Western Australia Mining Pre release by Global Business Reports

Western Australia Mining 2013

E S A E L N E R TIO E DI R P E

PRE-RELEASE WESTERN AUSTRALIA MINING

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Welcome Mining is in the lifeblood of all West Australians. From the industry’s humble beginnings, miners have ventured into the state’s harsh interior to develop vibrant communities and economies that would not exist without the determination of companiesto extract benefit from Western Australia’s vast mineral resources. In the midst of hard times, miners from down-under sigh as fickle financers flirt elsewhere and it becomes harder and harder to extract the expected margins from the rocks they mine. But the hangover from recent glory days also includes big investments, great facilities and the skills and technology which will ensure that WA will lead again when prices recover. We hope you enjoy reading this microcosm of the industry as much as we enjoyed our research. Thank you to everyone who participated in putting together this prerelease, and look forward to our full report which will be published in January 2014. Angela Harmantas, Senior Journalist and Katya Koryakovtseva, Project Director

View of the Kintyre camp in East Pilbara. Courtesy of Cameco.

Table of Contents Welcome..............................................................................................................................................................2 Introduction..............................................................................................................................................................3 Interview with Hon.William (Bill) Richard Marmion........................................................................................................................4 New frontier emerging in iron ore.......................................................................................................................................................5 Gold miners get creative as costs increase..........................................................................................................................................6 Exciting new developments in uranium..............................................................................................................................................8 Nickel players bullish on future price..................................................................................................................................................9 What happened with the Mineral Resources Rent Tax?...............................................................................................................10 Western Australia’s diversified commodities base.............................................................................................................................10 More incentives needed to promote exploration...............................................................................................................................11 Controlling costs and increasing productivity: a lesson in efficiency from Western Australia’s miners.........................................12 The new reality of mine financing.....................................................................................................................................................13 Perth: the new hub of overseas mining excellence...........................................................................................................................14 Conclusion: Signs of market recovery?.............................................................................................................................................15 Company Snapshots......................................................................................................................................................................15

Western Australia Mining 2013 Senior Journalist Angela Harmantas Project Director Katya Koryakovtseva Editor Mungo Smith Graphic Design Leigh Johnson

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PRE-RELEASE WESTERN AUSTRALIA MINING

The Behemoth breaths a deep sigh A Historic Region Adapts to Challenging Economic Circumstances If Australia is known as “the lucky country”, then Western Australia could be considered the luckiest of its five states and two territories. The nickname, coined by Australian professor Donald Horne in the 1960s, was largely inspired by the abundance of natural resources that punctuate the country’s landscape. Western Australia (WA), is a vast area that covers nearly one-third of Australia’s total surface, is home to some of the world’s largest iron ore deposits, as well as over fifty other metals and minerals. Queensland may have coal, Victoria may have gold, but WA has a culture and history deeply rooted in mining and resources, which it has used to its benefit becoming the fastest-growing state in Australia. Mining and resources have always been the backbone of Western Austral-

ia’s strong economy. In 2012, the value of the state’s mineral and petroleum sector was A$97 billion, which is the secondhighest total in history, behind the record A$108 billion in 2011 according to the Department of Mines and Petroleum in Western Australia. WA and the wider economy continue to benefit from the growth in the resources sector. Confidence has returned to the market on the back of solid price rises in iron ore. As of October 2012, committed capital expenditure on major projects in WA increased by 4.1% to A$141 billion from the $135 billion at the end of April 2012. Western Australian resources companies total market capitalization at the end of November 2012 stood at A$86 billion, an increase of 2.1% from the end of August 2012.

Yet behind the backdrop of sustained capital investment is the very real global commodities downturn that has had severe consequences for mining companies. In Western Australia, the US$80/ ton price of iron ore sent shockwaves that reverberated throughout the iron ore industry and beyond, leading former Minister of Natural Resources Martin Ferguson to declare Australia’s mining boom over. Though the industry’s general reaction to this sentiment was one of disdain, it forced companies to thoroughly examine their balance sheets in order to develop innovative strategies to manage domestic cost pressures and diversify export portfolios so as to access emerging markets around the globe and ensure WA’s continued success in the global mining industry. continued on page 5

Western Australia is blessed with rich mineral deposits, currently producing over fifty different minerals. Global Business Reports // PRE-RELEASE WESTERN AUSTRALIA MINING

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Interview with

Hon. William (Bill) Richard Marmion

MINISTER FOR MINES AND PETROLEUM, WESTERN AUSTRALIA Western Australia, but it must be done with the cooperation of the federal government. We need skilled labor in Western Australia, which is dependent on the accessibility of Section 457 visas that allow temporary skilled workers to immigrate to Australia. The problem, however, is not so severe in the eastern states. Unfortunately, Western Australia only has three members of parliament represented federally, so there is not a strong incentive to really address this issue. In the state, the Minister for Training and Education is trying to promote trades in order to meet the demands of the resources industry.

