22/04/2021 - 10:00

Crunching numbers on iron ore returns

22/04/2021 - 10:00


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With the big iron ore miners continuing to make record profits, is the WA community getting a fair return?

Roy Hill’s trains carry iron ore to Port Hedland.

With the big iron ore miners continuing to make record profits, is the WA community getting a fair return?

The ongoing strength of the iron ore market continues to surprise.

With China and its Asian neighbours buying all the ore Australia can produce, the benchmark price is around $US170 per tonne, not far off its all-time highs.

While just about every market analyst is predicting a major correction, there is no sign of that happening yet.

That means Western Australia’s iron ore miners, which dominate global trade, can look forward to another round of bumper profits this year.

A quick recap of their latest profit reports shows how well they are travelling.

Rio Tinto’s Pilbara iron ore business reported an 18 per cent lift in profit to $US11.4 billion ($A15 billion) for the year to December 2020.

BHP and Fortescue Metals Group, which have a different reporting cycle, illustrate the benefit of higher iron ore prices more clearly.

BHP’s WA iron ore division lifted its underlying profit by 47 per cent to $US9.3 billion, for the six months to December.

Fortescue went one better, lifting its half-year net profit by 66 per cent to $US4.1 billion.

The fourth big player in the market is Gina Rinehart’s Hancock Prospecting, which owns 70 per cent of Roy Hill Holdings and half Rio Tinto’s Hope Downs mine.

Its latest results, for the year to June 2020, show a 55 per cent jump in net profit to $4.1 billion.

Extrapolating from these numbers, and assuming iron ore prices stay around current levels, it’s easy to foresee the big miners reporting collective profits of more than $50 billion this year.

Based on recent practice, it’s likely that at least 80 per cent of future profits will be paid to shareholders, which range from Australian superannuation funds looking after mums’ and dads’ savings to wealthy individuals such as Andrew Forrest and Gina Rinehart, and global fund managers including BlackRock and Vanguard Group.

That is bound to stir more discussion about whether the industry should make a bigger return to the community.

This debate is not new. It was more than a decade ago when former prime minister Kevin Rudd targeted the big miners with his Resource Super Profit Tax proposal.

That was followed by former Nationals WA leader Brendon Grylls pushing for a hike in iron ore royalties.

The industry is making even more money now compared to when those levies were proposed.

Big investors

To put this in context, it’s worth noting the miners didn’t get big profits just by riding high commodity prices.

They have squeezed costs, boosted efficiency and undertaken large investments to expand the scale of their operations.

The Chamber of Minerals and Energy of Western Australia has estimated that more than $62 billion has been invested in major iron ore projects since 2013.

This has led to quite extraordinary growth in the scale of the industry.

Over the past two decades, iron ore production in WA has increased nearly every year, from around 200 million tonnes per annum to an estimated 847mtpa (see graph).

The growth in production combined with higher prices led to the value of iron ore sales increasing to a record $116 billion in 2020, up by 17 per cent on the previous year.

The industry’s increased scale has delivered a big flow-through to the rest of the economy.

Rio Tinto, for instance, spent $4.3 billion last year on goods and services from 2,800 suppliers in WA.

The big miners also need to continue investing. Fortescue has budgeted $US2 billion for capital expenditure in the current financial year, with more than half being sustaining expenditure on its existing assets.

The balance will be spent on major projects, such as its new Iron Bridge mine, and on exploration.

The industry has also become a much larger employer.

The latest data from the Department of Mines Industry Regulation and Safety (DMIRS) shows the iron ore industry employed a record 70,852 people in 2020.

That is well above the peak of 61,948 during the last mining boom, in 2014.

The sector employed just 27,500 people in 2010 and 8,600 people in 2000.

Rio Tinto is the largest employer in the sector.

It employed 23,611 people across its Hamersley Iron, Robe River, Mount Bruce Mining and Pilbara Iron operations, according to DMIRS data.

That put Rio just ahead of BHP, followed by Fortescue, Roy Hill Holdings and Citic Pacific Mining (see table).

Iron ore’s increasing importance is reinforced by its growing share of employment in the overall mining sector.

The latest DMIRS data shows that iron ore accounted for just more than half all employment in the sector.

At the turn of the century, it accounted for only 20 per cent of jobs in mining.

More taxes

The increased scale and profitability of the iron ore sector has led to a big rise in the amount it pays in taxes and royalties.

The big four miners paid nearly $14 billion in company tax on their iron ore operations in their most recent financial year.

The largest contributor was Rio Tinto, which paid $US4.6 billion ($A6.1 billion) in corporate tax on its Pilbara iron ore operations (see table).

There has also been big growth in the amount of royalties paid by the industry to the WA government.

The latest budget papers show that WA will get an estimated $9.9 billion in royalties in the current financial year.

That’s more than double what the industry paid just three years ago.

It has been a tremendous windfall for the McGowan government but leaves it heavily exposed to a sharp decline in iron ore prices.

