Tuesday, 20 October 2020 KordaMentha’s Behind Business podcast discusses the most pressing commercial, financial and operational issues facing business today. In the latest episode of Behind Business, we are talking about Australia’s most lucrative export industry, and one which defines our economy to the rest of the world, Mining. Transcript Sean Welcome to Behind Business, the podcast where KordaMentha experts discuss the most pressing issues facing business today. I'm your host, Sean Aylmer an economist and journalist for 25 years and the voice of the Fear and Greed daily podcast. Today, we're talking about Australia's most lucrative industry, at least in terms of exports, and an industry which defines our economy to the rest of the world, mining. Iron ore, coal and LNG captured the headlines. But Australia is among the world's leading producers of bauxite, alumina, uranium, lead, zircon, lithium, and zinc. Our history is littered with gold rushes, but Australia is only the fourth largest producer of the precious metal. It invests huge amounts of money over long periods of time and has a laser focus on safety. And it's a vital part of so many communities around the country. It's also an industry struggling with its social license to operate and its impact on the environment. Sean To talk to us about the history, the present and the future of mining in Australia, we have KordaMentha Partner, Richard Tucker joining me from the Perth office, and Julian Derrick Executive Director Restructuring joining me from Sydney. Welcome to Behind Business. Sean Now let's begin by getting a sense of the size of our mining industry. Richard, how many businesses, employees, dollars, directly involved in mining in Australia? Richard I'm based in Western Australia where ultimately you either dig it, build it or crop it. And mining would be the biggest contributor to the WA economy, approximately 35 to 40% of the WA economy and very material for Australia as a whole. But from a pure mining related basis, revenue from mining companies is approximately $285 billion, is approximately 8,000 businesses and about 170,000 Australians employed in those operations, equating to about $28 billion of wages. So very, very significant. Separate to that there's a number of other service providers and companies that hang off these businesses such as catering, transport, and machine shops, just to name a few. Which highlights the importance of the mining industry in Australia. Sean So Julian, it's not just the miners themselves, it's also the ecosystem of services and companies around mining that's impacted as well. Julian That's right. This is a sector that provides 68% of Australian exports. There's roughly 10 billion of revenue for businesses that directly support mines, but you could roll that down to the second tier and the third tier suppliers right the way down to transport. And you have an enormous infrastructure that sits around the mining sector that is impacted each time the commodity prices go up and down because often these more discretionary spends are the first to be cut or first to be brought on each time there is a movement up or down in a commodity price. Sean Richard, in terms of the process of mining, do all miners find it, dig it and ship it? Richard Look, I mean, ultimately each commodity and each oil body has a slightly different process. The reality is over the past probably 10 to 15 years, and it has come off recently, but there has been a very significant investment in capital expenditure. You've seen the mega projects in the LNG space off West Australia. You've seen very significant ramp up sort of pre 2014 in the iron ore space. And so along with that, you've seen differing degrees of infrastructure, which can include onshore processing in some commodities and, or it's just simply we dig it, we crush it and it's shipped to be processed off shore. Sean Richard, staying with you is iron ore the biggest commodity? Richard That's right. I mean, certainly from a West Australia perspective, iron ore is key, it is the number one export commodity from the whole of Australia with coal accounting for about 23%, so iron ore is about 31%. Beyond that, it's the sort of oil and gas. There's been a significant amount of funds spent in that space, developing projects, the mega projects, obviously all that happened pre the wash out that's come as a result of COVID and what that means for oil prices going forward. But yes, I know is the critical commodity for Australia with nearly all of it coming out of Western Australia. Australia is very fortunate at the quality and the grade of the iron ore that it has available. And what we've seen over the last 10 or 20 years is just a significant demand out of China. And for anyone who's been to China, it is quite mind blowing to just see the level of development that's occurred in that country over the last 20 years. It's something that we'll probably never see ever again, and ultimately fueled the fire for the demand for iron ore. Sean Among all the challenges of COVID-19, it seems that mining has somehow found a way to keep trading. You're both actively involved in working with clients in the sector. Julian, how has mining been operating during the past six months? Julian Well, I think it's been an enormous success story for the sector. The fact there's been no onsite outbreak of COVID 19 seemed amazing. Looking back now, it's been a real achievement for Australia to keep this crucial sector working. I know that the thought processes that have gone into making sure COVID stays off the work sites has been, right down to the granular level of making sure that food that's served on the planes that go out to the fly in fly out sites has been prepared in a safe environment or simply not providing it at all. I mean, they really have gone down to that granular level to make sure everything worked. Sean I suppose when you think about mining, it brings about images of brave entrepreneurs taking massive bets, winning, losing. The real story though seems to be much more about safety being the first priority, risk management, cost discipline, kind of more process driven. Julian, is that right? Julian Yeah absolutely. The most important thing with safety culture is that it isn't lip service. Every day when each mine manager arrives at site, he says, how am I going to keep my people safe today? And that is very much part of the Australian mining culture. Sean Richard, do you agree that safety is the first priority for mining? Richard From a mining perspective, employees are such a critical piece of the puzzle in ensuring a successful outcome. And ultimately any project when it first is getting ready for production or starting to come into production, there is inevitably going to be processing or other issues. And having continuity of employees who have been through that