GBR: The Liberal Government of Western Australia has been commended on its mining agenda. What are some of your key near-term priorities? BM: One of the key initiatives our government has put in place is streamlining the approvals process. We would like to implement an online tracking system across all of the departments, similar to what is already in place within the Department of Mines and Petroleum. Having an online system will alleviate any miscommunications across departments that slow down the approvals process. The Liberal government has allocated funds in order to achieve this goal. Another initiative is to capture and store environmental information into a database similar to what we already possess for the mineralogy of the region, so that a mining company can access historical environmental information. These two initiatives will help to make the approvals process smoother, and also highlight whether there is a bottleneck.

GBR: We have seen a troubling trend of declining exploration expenditure in Australia. How well can state incentives such as the Exploration Incentive Scheme address this issue? BM: It is extremely important for the government to offer exploration incentives to companies, because without exploration there will be no mines. The Liberal government will continue with the A$100 million Exploration Incentive Scheme, which currently goes through 2015; however, we are very keen for the scheme to continue beyond then. Data shows that there is a genuine multiplier effect with such schemes in place, so this is a worthy investment in Western Australia. Hopefully the Exploration Incentive Scheme will help to increase Western Australia’s competitiveness in what is a very global mining industry; recent data suggested that nearly 75% of companies exploring in Africa are Perth-based.

GBR: What is the state doing to address the increasing cost of doing business in Western Australia? BM: There is a range of initiatives that the state government is trying to enact in order to reduce the cost of labor in

GBR: How is the government working to diversify Western Australia’s mineral production? BM: Western Australia is one of the biggest iron ore producers in the world, but we also possess vast nickel, copper, gold and bauxite deposits,

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as well as mineral sands, rare earths and even garnets. The Ministry of Environment has recently approved the first new uranium mine in Western Australia, which is very good news for the state’s economy; this will hopefully open the path to other minerals becoming more prevalent in Western Australia. We have extensive data on every type of mineral in the state, and will be very supportive of any company exploring and developing. We are seeing lots of magnetite iron ore development of the highest quality as well. GBR: What is your longer-term vision for Western Australia’s mining industry? BM: Western Australia has such a large landmass, most of which is still unexplored. Every week there seems to be new mineral discoveries. There is still so much more to discover in the state, especially with the current technology available, vast amounts of historical data and exploration grants. Deposits that were never considered viable in the past all of a sudden are economic due to new mining techniques and methods of extraction. Western Australia’s entire economy has always been based around mining and the state has developed a strong mining culture as a result. While there are more environmental constraints on mining and exploration, the industry is exceptional at meeting these conditions and succeeding as a result. Western Australia is still a great place to explore and there is a lot of geological data available for companies. One only needs to see the success of the major companies operating in the region in order to understand how much potential exists in the state. Western Australia will continue to be a good place to do business, and Perth will always be a hub of mining activity around the world.

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continued from page 3 China is Western Australia’s main export market for iron ore, followed by Japan, South Korea and Taiwan. Courtesy of Wikimedia Commons.

New frontier emerging in iron ore Iron ore continues to be the driver of Western Australia’s mining industry. Nearly 93% of Australia’s iron ore deposits are found in the state, with most of these being located in the world-class Pilbara region, home to mining giants Rio Tinto and BHP Billiton and homegrown Fortescue Metals Group. However, a new iron ore region is emerging in the Midwest, with large hematite deposits ready to be mined as soon as port and rail challenges are solved. Most iron ore is shipped from the port of Esperance, on the southern coast, or Port Hedland in the north, but these two main hubs are already operating over capacity. A much desired A$6 billion development of the Oakajee port in the western part of the state held promise, but was recently suspended due to a lack of interest from potential joint venture partners. Small and mid-tier mining companies with economic projects in the Midwest consequently have no way to export their product, leaving them virtually strand-

ed. As Craig Ferrier, CEO of Golden West Resources, an iron ore junior who is part of the Geraldton Iron Ore Alliance, explains: “Western Australia plans to consolidate the governance of its ports into fewer authorities, and to expand Esperance into a larger-capacity multi-user iron ore facility, promoting growth in the region’s junior mining sector. However, it wants to do this without putting the state’s balance sheet at risk, proposing that private developers should design, construct, operate and subsequently transfer new infrastructure back to the state. This model is not without its challenges. It took 12 months for the government to go through its internal review and market research processes before it was sufficiently confident to fund the port authority to identify and select a proponent. The PPP process has its own lead times; the government is talking about a proponent entering construction by early 2014 and having the initial upgrade complete a year later.”

