in the world having such high technology copper.

A new project also just announced for Western Australia will cost $70 million to build and produce about 23,000 tonnes of high grade silicon a year. The project, to come on-stream at the end of 1988, will export about 20,000 tonnes of production to Japan, North America and Europe.

The plant will produce about 23,000 tonnes of high grade silicon over a life of 15 to 20 years. About 60,000 tonnes of high-purity lump quartz ore will be smelted yearly through a carbon reductant process which uses charcoal produced from jarrah firewood.

The plant will produce two types of silicon: silicon metal for use in aluminum alloying and chemical- grade silanes; and silicones which have wide ranging applications from industrial paints to solar cells and silicon chips.

An $18.1-million mine rehabilitation project has recently been completed to restore the site of Australia’s first uranium mine. The project has taken four years and has transformed an abandoned, heavily-polluted mine shaft into a landscape that is esthetically acceptable and might even be usable for recreational purposes.

Rum Jungle, about 80 km south of Darwin in the Northern Territory was Australia’s first uranium mine. It was operated by Territory Enterprises Pty. Ltd. on behalf of the federal government between 1952 and 1971.

Since it is the first time a uranium mine in a monsoonal climate has been rehabilitated, the experiences gained on this project should be valuable for other uranium mines in similar regions.

Two industry bodies are also working actively to develop sophisticated computer applications in the mining industry. Over the past 18 months the Australian Mineral Industry Research Association (AMIRA) and the Association of Users of Technical Computing
(ACADS) have jointly completed a study on computer applications in the mining and exploration industries.

While the study noted the proliferation of computer hardware, especially micro-computers, it also identified a shortage of specialist software and a lack of management understanding of computer applications, particularly at middle-to- top management levels of mining companies.

The two associations are now holding a series of seminars and are continuing the evaluation of computer techniques to give impetus to their more widespread application in mining and related areas.