learning process or able to go through that learning process from the start of ramp up to actually delivering ramp up is absolutely critically important in our view. And so if you treat the employees poorly, if their wellbeing and safety isn't well looked after, you're just not going to hold on to those key staff. Sean Mine is such a capital intensive industry. Richard, what are the capital constraints like at the moment? Richard Yeah, it is clearly a very capital intensive business and sector. We certainly seeing it's a tale of what commodity you're in. So for example, gold is extremely hot at the moment. And if you look back 18 months ago, a junior gold miner was unable to raise capital in any significant form, whereas you sort of fast forward and there is just a wall of money from global sources and locally chasing investment in the gold sector. So what you're seeing is these explorers trying to transition into a development assets, so transitioning from the exploration into development and then ultimately into production, have actually been able to access capital. I think the challenges that that brings is that the reality is it takes a special kind of management team to take a project from concept into production. And it's going to be interesting how a number of these management teams deliver those projects within the budgets and within the constraints of the cash flows, because that's what investors will be expecting. Iron ore another commodity which is clearly running hot. It went through a cycle, it came off a cliff in 2014, which was largely expected. The reality is in that period of 2012 to 2014, you saw a number of smaller operators coming online and ultimately you saw prices come off and come off significantly. And those projects were the first to fall over. Interestingly, you are now seeing some of those projects come back online, but the people that are bringing them back online are trying to keep them to be nimble, such that in the event the price does come off, they're able to shut those operations down. So look from an iron ore and gold perspective, we are seeing a lot of interest, a lot of money chasing home but then there are other commodities which are facing challenges. So two years, three years ago, lithium was the hottest commodity in Western Australia. You literally had to just put out an ASX announcement as a junior explorer and saying that you found some lithium and your share price would potentially double. Now the world suddenly turned and turned quite aggressively. It was always expected that the prices would retreat, but it fell and fell very rapidly, which reflects a couple of issues. Number one is that they had challenges with processing clients predominantly in China because that's where it's predominantly processed. And number two is you just had a significant amount of supply coming online all at the same time. So you're seeing some challenges in the lithium space. I expect those challenges will continue, but lithium will recover because it is one of those niche commodities where there is a real opportunity for it down the track. Sean Julian, do you have any more on that in terms of specific commodities? Julian Yeah. The one commodity that stands out as perhaps not fitting the same classes is thermal coal. Whilst coking coal, iron ore, and others always will have I think access to capital, there is a different view I think starting to emerge on thermal coal. The social license for new mines is now difficult to garner from the Australian public. I don't think the fact that the banks are pulling out is a big issue for miners generally. I think there are other sources of capital. But just the rationale for a new coal mine, thermal coal mine in Australia is getting harder and harder to put up. And that's a sector that's in long-term decline, all be it it'll be a glacier pace that it declines at, and it'll be a very slow and structured decline. But that is a one commodity that really sticks out as being slightly out of step with the others. Sean Mining needs a license to operate, and with the right to mine comes a responsibility to the community and to the environment. There've been some industry challenges recently, we all know about that. And a social license to operate seems to be increasingly important. Julian, do you agree? Julian Yeah. Critical now for minors. And I think the large end of town have certainly gotten the message, even if they haven't fully implemented it yet. You need to operate within a community. If you're a minor, you need the employees. And often, this is a mutual process because the communities often are reliant on the mine as well. So there has to be a good level of understanding and it has to be a good level of respect between the miner and the community they operate in. Richard, perhaps you can talk about why Whyalla and how critical the operations in Whyalla were to that community. Richard Yes, thanks Julian. So Whyalla is a small town in South Australia. We were involved in the restructure of Arrium Limited, which had a iron ore mines and a steel processing plant down there. Ultimately the entire town relied on that steel works and` mining operations. So without the Arrium operations being there, it would have very, very significant socioeconomic issues that would flow through the community. And that becomes multi-generational. And it was very interesting that when we arrived at that town on sort of day one, it only took a couple of days to realize that that engagement was not about saving a company, it was really about saving a town. And the community were naturally cautious when we first arrived, but through various initiatives we managed to get them behind us. And that was a critical piece in the puzzle in ensuring the successful outcome of that. Richard I think at the end, they even did a ticker tape parade and invited us and Mr Mentha to be at the head of that parade and he got presented with a key to the city. Which just shows how communities can really add so much to these operations. Sean Fantastic story. Richard Look just in relation to the social license aspects. It's really interesting. What we've seen is really a shift and it's probably a shift across business more broadly, and it's starting to cascade from sector to sector. And probably the first sector that saw this shift in what the public really expects of a corporate entity in how they operate and engage with their community was in relation to the banking sector, where we've had a banking royal commission that ultimately has led to a complete shift in the way that the banks operate and the way they engage with the community and their customers. And I believe what we're starting to see is the beginning of that occurring in the mining space. And that not only do you need to satisfy your environmental obligations, but how you engage with your community