This lack of clarity surrounding available options is undoubtedly a headache for juniors and investors alike. Padbury Mining, a fellow member of the Geraldton Iron Ore Alliance, which has 1 billion tons of JORC-compliant magnetite and 11.5 million mt of direct shipping ore in the Midwest region, took the unusual step of acquiring the intellectual property from a failed Chinese-backed bid for the Oakajee infrastructure development. The intellectual property itself is held in a subsidiary, which Padbury’s CEO, Gary Stokes, hopes to divest to an infrastructure development company. “Peak Hill’s region could absolutely become the next Pilbara,” said Stokes. “We believe there are 50 billion mt there; already 21 billion mt, JORC-compliant, have been identified. The Midwest is set to grow exponentially, just as soon as the infrastructure developments go ahead. China has an exposure of perhaps five billion dollars in the Midwest, so it is not just going to sit and watch.”

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Discovering Nickel and Copper at the Nova deposit, Fraser Range Our vision is to provide multiple returns on your investment through the discovery of high value mineral resources. We aim to achieve this through exploration and identification of early stage assets with high growth potential.

Sirius Resources NL (ASX: SIR) PO Box 1011 Balcatta, Western Australia 6914 T: +61 8 6241 4200 F: +61 8 6241 4299 W: siriusresources.com.au

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Gold miners get creative as costs increase Western Australia’s evolution as a state is historically been tied to gold rushes. Today, Western Australia is home to one of the country’s largest gold mines at Boddington, owned by Newmont, and exciting new discoveries like Tropicana, a 118 million ton resource containing 7.89 Moz of gold at a grade of 2.08 grams per ton. The recent slide in gold price is particularly felt amongst gold miners operating in the state. Average cash costs for operating gold mines in the state are above A$1000/oz. While still economic, falling prices and escalating costs are creating an environment of uncertainty amongst the state’s gold community. Enter small juniors who are making economic projects out of less. The projects coming into fruition in Western Australia over the near term are those that have less reserves or a shorter mine life, but lower cash costs and as a result, are highly profitable. Doray Minerals, who own the Andy Well project in the northern Murchison region, are gearing up for first gold pour by September 2013. The 444,000 oz resource is expected to produce around 74,000 oz of gold per year over a four-year mine life. With cash costs around A$900/oz, the payback

Allan Kelly, Managing Director, Doray Minerals

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Labor costs remain high in Western Australia putting extra pressure on mining companies.

period for investors is likely to be less than two years. Doray’s CEO, Allan Kelly, explained how the company was able to convince shareholders that Andy Well was worth mining. “The market’s focus has been on ounces instead of grade. The simplest way to value companies is putting an enterprise value per resource ounce, and when we are trading at A$300/oz, the market viewed us as overvalued. A company that has 1 million ounces at 1g/t might be trading at A$20/oz, and compared to them Doray seems expensive. However, these projects might not even go into production,” he said. KalNorth Gold Mines also recently started gold production from a smaller deposit. The Lindsay mine in northeast Kalgoorlie is on track to produce 24,000 oz in 2013. In an effort to control operating costs, the company hired contractors instead of operating the mine internally. “Operating it ourselves meant waiting in line for equipment and

finding the right people. The contractors are ready to go and have all the systems in place to start at a set date. This it was quite an easy decision to make not to incur further risk by doing it all ourselves. This way we remove the capital investment, but operate with highly professional contractors that get results,” said John McKinstry, CEO and managing director of KalNorth Gold Mines. Gold companies currently at the development stage face the challenge of building capital-intensive mines without steady cash flow. Gascoyne Resources is targeting production at their 1 million oz Glenburgh project by late 2014. “We did a placement late last year to some large gold funds in the United Kingdom, and have been doing a lot of fundraising to allow us to continue aggressive exploration,” said Michael Dunbar, managing director of Gascoyne Resources. “It is important for us to keep drilling because once the company loses

momentum it takes a huge amount of time to gain it back. In the meantime, the company is still responsible for administrative expenses.” Phoenix Gold is also aiming to begin production from their Castle Hill project in 2015. “Our main challenge is timing,” said Jon Price, managing director of Phoenix Gold. “There is always geological risk in the gold mining industry, and financing is continually a challenge. Our aim is to leverage off still-strong gold prices and get into production by 2015.” Despite the challenge of a high-cost environment, Doray’s Allan Kelly believes that the opportunities outweigh the negatives. “There is more gold to be found in the state, both in known deposits and previously operating mines. Also, the big gold companies that acquired most of the mid-tier companies in the 1990s are now beginning to spin out projects that have not been worked on for many years,” he said.

Michael Dunbar, Managing Director, Gascoyne Resources

Doray Construction progress June 13. Courtesy of Doray Minerals. Global Business Reports // PRE-RELEASE WESTERN AUSTRALIA MINING

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Resource Evaluation pit at Wiluna. Courtesy of Toro Energy.

Exciting new developments in uranium Western Australia has some of the best-known uranium deposits in the world, but uranium production in the state has lagged far behind its potential. Australia holds over a third of the world’s known uranium resources, yet it contributes less than 20% to the world’s current supply.

