Production targets should be backed up by competent persons

Market confusion the likely outcome if changes aren’t made regarding the disclosure of production targets says ASIC.

According to ASIC’s recent public submission paper responding to issues papers from the ASX and JORC, the reporting of production targets and financial information based solely on Inferred Mineral Resources or exploration targets could lead the market to be misinformed, inferring that the target or prospect will be achieved when in fact a high level of uncertainty actually surrounds the underlying resource.

Currently neither the JORC Code nor the ASX Listing rules explicitly address this issue other than requiring that companies have ‘reasonable grounds’ for making the statement – reasonable grounds being based on completion of sufficient work measured against various modifying factors.

Looking at international equivalents, ASIC noted that unlike ASX’s Option 5A, the South African and European codes don’t allow production targets or statements about future matters implying economic viability based only on Inferred Mineral Resources – at least some Ore Reserves are required.

It is, however, allowed in Canada. Companies are required to make full disclosure by way of technical reports written and consented to by qualified people who generally are independent.

Based on this, ASIC’s response is that production targets and other forward-looking statements should be consented to by a Competent Person under the JORC Code – an issue that neither the ASX or JORC issues paper addressed.

If these changes are implemented companies will have greater certainty over the requirements attached to production level disclosure. An eradication of future unsupported production assumptions will inherently bolster market integrity. However feasibility issues of engaging a competent person and completing sufficient work may increase the compliance burden on junior miners.

For a full copy of the ASIC submissions paper go to:

http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ASIC-submission-asx-jorc-published-1-December-2011.pdf/$file/ASIC-submission-asx-jorc-published-1-December-2011.pdf

Wiggins Island – something to be celebrated

As a person who spends a large amount of their time dealing with mining infrastructure, the rate of structural reform and progress in the area can be frustrating.  The Wiggins Island port project is however something to be celebrated.

It should be celebrated for the hard work and persistence of all of those involved - the miners, WICET, the State and GPC. Most of all it should be celebrated by all of the mining industry in Queensland (and further afield).

Wiggins Island will provide a great platform for future infrastructure investment. It will be a platform irrespective of your chosen model. Wiggins established a successful consortium. It has proved to the industry and the lending fraternity that a large infrastructure project can be financed by a large divergent group – a group of large and small miners. The model holds hope for the start-up miner, as well as the established miner in expansion mode.

The financial close of Wiggins Island has come at the right time. The demand for thermal and metallurgical coal remains strong. The pipeline of new and expansion projects (particularly having regard to the Galillee) is huge. That pipeline of development has an equally large pipeline of rail and port developments.

The State of Queensland has recently announced proponents for 6 new terminals at Abbot Point. Each one of those terminals will be wholly funded by the using miners. At least one of the proponents is a consortium of mining companies (again large and small).

Such a scale of development comes with many challenges. There is of course the challenge of finding a skilled workforce to develop the infrastructure. Input costs are forever rising.

The largest challenge however is one of coordination. For infrastructure to be brought on line efficiently, each part of the coal chain needs to be developed in sync. There is no point in developing a mine and port, without a rail solution.

Without coordination the industry faces uncertainty and inevitable delay. To date the Queensland mining industry has suffered as a result of a lack of coordination. For coordination to be effective the only party that can impose it is the Government. We keep our fingers crossed.

This article was written by Freehills Partner Jay Leary.

Record Mining Investment set to continue

Mining investment is up 74 percent since last year, and 34 percent in the last six months.

Last week the Bureau of Resources and Energy Economics (BREE) published their biannual report on Mining Industry Major Projects – showing the silver (or is that gold?) lining in the face of economic doom and gloom.

At the end of October there were 102 projects at an advanced stage of development with a record high capital expenditure of $231.8 billion.

So can we expect more for 2012? Put simply – yes. Investment is set to continue with 302 less advanced projects registering a potential capital expenditure of $224.3 billion.