and what the public expects of you is becoming a higher bar. And so you're going to start to see, I think, an ongoing shift away from purely profit based reporting to softer metrics around how does the community view you and how do you engage with that community? Sean Yeah. So as part of that, Richard, the environment presumably plays a huge role. And we're not just talking about starting a new mine, but actually finishing a mine as well. Richard That's correct. I mean, environmental issues are nothing new. And the standards in Australia, ultimately companies are held to a high standard. Often when we get involved, the reality is the company has been through a period where it has been cash constrained and potentially there have been environmental breaches. The one thing I'd say is that the different departments of mine across the different states are actually relatively pragmatic and commercial. They want to see operations continue, but they want to see them continue in a safe manner and with appropriate environmental controls in place. But environmental in terms of operating within appropriate environmental regulations is an absolute critical cornerstone of any mining operation and should continue to be so going forward. I think the public is going to hold mining companies to a higher bar beyond just meeting the environmental obligations. Sean Julian, do you agree with that? Julian Yeah, I think that's right. And I think there's been a real change in the mindset of state governments around what they're willing to accept from minors. I mean, we're seeing some legislation changes in WA to stop some of them past practices where bonds were completely insufficient to meet liabilities and effectively the make good on the mine sites wasn't completed. I think we've seen, hopefully we've seen an end to a lot of those bad practices. I mean, my first trip out to Kalgoorlie, it was very noticeable that the rehabilitation only happened on the side of the road that was facing the mine. And when you kind of drove around the back, no rehabilitation had been done at all. Hopefully those kinds of practices are long gone and we can see much better behavior from miners going forward. But I think it's important to say that this is something that has to be led from state government. Sean Richard, do you think that institutions, banks and investors will also force miners to do more? Richard I think ultimately banks and investors are going to be part of the solution that drives change and drives accountability. I think you have seen a significant shift in the way that people who invest with some of these funds who ultimately then invest in the corporates, want their money to be used. And it's not purely for profit. They want to know that the companies that are receiving their funds are good corporate citizens. Sean Julian, what's yours outlook on the mining sector over the next five years? Julian I think it's a relatively stable outlook for mining in the next five to 10 years. There will be this forever process of cost down, which means generally speaking, greater scale and more automation. They are trends that have been with us now in the mining sector for a very long time. And equipment will get bigger and more powerful and there'll be a greater automation with that equipment. But generally speaking, I think it's a relatively stable outlook for commodities, not withstanding volatility and commodity prices. Sean Which is part and parcel of running a mine? Julian Exactly. Sean Yeah. And to you Richard? Richard Yeah. I tend to agree with Julian. I expect there will be a period of stability where certain commodities will become the sort of next hot thing and others might drop off further or drop off from their current highs. Sean Will China continue over the next decade to be our main buyer or do you think we will diversify into other, India, Southeast Asian countries? Particularly for our iron ore I suppose I'm talking about. Richard Yeah. I fully expect that there will be a decrease in reliance on China. I mean, China will still be a key trade partner in relation to commodities, but probably the next key growth economy is India. And there are significant opportunities for our commodities in those jurisdictions. Sean Julian, do you have any more on that one? Julian Yeah. I echo Richard's points about diversification from a coal perspective at least. There's a lot of really strong infrastructure on the eastern seaboard of Australia, which opens up other markets other than just China. There's scope to do more in Korea and Vietnam and other Asian economies. Sean So Julian, what are the key points for mining operators to remember right now to best set themselves up for success, given everything we've discussed? Julian I think I'd always come back to focus on safety and making sure you've got those safety fundamentals in place, is the absolute number one goal. And then it's all about having a long-term look. You have to look through the commodity cycle and make sure the fundamentals of grade recovery and waste or ratio stack up. And ultimately those are the critical factors. Sean Richard? Richard Yeah, for me, there's probably two things and they're interlinked. The first is discipline. We sometimes say to go fast, you need to go slowly first. It's all about discipline in my view. And then also cost control. So understand your costs and have control over them because the commodity prices can turn and will turn. And if you're on the wrong side of the cost curve, there is nothing you can do. You are merely a passenger in a global game. Sean Richard and Julian, thanks for talking to Behind Business. Richard Thank you, Sean. Julian Thank you. Sean That brings us to the end of today's episode of Behind Business, the podcast where KordaMentha experts discuss the most pressing issues facing business today. It's clear that mining is critical to Australia's prosperity and position as a middle economic power. It's a diverse industry in terms of both metals and minerals and geographies. And it has huge flow on effects to many other businesses that rely on mining. Iron ore is king, but coal and LNG are certainly part of the royal family. The industry is hugely capital-intensive, has long time horizons and in many respects is at the whim of global markets and prices. The best operators think about safety and processes first. They understand their license to operate and their responsibility to the community and to the environment. It's evolved into the powerhouse of the local economy and will continue to grow over the next decade, reaping the rewards of strong management and a clear focus. It's an industry Australia should be proud of. In the next edition of Behind Business, we'll talk to KordaMentha about one of the most critical and contentious industries, aged care. I'm Sean Aylmer and that was Behind Business.