This gap could start to change, thanks to the West Australian state government’s April 2013 decision to grant the state’s first uranium mining license to Toro Energy’s Wiluna project. Toro Energy’s managing director, Dr. Vanessa Guthrie, hopes that the shift in policy will allow the sector to realize its poten-

tial. “The state government’s decision in 2008 to commence uranium mining created real momentum and excitement within Western Australia’s uranium community, and was the signal that triggered Toro Energy to kick off Wiluna. The government’s re-election in March 2013 created significant certainty and predictability for the uranium sector in the state – our projects now have four more years of clear support,” she said. However, Western Australia has no history of uranium mining, which, according to Brian Reilly, managing director of Cameco Australia, creates a fear of the unknown. Cameco, a major global uranium player, own a portfolio of exploration-stage uranium projects in Western Australia. “Northern Territory and South Australia have been producing safely and efficiently for decades, but in Western Australia much more education needs to be done,” said Cameco’s Reilly.

Dr. Vanessa Guthrie, Managing Director, Toro Energy

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Nickel players bullish on future price

WA’s Newest Gold Producer ASX: DRM Doray Minerals is Western Australia’s

For a commodity whose price has Mark been in the dolBennett, Managing drums for the past Director & few years, some of CEO, Sirius Resources the most exciting stories to emerge recently from Western Australia have been from nickel companies. Sirius Resources’s share price rose nearly 3500% with its Nova and Bollinger discoveries, while Poseidon Nickel is set to reopen the Windarra mine soon. David Singleton, Poseidon Nickel’s CEO, is bullish on nickel prices. “Nickel forecasts are predicting huge price rises by 2016, due to supply problems in the market. As long as the demand side is reasonable, then the supply side is going to struggle to fill in the gap,” he said. Sirius’s CEO, Mark Bennett, distinguishes between the wider nickel market and the sulphide subset, which holds a different set of dynamics. “There are a number of smaller producers of concentrate, and the majors with downstream processing infrastructure who are continually looking for more feed. Anyone who can produce a good nickel sulphide concentrate is in a good position to market the product,” he said. Rox Resources, who recently intersected nickel sulphide mineralization at Mt Fisher, is also hoping to capitalize on the sulphide distinction. The company was able to raise A$5 million last year on the back of the excitement generated by the discovery, said Ian Mulholland, Rox’s managing director. “For the vast majority of exploration companies in Australia, it is still extremely difficult to raise funds, and companies are forced to do so at discounts to their share price. We need to get an understanding of what we are dealing with before making significant investments.”

newest high-grade gold miner and producer at its Andy Well Gold Project in the northern Murchison region of WA. The Company’s transformation from junior explorer to gold producer in just 3.5 years has been meteoric. There is near-term project upside with the potential for additional deposits and the Company has an excellent track record of meeting milestones on time and under budget. A strategic portfolio of gold properties in the Murchison and South Australia places the Company in an enviable position of future potential upside and returns to shareholders. Led by an experienced team with a track record of discovery, development and production, Doray is now a low-cost gold producer and self-funded explorer. www.dorayminerals.com.au

Solid Copper Sulphide. Courtesy of Sirius Resources. Global Business Reports // PRE-RELEASE WESTERN AUSTRALIA MINING

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What happened with the Mineral Resources Rent Tax? Mining companies in Australia were dealt another serious blow when the federal Labour government introduced the Mineral Resources Rent Tax (MRRT) in July 2012. The tax applied to new and existing iron ore and coal companies making more than A$75 million in profits per year at a rate of 22.5%. “When the tax was first introduced in 2010 as the Resources Super Profits Tax, it came as a shock to the industry because there was no prior warning,” said Helen Cook, national leader, natural resources at global tax firm KPMG. Industry insiders decried the new tax as ill conceived and toothless. In truth, the tax is estimated to generate only A$126 million for the government this year, far short of the initial A$2 billion estimates, thanks to the fall in mining profits across the board. “The MRRT is one of the most inelegant taxes ever conceived; it taxes companies on a product that they do not actually sell and relies on determination of a market cost base that must be calculated and will inevitably be debated with the ATO and yet, it does not generate any income for the Commonwealth.” said Geoff Rasmussen, managing director of Azure Capital. Such a tax does little to convince the global financial community that Australia is a safe place to invest. “Australia is heavily dependent on foreign capital, and the introduction of the tax led to the global economic community to believe that there were now potential sovereign risk issues. This perception has had more of an impact on companies rather than the direct cost of the tax itself,” said Reg Howard-Smith of the CMEWA. It remains to be seen whether or not the MRRT will ever have the intended effect on Australia’s balance sheet: with federal elections looming, the opposition Liberal Party has promised to remove it as one of the key campaign platforms.