ESG performance

The amount companies pay in taxes and royalties is dictated by black letter law.

Beyond that, the iron ore miners have a lot of discretion as to how they use their money.

More generally, they also have a lot of latitude in how they interpret their responsibility as ‘good corporate citizens’.

This has come into sharp relief since Rio Tinto brought global condemnation upon itself by blowing up ancient Aboriginal rock shelters at Juukan Gorge.

With Rio Tinto scheduled to hold its annual shareholder meeting in Perth early next month, the industry’s approach to Aboriginal heritage management will stay in the spotlight.

Aboriginal heritage is one of numerous areas that fall under the banner of environmental, social and governance (ESG): the catch-all term that covers the non-financial performance metrics that listed companies report on.

The big miners report against dozens of ESG metrics, everything from carbon dioxide emissions and water usage through to numbers of staff taking parental leave and workplace injury rates.

However, the high volume of data does not always provide a clear picture on the sector’s performance or contribution.

At a macro level, this challenge is illustrated by the DMIRS employment data, which shows big shifts in the composition of jobs over the past 20 years.

In particular, the growth over this period has been dominated by part-time contractors.

This trend has applied in many industries but been particularly pronounced in iron ore.

In December 2020, the sector had 27,000 employees and nearly 43,000 contractors for a total head count of just more than 70,000.

On a full-time equivalent basis, that equated to a less impressive total of about 56,000.

The monthly DMIRS data also reveals the flexibility that comes from employing so many contractors.

While the number of employees in the iron ore sector shows little change month to month, the number of contractors fell from just above 50,000 in November to 42,900 in December.

Indigenous employment

One performance measure that all listed miners focus on is indigenous employment.

BHP, for instance, has reported 17 per cent growth in the number of indigenous employees in its WA iron ore business, to 857.

The number of indigenous employees working for BHP’s ‘core’ contractors in the Pilbara also increased.

BHP said the total number represented 10.7 per cent of its workforce.

Like other miners, its Pilbara operations performed better.

At the South Flank project, for instance, its indigenous employees represent 14.7 per cent of the workforce.

Fortescue’s latest numbers are similar. Aboriginal people comprise 10 per cent of its total workforce and 14 per cent of the operations workforce at its new Eliwana mine.

Rio measures its performance differently but with a comparable outcome.

It said 12 per cent of its residential iron ore workforce comprised Pilbara Aboriginal people.

The performance of the big miners is less impressive when looked at over time, however.

In particular, they have failed to maintain Aboriginal employment as a share of the total.

At Rio, for instance, Pilbara Aboriginal people accounted for 13.5 per cent of its residential workforce two years ago.

Fortescue’s Aboriginal employee numbers have grown slightly in absolute terms but declined from 14 per cent of total employment to 10 per cent over the same time frame.

That’s well short of its ambitious target of 20 per cent.

There has also been an absolute decline in the number of Aboriginal people working across all Fortescue sites, if contractors are included.

That figure has gone from 1,161 to 844 over the past two years.

Indigenous contracting

Another big focus is indigenous contracting, an area where Fortescue appears to outperform its peers.

Fortescue said it spent $354 million with 63 Aboriginal businesses in FY20.

Its cumulative spending with Aboriginal businesses increased to $3 billion.

The value of contracts in FY20 represented 6 per cent of its total procurement, with the company targeting 10 per cent.

Fortescue added that half the contracts (by number) must be awarded to businesses with more than 50 per cent Aboriginal ownership.

This provision targets the chronic issue of ‘black cladding’ where businesses that purport to be Aboriginal are controlled or run by non-indigenous people.

BHP has targeted the same issue. Only businesses that are owned 50 per cent or more by Aboriginal people are included in its indigenous contracting statistics.

BHP’s spending with indigenous businesses increased by 37 per cent to $67.6 million in FY20.

That was spread across 43 Aboriginal businesses.

Rio measures its performance differently.

It said 58 per cent of its Pilbara business expenditure was with Pilbara Aboriginal businesses.

It also disclosed that it spent $293 million with indigenous suppliers across the country, but without a detailed breakdown.

Local content

A third area where the big miners are under scrutiny is their local content levels; i.e the amount of work that is awarded to local contractors rather than international suppliers.

In practice, they appear to achieve remarkably similar outcomes.

Fortescue, for instance, awarded $1.8 billion worth of contracts to Australian businesses for its recently opened Eliwana mine.

Among this figure were contracts awarded to 290 WA businesses.

The miner said local procurement totalled 84 per cent of the project spend.

Similarly, Rio Tinto said 85 per cent of spending on its $1 billion Western Turner Syncline Phase project had been awarded to WA and Pilbara Aboriginal businesses.

Likewise, BHP expects 85 per cent of the spend on its $US3.6 billion ($A4.7 billion) South Flank project will be awarded to Australian companies, with about 90 per cent of that likely to be completed in WA.

While these numbers seem impressive, achieving high levels of local content on iron ore projects is relatively simple.

