Extension of WA co-funding drilling exploration program

The Western Australian State Government (State) recently announced the thirteenth round of applications for the Co-Funded Exploration Drill Program (Program), with an additional $5 million in grants available for explorative drilling programs in the 2016 / 2017 year. To date, prior Program rounds have provided funding of approximately $23 million to explorers, miners and prospectors.

The Program is the flagship program of the State-funded Exploration Investment Scheme (EIS), which promotes and supports innovative exploration drilling projects throughout Western Australia. The Program offers up to a 50% refund for innovative explorative drilling programs, subject to caps determined by whether the project is for general multi-hole drilling, single deep-hole drilling or prospecting. The EIS has resulted in multiple significant discoveries since its inception in 2009, including the Nova nickel deposit.

The State’s move to extend funding is an important response to the current economic climate and the associated impact on mining activity in Western Australia, particularly exploration. Concerning trends such as a decline in exploration spending and a narrowed focus on brownfield funding are reflective of a lack of confidence in the resources sector during a period of volatility in commodity and currency markets. Limited private investment and capital raising opportunities for junior proponents compound the issue, making it particularly difficult for junior proponents to commit to and fund meaningful exploration programs. In announcing the Program funding extension, Mines and Petroleum Minister Bill Marmion stated “There has never been a more important time to support exploration. This innovative program favours under-explored and greenfield[s] areas, helping more than 590 projects and 450,000 metres of drilling since it began in 2009.” 

Sustained exploration is key to adopting a long-view of the commodities cycle. There is currently a strong focus on capital returns for projects in a low-growth environment, however given the finite nature of mining projects, a lack of exploration at this point in the commodities cycle may lead to a constrained future project pipeline.    

Applications for Program funding are open until 5 April 2016, and should be made via the Western Australia Department of Mines and Petroleum website.

For further information, please contact Jay Leary, Partner, or your usual Herbert Smith Freehills contact.

Update on mineral royalty rates in Western Australia

No increase in mineral royalty rates in the 2015-16 State Budget

The Western Australian Government (Government) has confirmed in the 2015-16 State Budget that mineral royalty rates will not be increased as a result of the Mineral Royalty Rate Analysis Final Report 2015 (Review).

In the Review, which was published on 25 March 2015, the Department of State Development and the Department of Mines and Petroleum recommended 18 changes to the current system of mineral royalties, including:

• increasing the ad valorem rate for gold from 2.5% to 3.75%,
• introducing an additional royalty tier of 3.75% for minerals that are subject to more intensive processing than is typically used to produce concentrates, and
• keeping the 10% benchmark rate as a gauge of fair return to the community.

When the Review was published, the WA Mines and Petroleum Minister Bill Marmion ruled out any immediate royalty increases for commodities in the 2015-16 State Budget. On 14 May 2015, the 2015-16 State Budget confirmed that no increases will be introduced.

The decision not to increase royalty rates seems to have been met with widespread relief from miners, mining services contractors and industry groups, in particular the gold sector. In a media release, the Chamber of Minerals and Energy of Western Australia Chief Executive Reg Howard-Smith welcomed the move and said that it provided royalty rate certainty for the WA resources sector.

Iron ore royalty forecasts cut

The Government has also cut its iron ore royalty forecasts from a peak of almost $5.5 billion in 2013-14 to $3 billion in 2015-16. This represents a decline from 19.5% to 11.5% of total government revenue, and is largely due to a sustained fall in the iron ore price.

The Government expects the 2015-16 iron ore price to be US$47.50 per tonne, which is just slightly lower than the Commonwealth Government’s forecast of US$48 per tonne. Last year, the Government forecasted a 2014-15 price of around US$123 per tonne.

Iron ore volumes are expected to rise from 632 million tonnes in 2013-14 to 716 million tonnes in 2014-15 and 799 million tonnes by 2018-19. The three biggest iron ore miners, BHP Billiton, Rio Tinto and Fortescue Metals Group are expected to account for 92.8% of all production volume in 2014-15, and 94.2% of royalty income.

For further information, please contact Jay Leary, Partner, Perth, or your usual Herbert Smith Freehills contact.

Mining blog recap for 2012

2012 saw the merger between Herbert Smith and Freehills, creating one of the world’s most experienced energy and resources firms. As it draws to a close, we pause to reflect on some of the key developments in the mining industry.

This year we saw several regulatory and legislative changes take place in the mining sector:

• New South Wales, Queensland, Northern Territory, Australian Capital Territory, South Australia, Tasmania and the Commonwealth all took steps to ensure the harmonisation of safety laws via the Model Work Health and Safety Act was introduced by January 1.
• In August, Victoria declared a ban on approvals to undertake hydraulic fracturing (fraccing) as part of onshore gas exploration, and the issue of new exploration licences for coal seam gas (CSG). While Queensland took a significant step in reducing red tape by passing the Mines Legislation (Streamlining) Amendment Act 2012.
• The new Indonesian Mining Law enabled foreign investors to hold business permits for the first time, although foreign investors are now required to divest ownership in companies on an incremental scale after 5 years of production (up to 51%).
• The Commonwealth Government released, for comment, the exposure draft of the Native Title Amendment Bill 2012, which proposes substantive amendments to the Native Title Act 1993 (Cth).