Western Australia’s diversified commodities base Western Australia produces over fifty different commodities, yet most of the investor attention is focused on iron ore and precious metals. Companies operating outside of this sphere have to overcome a distinct set of financial and regulatory challenges. Western Australia’s rare earths industry is facing the problem of educating investors about the value of less-understood mining projects. “Some people now think the rare earth market is over. The fundamentals are still there, but visible value is lacking,” said George Bauk, CEO and managing director of Northern Minerals, a rare earths developer. Rare earths in particular have a potentially exciting future in Western Australia, as China, the world’s largest producer of the commodity, recently made moves to curb its exports in order to satisfy internal demand. Mineral sands players are hoping for a similar supply void caused by the price shock that triggered the three dominant producers to curb their production. David Harley, managing director of Gunson Resources, explained: “When the industry suffers a price shock, the big producers

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Peter Davies, Managing Director, Image Resources

stop selling their product, creating an opportunity for smaller players to gain market share.” Even though some analysts believe that demand will increase, it may not translate into investment for mineral sands projects thanks to the steep drop in zircon prices. “Now that zircon prices have retreated to around US$1400 from highs of US$2500 in 2012, investors perceive zircon producers with more caution,” said Peter Davies, managing director of Image Resources. Another commodity not usually associated with Western Australia is potash, although two companies are hoping to put their projects into production over the next few years. Russia and Canada have dominated the world’s potash market, but West Australian potash players are confident that they can break that stronghold. “It is going to be challenging to break through,” said Patrick McManus, managing director of Potash West, an early-stage potash player. “The growth of China as an iron ore market changed the iron ore supply business, and we are seeing that with the potash market now.”

Zircon is one of the misunderstood minerals among Australian investment community. Courtesy of Parent Gery, Wikimedia Commons.

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More incentives needed to promote exploration Exploration expenditure has dramatically reduced in Australia over recent years. In 2002, Australian exploration for non-bulk commodities accounted for around 21% of global mining exploration, yet in 2012 it was closer to 12%. This trend is not echoed in other jurisdictions: Canada, for example, has seen an increase in exploration activities of 4% over the same ten-year period. According to estimates, the current level of producing mines and those close to development will sustain the mining industry in Western Australia for another 15-20 years. With less greenfields exploration activity, the future beyond 2030 is murky. There are a number of reasons why exploration expenditure has declined in Western Australia, according to Reg HowardSmith, CEO of the Chamber of Minerals and Energy of Western Australia (CME), the main representative body of the resources sector in Western Australia. “The high cost of exploration in the state is a significant problem: over the last few years Western Australia has become one of the most expensive regions in which to operate. There is also a lot more competition on a regional level, causing many exploration companies to find greater opportunities in Africa.” Companies who stay Western Australia face a costly approvals process that eats into their precious exploration capital. Prospecting and exploration applications in the state dropped by almost 50% in the fourth quarter of 2012, the lowest level since 2009. Industry representatives such as the Association of Mining and Exploration Companies (AMEC) have called for a more streamlined process and less duplication amongst various departments to help junior miners secure licenses. Another option is for the federal government to examine a flow-through shares scheme similar to Canada’s, where mineral exploration companies can pass tax breaks for exploration onto investors. Although the Australian government has examined the scheme in the past, no such incentive exists despite backing by industry representatives. “The CME supports greater incentives for exploration, such as flow-through shares, but it is difficult for the federal government to support a similar scheme in Australia since there has been major investment into the iron ore sector, making it difficult to justify exploration incentives,” explained Reg HowardSmith of the CME. For those investors who appreciate the ongoing potential in Western Australia, the market has rewarded them handsomely. Case in point is Sirius Resources’s Nova nickel-copper discovery in August 2012. With just over A$1 million in cash, the company managed to uncover an entirely new deposit in the Albany-Fraser Range. The resource comprises of over 10 million mt of 2.4% nickel, 1% copper and 0.08% cobalt. “The target was such that if we drilled the hole and found nothing, it would be all over. The company only had A$500,000 left when we hit mineralization. It had looked so prospective all along that we did not want to allow ourselves to believe it was real; it was either graphite or one of the world’s biggest nickel deposits, and it turned out to be the latter,” said Sirius’s managing director Mark Bennett.

Since the Nova discovery, an almost inconceivable stream of good news has emerged from the project as further drilling revealed a similar deposit to Nova, which Sirius has named Bollinger. At press time, the company has over A$60 million in cash and is actively drilling to advance the project toward feasibility. A similar story is Sandfire Resources, whose share price in mid-2009 was trading at around A$0.10 when it announced it had discovered a high-grade VMS copper-gold mineralization at their DeGrussa project. In just over two months, Sandfire’s share price jumped to A$2.27. The company shipped the first load of copper concentrate in December 2012 and is now valued at just under A$900 million. Both Sirius and Sandfire’s stories are bright spots for an industry that is suffering from a lack of available capital and increasing red and green tape – Sirius in particular, because it happened so recently and in much more difficult economic conditions. Their success signals a new era for Western Australian explorers, opening up previously underexplored or even virgin regions and highlighting the need to keep drilling despite challenging circumstances. Only then will the capital markets follow suit and return Western Australia to the dominant position it once enjoyed as a leading destination for exploration enthusiasm.