BREE’s Chief Economist said "Significant growth in coal, iron ore and gas exports are expected to occur over the medium and long term, underpinned by the capital investment that is occurring in these sectors."
Of the 102 advanced projects 40 are Mineral Projects representing capital expenditure of $30.7. billion Major iron ore projects include: CITIC Pacific’s US$6.1 billion Sino Iron Project; BHP Billiton's US$3.4 billion Jimblebar mine and Fortescue Metals Solomon Hub Stage 1 having an iron ore capacity of 60 million tonnes a year at a capital cost of US$2.7 billion. The largest advanced gold project is Newcrest’s Cadia East development in New South Wales, which is scheduled for completion in 2013 with a capital cost of $1.9 billion.

37 Energy Projects with capital expenditure of $170 billion. The Gorgon LNG project is the largest single resource project undertaken in Australia with an estimated capital expenditure of $43 billion.

21 Infrastructure Projects with a capital expenditure of $25 billion. The largest of these is Wiggins Island Coal Terminal which is located in Gladstone at an expected to cost around $2.5 billion to construct.

4 Mineral Processing Plants with a capital expenditure of $6.4 billion. The two largest mineral processing projects are both alumina refineries. The Worsley Refinery Efficiency and Growth project in Western Australia, scheduled for completion in 2012 for an estimated capital cost of US$3.5 billion. Expansion of the Yarwun refinery in Queensland at an expected capital cost of US$2.3 billion.

In 2010-11, New Capital Expenditure increased by 28 per cent to $51 billion, an all time record around three times the average annual expenditure over the past 30 years ($17.1 billion).

In 2010-11 Exploration Expenditure increased 9 per cent to $6.2 billion from 2009-10, the second highest level on record. Nearly all sectors increased their exploration with Coal increasing by 62 per cent; Copper 60 per cent; Base Metals 46 per cent; Uranium 26 per cent; Iron Ore 27 per cent; and Gold 13 per cent. Petroleum was the only major sector to slide decreasing by 8 per cent.

The accumulated capital expenditure of Completed Projects in the last six months totalled $9.6 billon. The largest energy project was the Cossack Wanaea Lambert Hermes field redevelopment and floating production, storage and offtake vessel located at the North West Shelf in the Carnarvon Basin, Western Australia, completed at a cost of US$1.47 billion and has the capacity to produce up to 60,000 barrels a day of oil. The Kitan oil project at a capital cost of US$600 million has an oil production capacity of 35 000 barrels a day.

What a great time to be a part of such a vibrant and prosperous industry

For a full copy of the report go to:
http://www.bree.gov.au/documents/publications/resources/BREE_MEMP_NOV2011.pdf

Can the mining sector lead diversity?

The resources sector is no different than any other male dominated industry, where attracting and retaining women in non-traditional roles and developing women to senior leadership roles is a difficult challenge.

But the need to increase female participation is even more compelling in this sector, where projected labour shortages could impact Australia’s future prosperity.

Government projections are that Australia will require 70,000 additional skilled workers for major resources projects over the next five years, and they have accepted the recommendations of the National Resources Sector Employment Taskforce, including the need for a strategy for attracting and retaining women in the resources and construction sectors.

So what now?

Cath Pattenden of the University of Queensland is currently reviewing progress for women in the resources sector.

Her statistics are telling. Currently the sector employs 17% women compared to the 45% women in the broader workforce, with only 3% in site-based roles.

Men earn more than women at almost every level. EOWA 2010 Census data shows that materials companies represent over one quarter of the ASX 200 index, yet only 4.3% of executive key management and 5% of board members are women.

The good news is that this is a marked improvement from the late 80s when less than 10% of workers in the resources sector were women.

However, these statistics show there is lots of scope for improvement.

While the solutions to the challenge of increasing female participation are many and varied, retention of female talent will no doubt be improved with better management of workers through pregnancy and early years of parenthood.

To help resources sector employers, the Minerals Council of Australia commissioned Freehills to develop a comprehensive parental leave and flexible work toolkit aiming to inform and educate employees, supervisors and managers of their rights and responsibilities around parental leave and flexible working arrangements.

It is one step to address a complex problem.

The challenges in the resources sector are well known: low enrolment of women in relevant tertiary courses; lack of women applicants for non-traditional roles; 12 hour rosters which are inconsistent with most childcare arrangements; remote locations, which in some cases lack facilities for families; the fly-in/fly-out schedules used at some remote locations; the lack of female mentors and role models; perception that the tough work cultures do not embrace diversity; concerns about safe jobs during pregnancy.