That’s because most of the work – shifting dirt, building access roads and constructing railways and bridges – by definition must be undertaken locally.

When Premier Mark McGowan was first elected four years ago, boosting local content was a big focus.

He believes the big miners understand their obligation to help local suppliers.

Mark McGowan visited Rio Tinto's Tom Price operations before the election.

“The industry itself these days is far more attuned to that, especially after the Nationals’ campaign in the (2017) election, that they need to do more,” Mr McGowan told Business News in a recent interview.

The premier also believes local manufacturers and fabrication workshops are getting enough opportunities on big projects.

“I get a lot of positive feedback from the manufacturers,” he said.

The Australian Steel Institute is not so convinced, with WA director James England telling Business News the bulk of fabricated steel used on big projects still came from overseas, with the miners opting for cheap prices over quality.

While Mr McGowan has been very supportive of the mining industry, he is still hoping for more local content. His latest initiative is a push for the components on iron ore wagons to be manufactured locally.

The focus on local opportunities manifests in other ways, too.

The big miners have all announced plans to pump millions of dollars into training schemes.

This has been welcomed by governments, with Prime Minister Scott Morrison choosing BHP’s FutureFit training academy at Welshpool as the location for his first WA press conference on his recent visit to the west.

The increased spend on training is also self-serving as the big miners struggle to find sufficient skilled staff to support their operations.

This challenge was made more acute by the COVID-19 restrictions on interstate travel.

The big miners were forced to relocate an estimated 5,000 east coast-based fly-in, fly-out workers to WA during COVID-19.

The CME has estimated that about half these FIFO workers have chosen to make WA their home. Mr McGowan wants to see even less interstate FIFO.

Speaking last month at the launch of a TAFE training package for the mining sector, he said a key plank of the government’s WA Jobs Plan was a reduction in interstate FIFO.

“I am very focused on reducing interstate FIFO and making sure these quality, high-paying jobs go to Western Australians instead,” Mr McGowan said.

CME chief executive Paul Everingham believes the resources sector is committed to employing Western Australians wherever possible.

“There are always going to be occasions when this may not be possible,” Mr Everingham said.

“Our sector will still need to call on interstate skills and at times international skills to meet the demand of our large diverse sector.”

Community investment

When the big miners seek to win the hearts and minds of the community, they highlight their contributions to community programs.

After the recent Perth Hills bushfires, for instance, the miners were among the largest contributors to fundraising campaigns.

However, the big iron ore miners have very different approaches to community investment, and that is reflected in their reporting. Fortescue said it spent $6.6 million in FY20 on social investment in its communities.

Rio Tinto spent substantially more – $19.6 million – on community investments. At first glance, BHP appeared to spend vastly more than its two main competitors.

Its WA iron ore community development report said it spent $295 million on community development in FY20.

However, this definition is very broad. It includes training and indigenous contracting as well as social investment and community infrastructure.

infrastructure. A better guide comes from the group’s economic contribution report.

It discloses that BHP’s social investment in Australia totalled $U86.7 million ($A114 million) in FY20. Assuming one-third of this was spent in WA (in line with WA’s share of group employment), that means BHP’s social investment in WA would be about $38 million.

BHP President Edgar Basto is promoting more apprenticeships across Australia.

This roughly accords with other information supplied by BHP, such as WA’s share of spending from the group’s $50 million Vital Resources Fund.

More than 20 community groups across WA have been allocated grants from this fund, which was set up at the start of COVID-19.

The single largest was a $2.6 million commitment to the Telethon Kids Institute, for research into the effectiveness of the drug Interferon in preventing outbreaks of COVID-19.

BHP also contributed $2 million to the Royal Flying Doctor Service, to support extra capacity across WA during the pandemic.

Other big contributions included $1.25 million for Foodbank WA and $847,000 for 23 Aboriginal medical services across the state.

These grants are on top of several other large commitments BHP has made in WA.

In 2019, it committed $20 million to the Telethon Kids Institute over five years to fund a world-first research partnership with Aboriginal families in the Pilbara and Perth.

That followed a similar $20 million, five-year commitment in 2014.

BHP has also made big commitments under the category of community infrastructure, such as $15 million to co-fund the redevelopment of Newman hospital, currently under construction.

Rio Tinto has made similar commitments.

It announced in February this year it would contribute $20 million to help fund the construction of a new hospital in the town of Tom Price.

Interestingly, BHP’s community development report also includes a $300 million, five-year commitment to improve air quality around its Pilbara operations.

This includes measures such as wind fences and vegetation barriers to minimise the amount of dust blowing from its ore stockpiles onto houses and shops in Port Hedland.

Arguably this should be considered a required investment in environmental and health management rather than community development.

The scale of this problem was highlighted by the property buy-back scheme introduced last year by the state government.

Under this scheme, industry will have to pay up to $200 million to purchase up to 400 properties in the town’s historic west end that have been adversely affected by dust.


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