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Controlling costs and increasing productivity: a lesson in efficiency from Western Australia’s miners

will reduce upfront costs instead of relying on traditional techniques.” “There are a number of innovative companies who are working on various ways to collect, process and model data that will ultimately lead to faster, cheaper and better ways to evaluate and mine mineral deposits.” Ray Hince, general manager of recruitment company JDA Applus Velosi, agreed that companies should move towards the adoption of new technology in order to remain profitable. “It is difficult to rein in an established labor cost base, so the best strategy is to cut people out of your processing equation to reduce capital maintenance costs. A number of companies are following Rio Tinto’s drive to automation. There will always be a requirement for maintainers, supervisors, planners, managers and professionals, but a lot of operational expenses can be cut,” he said. The belief that productivity is dramatically waning, however, may be slightly overstated, according to KPMG’s Cook. “At face value, the economic analysis of productivity in Australia’s mining industry looks terribly unproductive; however, when there is capital investment going on, there is no output. As we see the transition from big projects currently in construction moving into production, we will start to see this figure change,” she said.

Mining (including Oil and Gas) Productivity Indices Capital and Labour Sources: PwC, Productivity Scorecard, March 2012

180 160 140 120 100 80 60 40

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Mining (capital)

Mining (labour)

2009-10

2007-08

2005-06

2003-04

2001-02

1999-00

1997-98

1995-96

1993-94

1991-92

1989-90

1987-88

1985-86

A critical challenge for the mining industry in Western Australia is to manage the rising cost of doing business in the state while increasing operational productivity. Costs have risen exponentially over the last decade, far outpacing that of the rest of Australia and negatively impacting Western Australia’s competitiveness in the global Helen Cook, Partner Australia, mining industry. Energy & Natural Productivity, classified here as both laResources, KPMG bor and capital expenditure versus output, has declined significantly over the same time frame. The recent high commodity prices has led to less skilled and experienced employees getting paid exorbitant wages to mine more marginal deposits, requiring more ore to be processed at a lower grade. This vicious cycle caused a 50% drop in labor productivity and a 37% drop in capital productivity. Gascoyne Resources’s Michael Scott Dunbar points to the mining industry’s Jackson, Managing adoption of a fly-in, fly-out lifestyle as Director, one of the causes of cost overruns. With Quantitative Group many mines located in remote areas of the state, companies have little choice but to import staff on a rotational basis. “We are seeing people moving away from fly-in, fly-out 2/1 rosters to 8/6 rosters, which is incredibly inefficient because in essence you need two people to do one job, and with labor costs already high it is making the industry essentially uncompetitive,” he said. The permitting process is also a significant factor in the cost overruns that mining companies face in Western Australia. Duplication in the approvals process leads to challenging delays as companies are forced to continue spending money while waiting for mining licenses to be granted at the state and federal level. As KPMG’s national leader, natural resources Helen Cook explained: “Our regulatory environment is highly complex, from federal to state to local regulations, and a number of new taxes introduced.” While Western Australia may be an incredibly highcost environment for mining, companies still proceed with business as usual. The successful mining companies in Western Australia are the ones that are managing costs and increasing efficiencies, according to Scott Jackson, managing director of Quantitative Group, a Perth-based mining consultancy. “The adoption of technology is essential, and companies must examine methods of exploration that

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PRE-RELEASE WESTERN AUSTRALIA MINING

The new reality of mine financing The effects of the funding crisis faced by mining companies around the world are felt differently in Australia, which had by virtue of geography largely been immune to the US economic crisis and Europe’s debt woes. In order to understand why Australian miners find themselves in a cash-strapped position today, one needs to look back to the heady days of 2010, when China’s growth and demand for natural resources seemed insatiable. What this demand created was an appetite for risk amongst Australian investors eager to finance the next big iron ore, coal or gold project. That in turn kept the entrepreneurial spirit for exploration high, and mining companies were more than willing to explore Australia’s fertile ground for attractive deposits. China’s infrastructure spending could not last forever, and once updated growth figures were released in 2012 – a healthy 7%, but nowhere near the figures that buoyed Australia’s most recent mining cycle – the era of risk-friendly capital dried up. Australia’s economy was now much more exposed to the financial troubles facing the rest of the world. The fall in commodities prices also came as a shock to shareholders, who saw their investments dwindle as share prices fell. Suddenly, the mining community in Australia experienced a crisis of confidence that had reverberations on the fundamental financial models in the industry. Liam Twigger, Last year was one of the more diffiManaging cult years for IPOs on the ASX, although Director, PCF Capital Group this echoed a global trend. “IPOs were lower than they have been, but we still had over 100 new listings, of which nearly 80% were in the resources sector. Our upcoming IPOs show that of the 19 new listings, 16 are resources companies. We have seen some improved market conditions, but it takes a little while for those trends to reflect in IPOs and capital raisings” said Eddie Grieve, senior listings manager at the ASX. Behind the scenes, a generational shift is also taking place amongst Australia’s investment community, according to Bert Koth, director of Perth-based private equity firm Denham Capital. “The younger generation does not have the means with which to fill the financing void because of their obligation to put money in superannuation, or retirement, funds. The groups who have a stronger understanding of the mining business and the risks involved do not have the same pool of capital to invest as their older counterparts,” he said. Global financial conditions and a shift in Australian attitudes created an almost perfect storm for mining companies trying to raise the necessary funds to further develop the projects needed to sustain Australia’s mining industry in the future. While the situation seems bleak, there are still options available for those companies willing to be creative in their financing strategies.