The less obvious challenges involve: the social conditioning that still subtly directs our children from birth towards traditional gendered roles (trucks vs dolls); the unconscious bias that affects most of us to more readily associate women with family and men with work; the unequal share of domestic responsibilities, which shows that working women still bear the majority of domestic and caring responsibilities; the operation of homophily, which is the tendency of individuals to associate and bond with similar others (eg. men with men).

There is no question that improving gender diversity in the resources sector is difficult. At the same time, there is recognition that change will help overcome projected labour shortages in the future and result in better workplaces and more profitable businesses.

Earlier this year the Minerals Council of Australia hosted a Women in Mining workshop which showed there is strong momentum for change among industry bodies, employers and women’s networking groups.

Their request is for the companies to show leadership with real actions that support the goal of increasing female participation and leadership.

The new ASX reporting requirements on diversity policies with measurable gender targets is an important starting point.

There is a great opportunity for change with the support of all industry participants, however those highly committed women in mining need lots more support to achieve that change in the next five years.

This article was written by Freehills partner Kate Jenkins and was first published by Australian Mining.

A new era for investment in the Trans-Pacific region

We are entering an important new phase in the push for the liberalisation of trade in goods and services – one which highlights the importance of the Asia Pacific region as a driver of economic progress and welfare and may finally bring long promised benefits to Australia.

At this month’s summit of the APEC leaders in Honolulu, the nine current negotiating states of the Trans-Pacific Partnership Agreement (TPP) have issued a joint statement outlining the key objectives and features of the proposed free trade agreement between the USA, Chile, New Zealand, Singapore, Australia, Peru, Vietnam, Brunei Darussalam and Malaysia.

This joint statement, which is also endorsed by the Australian Government, announces that “[t]he investment text will include provisions for expeditious, fair, and transparent investor-State dispute settlement subject to appropriate safeguards, with discussions continuing on scope and coverage. The investment text will protect the rights of the TPP countries to regulate in the public interest.

This announcement appears to be a significant shift in attitude by the Australian Government. In April 2011, the Gillard Government published its trade policy, stating that Australia would discontinue the practice of including investor-state dispute resolution mechanisms in trade agreements with developing countries. There is no comment available on the Government’s website as to how to reconcile the two statements.

If agreed, the inclusion of investor-state dispute settlement procedures into the TPP is a good development for Australian investors abroad, giving them a direct right of recourse against the foreign state in an international arbitration forum in the event that that state has enacted measures negatively affecting the investment.

The participating states have indicated a wish to finalise the legal text of the TPP within 2012, and it remains to be seen which precise form the investor-state dispute settlement mechanisms will take. With the announcement of Japan, Canada and Mexico to join the negotiations, the TPP has gained new momentum making it the largest free trade agreement world-wide. President Obama is highly supportive of the TPP announcing that the United States “are a Pacific nation and … are deeply committed to shaping the future security and prosperity of the Trans-Pacific region, the fastest-growing region in the world”. The ultimate aim is to create a Pacific Free Trade Area. Such a bloc – one which would counterbalance the European Union and other free trade areas – would significantly change the dynamics of trading relations in goods and services, to the benefit of all. This trend of an increased focus on free trade in the Asia-Pacific region is further highlighted by Indonesia’s ratification of the ASEAN-Australia-New Zealand free trade agreement last week.

For further background on the importance and effect of investor-state dispute settlement mechanisms in bi- and multilateral investment agreements for Australian cross-border investments, please see http://www.freehills.com.au/7589.aspx and http://www.freehills.com/7649.aspx.

Disclosing production targets

Controversy surrounds listed mining companies disclosing their production targets with the ASX and JORC unexpectedly deciding to release separate consultation papers on the issue.

The production target disclosures debate was highlighted in ‘08 with the Midwest Corporation Limited Takeovers Panel decision and arose again in August ’11 when Tigers Realm Coal Limited reissued its prospectus having removed all references to forecast production tonnages and dates, capital development and operating cost estimates for a number of its projects.