In March, we reported that M&A transactions in the mining and energy sectors were buoyant, accounting for almost half of all deals in the preceding 6 months. Despite significant nervousness and negative opinions surrounding the market in recent months, Chris Richardson of Deloitte Access Economics suggested that the glass is still ‘half full’ for the resources sector at the Annual National AMPLA Conference.
In September, Queensland called for EOI in its lucrative bauxite leases, while also announcing an increase in coal royalties of up to 50 per cent per tonne. In October, Western Australia granted approval for Toro Energy to proceed with the State’s first uranium mine to be developed.
The year also saw a raft of inquiries and debates:

• Coal seam gas (CSG) was on the agenda on the east coast. Victoria released a report entitled ‘Inquiry into Greenfields mineral exploration and project development in Victoria’, in a move to understand how better to develop and regulate Victoria’s CSG potential, while New South Wales tabled an inquiry into the environmental, economic and social impacts of mining CSG.
• In October, the Productivity Commission announced a 12 month inquiry into the non-financial barriers to mineral and energy resource exploration to determine if there is unnecessary regulatory burden.

With still a month or two to go in 2012, be sure to keep an eye on our blog for further updates.

State approves Western Australia’s first uranium mine

Western Australian Environment Minister Bill Marmion has granted approval for Toro Energy to proceed with the State’s first uranium mine to be developed, four years after the Liberal government lifted a ban imposed by Labor. The project is based at the Centipede and Lake Way deposits near Wiluna in the State’s Mid-West, processing approximately 820 tonnes of uranium oxide concentrate per year. The capital cost expected to be about $280 million.

In May, the Environmental Protection Authority recommended the Minister approve the project, subject to strict conditions. Mr Marmion said the environment will be sufficiently monitored in the event that the project obtains Commonwealth approval, with stringent dust management and rehabilitation measures in place to protect stygofauna and groundwater-dependent vegetation.

Environmental groups have criticised the decision, claiming that the uranium industry is fading and the announcement was only made to fast track the Barnett Government’s political agenda.

The Commonwealth is expected to make its decision by the end of 2012. The company hopes to have the mine operating by 2014, with the first uranium sales in 2014-2015.

The decision will likely assist other similar uranium mine projects being developed in W.A.

Herbert Smith Freehills assists the development of many of Western Australia’s significant mining projects and will continue to monitor the development of the uranium industry in WA.

Industrial unrest: coming to a mine-site near you!

Since the Federal Government's Fair Work Act came into effect in 2009, the mining industry has seen a steady increase in industrial activity. This is hardly surprising as the new legislation gives significant new rights to unions and compels mining companies to bargain with unions in most circumstances.

While much of the mining industry has relied on industrial agreements made under the old legislation, 2012 will see many of these agreements nearing their expiry date and a new round of industrial bargaining commence. Most of the major mining houses will be negotiating agreements with unions in 2012 under this new legislation. For this reason, mining companies will need to be well advanced in their planning and implementation of forward industrial strategies.

An example of the challenges of the new bargaining regime is the BMA negotiations which have been ongoing in the Bowen basin coal fields for more than 12 months. These negotiations will continue in to 2012 with a likely coordinated campaign of industrial action across all of the companies coal mines. 

In addition to the increase in industrial bargaining throughout the mining industry, 2011 saw the announcement of a large number of new mining projects across all tiers of the sector. These developments are likely to exacerbate the labour shortages already being seen in the boom mining states of Western Australia and Queensland. Initial resourcing strategies have led to an increase in the number of employees commuting from other states and territories and an increase in the use of foreign labour. 

Foreign labour will continue to be a contentious issue, with mining unions recently staging protests in Perth in relation to the use of foreign labour by major resources companies operating in Western Australia. The government’s new Enterprise Migration Agreement scheme will be available to larger players in the industry, however these agreements will require detailed consultation with relevant unions at an early stage in the planning process. The current consultation protocols include a requirement for project owners to provide manning plans and other detailed commercial information to unions as part of this initial consultation process. This, combined with the powers provided to industrial organisations under the Fair Work Act, will further feed the strength of mining unions in Australia during 2012.

Finally, the Federal Government has appointed a committee to review the operation of the Fair Work Act. The terms of the review have caused some concern among employers, including those in the mining industry. This review may lead to changes to the legislation—it will be important to monitor those changes and plan for their implementation.