Enter private equity players setting up a base in Perth, an emerging hub in Asia Pacific for mining investment. Private equity is a fairly novel option in mining finance, but perhaps represents one of the more viable ones for companies seeking to raise capital. Having traditionally avoided the sector due to the scale of investment needed and the accompanying risks involved, private investors have recognized an opportunity in the lower project valuations and sheer lack of available capital. It is too soon to tell whether these represent an attractive option for investors and mining companies alike. Even with a major push expected from investment houses, the total amount of funding available from private equity is estimated to be less than A$20 billion – meaning that very few companies can benefit from this route. For already-listed junior companies, the options are fewer. The traditional financing option of raising money on the public markets worked well when share prices were healthy, but the prospect of diluting the company’s shareholder base in a depressed market is distressing to many juniors with loyal backers. The ASX, however, has instituted new capital raising initiatives to make it easier for juniors who choose this route. For many years, the ASX required that a company that wished to raise more than 15% of its capital in a 12-month period either had to receive shareholder approval, or issue those shares pro-rata to its shareholders. Now companies under A$300 million market capitalization are able to receive shareholder approval to increase their capital from 15% to 25%. Strategic partnerships should be realistically considered as another funding source. “Private equity is not the solution to the mining market’s troubles. A few groups with deep pockets have come in, but strategic partnerships should be considered as another funding source. Overseas investors like the Chinese are recognizing the advantages of these earn-in arrangements, and subtle though the difference might be, they send a slightly better signal to investors than putting an asset up for sale. You can always go from a strategic partnership to a sale, so it leaves more options open,” said Liam Twigger, managing director of Perth-based PCF Capital, a boutique financial services firm. Most financiers will agree that there is still a pool of investors who have the funds and are willing to take on a certain degree of risk, but the days of free-flowing mining capital are over for the foreseeable future. The fundamental mining investment tenants of a good project, good management, good asset and good jurisdiction are becoming ever more important, and Australia is in the fortunate position of being able to capitalize on the country’s strong mining history and low political risk. The financial community in Australia is evolving to meet the pressures and mining companies must do the same in order to survive.

Global Business Reports // PRE-RELEASE WESTERN AUSTRALIA MINING

PRE-RELEASE WESTERN AUSTRALIA MINING

Perth: the new hub of overseas mining excellence Australian companies have not been as quick to explore outside their borders as their Canadian counterparts, but this is quickly changing. Although Perth-based companies have operations all over the world, a large proportion of mining companies are focused on the African continent. There are over 240 ASX-listed companies who are based in Australia but have operations in Africa. Some, such as uranium producer Paladin Energy and iron ore behemoth Sundance Resources, have large operating mines, but the majority of companies are quietly advancing exploration and development projects in

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Perth’s inflated housing prices are slowly decreasing on the back of the investment plateau in the mining sector. Courtesy of Katya Koryakovtseva.

a variety of commodities, from precious metals to rare earths. Bill Turner, chairman of the Perth-based Australia Africa Mining Industry Group, explained the attraction of the continent to West Australian miners: “Africa has undergone some challenging times since the end of the colonial period, from civil wars to dictatorships, but the situation has changed dramatically over the past twenty years. The continent has not been explored to the extent that Western Australia has been. The topography is very similar what you would find in Western Australia.”

Global Business Reports // PRE-RELEASE WESTERN AUSTRALIA MINING

Peak Resources are working to advance their Ngualla rare earths project in Tanzania, which is on track to a 2016 production target. According to the company’s chairman, Alastair Hunter: “Australian companies are becoming more and more adept at working in Africa and have a clearer understanding of how to cope with the issues.” Mining companies working in Africa have a very different range of issues to deal with than they do in Australia. There are political risk issues, poverty, bribery and corruption, and the responsibility to assist in developing a viable industry in an infrastructure- and educationally-challenged region. Of particular concern is the degree of sovereign risk, or resource nationalization, associated with certain African destinations; the chance that a company could stand to lose their project is much more real in Africa. The allure of Africa as an investment destination translates into an A$50 billion flow of capital into the continent. The concern is creating an “us-or-them” scenario where the domestic West Australian mining industry suffers. Not so, according to Brad Boyle, managing director of Triton Minerals, a Perthbased junior advancing a graphite project in Mozambique. “Perth and the ASX both have an absolutely huge influence on the global market; there are thousands of juniors and a massive network of opportunities. Other centers around the world are probably more risk averse, while this market understands mining and is prepared to invest in promising opportunities. Mining has been so strong in Western Australia for so long that it is ingrained in society; few people in the state are not directly or indirectly influenced by the sector,” he said.