Neither the ASX Listing Rules nor the JORC code specifically address the disclosure of production targets in their present form but leave the requirement for having ‘reasonable grounds’ for making a statement contained in s670A(2), s728(2) and s769C of the Corporations Act 2001 (Cth).

ASIC Regulatory Guide 170 gives some colour to what is meant by ‘having reasonable grounds’ but a considerable degree of discretion is retained by individual companies due to the ’08 decision and the lack of detail in the rules and regulations governing the issue.

The ASX has suggested a mandatory minimum reporting obligation whereas JORC has stated that it considers this approach to be overly prescriptive. After failing to agree on a preferred approach to the matter, the ASX and JORC decided to release separate consultation papers on the issue.

So what’s the likely outcome of the dual consultation process?  

In addition to formalising the production targets disclosure requirements applicable to mining companies, the process is likely to require companies to identify:

1. the key assumptions made in calculating the target
2. the key contingencies and risks associated with the realisation of the target
3. a cautionary statement highlighting the aspirational nature of the target.

These elements would all need to be disclosed clearly and unambiguously in an equally prominent manner to the target, as well as being proximately situated to the target in the disclosure.

Two of the more restrictive approaches canvassed in the ASX discussion paper would also see companies banned from disclosing production targets based on exploration targets or inferred mineral resources in greenfields projects respectively.

Let’s see where the debate ends up.

Carbon price passed: Now what?

After many years, 2 Prime Ministers and 3 opposition leaders to name a few, the Federal Parliament passed carbon price legislation yesterday. The price will apply from 1 July 2012 at $23/t Carbon Dioxide equivalent in the first year.

Many will be unhappy about this, but our focus must now turn to what do we do about it. We can’t ‘wait and see’ anymore.

The Opposition has committed to ‘roll back’ the carbon price if it wins government in the future. However, a roll back would be very difficult and appears unlikely, or at least not for some time (meaning we must still prepare for the carbon price).

So there are 2 key questions:

1. What does it mean for the mining industry?
2. What should the mining industry do about it?

What does it mean for the mining industry?

A carbon price will increase the cost of activities that directly or indirectly (ie through their inputs) emit greenhouse gas emissions. For mining the key carbon costs will attach to gas, coal, diesel and electricity use. Coal mines will also face direct costs for their direct methane emissions.

Whether carbon costs are directly paid to government by the mining company or its suppliers will depend on where the emissions arise and who has operational control of them.

Notably, the default position for liquid fuels is they will not be subject to the carbon price regime (with an obligation to obtain and surrender permits). Instead some liquid fuels, including off-road mining and power generation fuel, will face an equivalent carbon price through the fuel tax/rebate system. Mining diesel use will have a reduced diesel fuel rebate, initially at 6.21c/L in 2012/2013. Large fuel users will have the opportunity to ‘opt in’ to the carbon price regime and then need to obtain and surrender permits instead of paying through the fuel tax system. The ‘opt in’ regime is yet to be finalised, but this opportunity is expected to be available for users of fuel that produce more than 25,000t CO2e pa (about 9.1mL of diesel).

This generally means mining companies will pay for their fuel use, any power generation they undertake and coal methane emissions. Suppliers will most likely have any other direct liability. Those suppliers will in turn look to pass their costs through to the mining company.

The end result is the mining company will pay for their carbon footprints, directly or indirectly. Therefore the mining company’s commercial exposure is best calculated on the basis of its total emissions profile. 

Some compensation is being made available for ‘emissions-intensive, trade-exposed’ industries. However, it appears to be of limited availability for the mining industry. It will give some compensation to some minerals refining. Gassy coal miners will be able to access separate compensation.

What should the mining industry do about it?

Key steps include:

1. Review and design contracts: It is important to review and design your contractual arrangements to best manage carbon costs. This is generally achieved where all parties accept appropriate pass through. You should always consider where emissions (and therefore costs and risks) are likely to arise and how they can be best managed.
2. Offsets: Carbon offsets may be one key way to manage carbon costs. The ‘Carbon Farming Initiative’ voluntary scheme will present positive emissions reduction opportunities.
3. Disclosure: Be careful what statements you are making publicly and in your financial documents.
4. Approvals: If you are going through an approval process, any carbon offset proposals or negotiations should be revisited.
5. Compensation: Review what compensation may be available.
6. Opt in?: Large fuel users should consider whether to opt in to the carbon price regime or not. Main reasons to do so are to more effectively manage the carbon price exposure, including through the use of offsets.