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Conclusion: Signs of market recovery? The steep drop in commodity prices and lack of available risk capital wreaked havoc on West Australian miners. The boom and bust cycle, however, is not a new trend in the mining industry, and stakeholders are confident that good times will return. These tougher times demonstrate just how sentiment-driven the mining industry is, where using emotion-laden terms such as boom and bust can have a profound economic effect. Reg Howard-Smith of the CME prefers not to use such language when discussing the mining industry. “We focus on sustained economic growth,” he said. “There have definitely been interesting commodity price movements over the last decade, but we will see a major pickup in production that will contribute towards the sustainable development of the state. The sector is changing, not ending.” Some signs of relief can be seen on the horizon: analysts are confident that the strength of the Australian dollar, currently trading nearly ten cents higher that the American dollar, will soon drop to more manageable levels as the United States edges closer to energy independence and the European debt crisis is resolved. As well, labor costs are due to drop once construction of the large-scale liquefied natural gas projects is completed. Inevitably, West Australian mining companies will have to adapt to economic circumstances. Once confidence returns, the industry’s key players agree that the state will continue to benefit from its blessed mineral endowments and strong expertise. “Western Australia is still a great place to explore,” said West Australian Minister for Mines and Petroleum Bill Marmion. “One only needs to see the success of the major companies operating in the region in order to understand how much potential exists in the state.”

PRE-RELEASE WESTERN AUSTRALIA MINING

Company Snapshots Sirius Resources (ASX:SIR)

Amidst a gloomy period of exploration for Australian junior miners, the Sirius story provided a bright spot for companies and investors alike in the Nova and Bollinger nickel discoveries (see page tktk). Now the challenge for Mark Bennett, Sirius’s CEO, and the rest of the team is capitalize on the excitement generated by the discoveries in the face of depressed nickel prices. According to Bennett, Nova is such a robust deposit that it will likely be very low cost so that the nickel price does not matter. “Even at low nickel prices, Nova should still make money, and it is sufficiently big enough to last more than one commodity cycle,” he said.

Toro Energy (ASX:TOE)

Despite being blessed with some of the world’s largest uranium deposits, Western Australia currently has no domestic uranium production. The April 2013 decision by the WA state government to approve Toro Energy’s Wiluna project signals a change in policy and opens a new era in uranium production in Australia. According to Dr. Vanessa Guthrie, Toro’s CEO, the company’s strategy is to focus on establishing a financing plan to take Wiluna to a bankable feasibility study and secure offtake agreements with potential customers in Europe and the United States. “We hope to commence construction toward the end of the year, with first sales by 2015,” said Dr. Guthrie.

Triton Minerals (ASX:TON)

With the Mozambican government is actively promoting the mining and oil and gas industries, Triton Minerals acquired the Balama North graphite project, where an extensive drill program is currently underway. Brad Boyle, Triton’s managing director, mapped out the company’s strategy to being successful in an emerging mining destination. “You have to prove your genuine credentials as an explorer when you arrive in Mozambique, because some companies are not really serious. Companies must recognize their responsibilities to invest in roads, power, telecommunications and CSR activities. The government is extremely keen on investors providing economic opportunities and education to local people.”

Doray Minerals (ASX:DRM)

The current resources funding crisis caused many mining companies to either shelve or cancel upcoming capital-intensive projects, yet Doray Minerals is forging ahead with the Andy Well gold mine. Following the most successful IPO on the Australian Securities Exchange in 2010, Doray’s managing director, Allan Kelly outlined a step-by-step plan to get the project into production and, despite the economic downturn, has largely stuck to their self-imposed milestones. “For the last three years, everything has happened on time and on budget; there was never a question that the project would be economic,” said Kelly. “We knew that the original deposit was always the tip of the iceberg, and in early 2012 we found a second lode, Judy, where we just released our maiden resource. Judy allowed us to justify building our own processing plant, despite having a small resource, because the closest plant is 3 million mt per annum and if we were to process the ore through such a big mill, we would lose a lot of the grade.” Global Business Reports // PRE-RELEASE WESTERN AUSTRALIA MINING

We would like to thank everyone who took the time to participate in our research. The full report will be published in January 2014. If you would like to be interviewed for the report please contact Katya Koryakovtseva (katya@gbreports.com).