How important is Africa to Australian mining?

Australian mining companies now have more projects in Africa than in any other region outside of Australia. While our mining companies have been part of Africa’s mining industry for years, the last several years have seen a dramatic increase in the level of direct investment into the broader African resources sector.

The Chinese are no less ambitious in their interest in African projects, being engaged in almost all of Africa’s 54 countries – either as miner, trader, offtaker, engineer or lender. More recently, a trend has emerged of Chinese entities seeking control of ASX listed vehicles with African assets.

At this time of increased focus on mining investment into Africa, highlighted at the recent Commonwealth Business Leaders Forum held in Perth as part of the build-up to CHOGM – Freehills’ partners Justin Little, John Tivey and Gemey Visscher, as well as representatives from our alliance firm in Beijing (TransAsia), are gearing up to speak on the importance of fostering greater ties between Chinese and Australian companies looking at investments in African mining projects at the 3rd annual China Overseas Investment Fair in Beijing next month.  The Investment Fair will be attended by all of the major Chinese SOEs and government agencies, including those such as the China-Africa Development Fund, which have a mandate to support investments into Africa.

Australia’s bullish approach to investing in regions once considered to be on the wrong end of the sovereign risk spectrum is certainly supported by recent statistics, comments recently made by the Foreign Minister, Kevin Rudd, and by a recent Australian Trade Commission Survey:

• there are now approximately 230 Australian mining and oil & gas companies operating about 650 projects in approximately 43 countries within Africa.  In total, these projects account for around $24 billion worth of investment 
• 143 new projects were added in 2010 alone and approximately 100 new projects (sponsored by roughly 20 companies) have been added since the beginning of 2011
• of the 700 or so mining companies listed on the ASX, 127 (or 18%) have their primary asset in Africa, spread across 400 projects
• Recent examples of Chinese entities bidding for companies with African-focussed mining projects include:
• Minmetals $6 billion bid for dual Australian and Canadian listed copper miner Equinox
• Minmetals friendly $A1.3 billion takeover of Congo-focused copper miner Anvil Mining; and
• Hanlong Mining’s recent takeover bid for Sundance Resources which has an iron ore project in Africa

Freehills’ has acted in both of the recent Minmetals’ transactions referred to above and for other Chinese entities seeking cornerstone or strategic investments in ASX-listed mining companies with exposure to African projects.

The China Overseas Investment Fair is scheduled to run for two days from 8 – 9 November 2011.

Unconventional moves: changes to WA onshore gas regulation

WA has proven it is alive to the fact that there is an increasing importance of unconventional gas resources, with the WA Department of Mines and Petroleum (DMP) releasing on Monday its response to Dr Tina Hunter’s report on the regulation of shale, coal seam and tight gas activities in onshore WA.

Stakeholders should take a keen interest this response as it proposes amendments to provide for public disclosure of the chemicals used in fraccing operations, and of approved environmental management plans – information which is usually commercially sensitive. 

Dr Hunter’s report was commissioned by the DMP to provide an independent assessment of the existing regulatory framework for unconventional gas resources. Their response indicates that changes are afoot for the regulatory regime for onshore gas activities in WA, particularly on key issues associated with development of unconventional gas resources – with the reform package seeking to propose:

1. legislative amendments to mandate full disclosure of chemicals used in fraccing operations and publication of approved environmental management plans on the DMP website
2. new Resource Management Regulations to regulate onshore petroleum activities and which will:
• specifically address field sterilisation
• incorporate requirements for field abandonment; and
• address onshore decommissioning
3. new Environment Management Regulations to regulate onshore petroleum activities including gas from unconventional sources and which will:
• clarify guidelines for management of produced water from fraccing processes; and
• include management guidelines for produced water from abandoned wells.

The Resource Management Regulations and the Environment Management Regulations are expected to be released for stakeholder input by mid 2012 and end 2011 respectively.

ASX calls for submissions on reforms to Aussie resource reporting

The ASX has asked for submissions on proposed reforms to resource reporting in an aim to harmonise Australian reporting requirements with international best reporting practice, enhance access to capital and reduce costs.

The proposed reforms will affect the internal work listed companies must do to support disclosure and how disclosure is made.

The paper covers two areas:

• Part A – mining companies, looks at enhancing disclosure of exploration information, Mineral Resources, Ore Reserves and associated production targets by reference to international reporting requirements and reporting issues identified in the Aussie market.
• Part B – oil and gas companies, looks at promoting consistency and confidence in reporting of petroleum reserves, other petroleum resources and related production targets by adopting standardised technical definitions, a petroleum resources classification system and updated general reporting requirements.

Aussie mining and oil and gas companies have until 27 January 2012 to comment on these proposed reforms.

Interestingly, the Australasian Joint Ore Reserves Committee (JORC) has cited an inability by the ASX to reach an agreement with JORC in respect of a joint paper. As a result, JORC will release its own issues paper in respect of the JORC Code. Mining companies should make separate submissions to both the ASX and JORC.

For a full copy of the paper go to http://www.asxgroup.com.au/media/PDFs/ASX_LRs_Review_Issues_Paper_mining_and_oil_gas_reserve_and_resource_reporting_20111005.pdf

Double edged sword of E&R boom

Last night Freehills hosted 80 guests from the energy & resources industry at a Gala Dinner preceding the AMPLA Conference, with Key Note Speaker Shadow Minister for Energy & Resources, the Hon. Ian Macfarlane outlining the double edged sword of prosperity and scrutiny that is influencing Australian E&R. Prosperity in the form of projects totalling over “$300b in the pipeline” versus domestic and international scrutiny. “Now is the time to make the most of the boom,” he said, reflecting on increases in employment in his local electorate due to the coal seam industry. “E&R has come of age” as now the community are witness to the revitalisation of regional Australia. 

Macfarlane spoke of the responsibility of ensuring everyone is a beneficiary of these prosperous times falls on Government to “get it right… involve those participants not directly involved,” and called for co-operation and co-existence with farming and manufacturing in his address, stating that the Coalition would ensure that no tariffs would hinder these industries allowing for greater benefit from co-operative projects.

However, it was not all positive with Macfarlane reflecting on Australia’s current political dynamic with a Green controlled Gillard Government at the helm the carbon tax that will be passed by Christmas. But the political banter was to be expected and did not overshadow the engaging address.

Macfarlane affirmed the Coalition’s intention to repeal the Carbon Tax and any Mineral Resource Rent Tax, stating that the Coalition’s policy is that such taxes will stifle the current boom by placing Australian E&R in an un-competitive position, compared to Africa and South America. The speculation of the future remains, however when questioned over the current stability of foreign investment he was more direct, admitting confidence was destroyed and investors spooked by “weird things”, such as the ousting of Rudd, condensate tax on North West Shelf producers, failed super profits, and now the carbon tax. “if we were to win…the fix would not be quick and would take 10 years to recover.”

The elephant in the room was the timeframe and process of unwinding the taxes.

The final insight was the notion of a sovereign fund. Macfarlane argued that it is irresponsible for Labor to immediately spend the proceeds from the mining taxes. He would like to see a sovereign fund raised from the “unusual amounts” provided by the boom to be retained and grow from the interest rather than being spent. Though he stressed that a sovereign fund is not a Coalition policy. 

Macfarlane concluded that the end of the boom would one day come, and would require action to secure prosperity 20 or 30 years down the track. 

However, it remains uncertain as to exactly what a successful Coalition would do.

As noted by Business Spectator’s Robert Gottliebsen in his column this morning, the mood of the night was buoyant. Freehills would like to sincerely thank the Hon. Ian Macfarlane for his insightful address.

Your comments are most welcome.

Keynote speaker the Hon. Ian Macfarlane.

Business Spectator’s Robert Gottliebsen quizzing Macfarlane during question time.

Freehills’ Mining Industry Lead Partner, John Tivey with keynote speaker the Hon. Ian Macfarlane.