24/06/2010 - 00:00

Investment dollars will follow opportunity

24/06/2010 - 00:00

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The government has got the modelling wrong on the RSPT.

MEDICINE and mining have little in common until you consider how the lessons of one industry can be applied to the other, a fact graphically illustrated last week by the world’s top management consulting firm, McKinsey & Company.

What McKinsey did was analyse how forecasting can go horribly wrong, using as its chosen case study a British attempt to produce the correct number of cardiothoracic (CT) surgeons, the people who specialise in hearts and lungs.

It is unlikely that the prime minister, Kevin Rudd, or his treasurer, Wayne Swan, will read the McKinsey research, or have its results drawn to their attention by their staff.

Pity really, because what the CT analysis shows is that an early mistake produces disastrous long-term results, as will happen to the Australian mining industry if it is rendered uncompetitive by the proposed super profits tax.

What happened with the CT surgeons is that, in 1998, a forecast was made about the future demand for their services, and how many would be needed. Once made, the forecast was set in stone, because it takes roughly 10 years (and perhaps more) to train a doctor to the point where he or she’s legally allowed to start re-arranging the hearts and lungs of patients.

Fix that 10-year time-frame in your mind because it’s roughly how long it takes to explore, discover, and develop a mine to the point where it is selling minerals for a profit. In other words, a decision today can have its consequences delayed for 10 years.

In the case of the surgeons and their allied staff, decisions taken to substantially boost the number of trainees in 1998 failed to account for advances in medical treatment such as the insertion of stents to open arteries, or medicine to treat disease.

Within a few years the rising supply of CT surgeons met falling demand, to produce a yawning gap of supply over demand with the number of operations performed by each surgeon plunging from 175 a year to 93.

If CT surgery was a business it would have gone bankrupt, and perhaps quite a few of these highly specialised doctors have been forced to change what they do for a living.

What happened to British heart and lung surgeons can be seen as a guide to what will happen to the Australian mining industry if it is rendered uncompetitive by high tax rates.

Little damage will be seen immediately. Mines in production, like CT surgeons in business, will continue to operate. But, over time, profits will fall, and demand for Australian minerals decline because we will have become the high-cost producer.

Neither doctors nor miners are immune from the laws of supply and demand and, in both cases. Creating a doctor takes a lot of training. Developing a mine takes a lot of time.

In the case of the doctors it was excess supply caused by decisions taken 10 years earlier, followed by a failure to recognise that the game had changed.

In the case of the miners it could be the flipside, with the same result. Demand for Australian minerals will decline because cheaper (lower taxed) sources are available from elsewhere.

There are only two ways for the miners to dodge the tax bullet heading their way. The government can change its mind now, or recognise that the higher costs being forced on the miners will produce a graph in 10 years’ time similar to McKinsey’s CT surgeon graph, but in reverse, with supply plunging as costs rise.

What the McKinsey study shows is how long it takes for a really bad decision to produce a really bad result, a fact that the Rudd government hopes no-one will notice until it has been re-elected.

And the winners are ...

CANADA and Chile have been the two countries laughing loudest at the way Australia is proposing to cripple its mining industry, but a country closer to home, Thailand, has provided the best example of why investment dollars will be re-directed away from Australia.

Just as we are debating whether to hit the miners with a 40 per cent super profits tax, the Thai government has awarded an Australian goldminer an eight-year tax holiday, plus a further five years at half the normal tax rate.

The deal, announced on June 10, applies to a $120 million investment Kingsgate Consolidated is making in the expansion of its Chatree goldmine, which will more than double gold output from about 120,000 ounces a year to 250,000 ounces.

The Thai government has recognised that the $120 million from Australia will create hundreds of jobs, that the employees will pay tax, and a rural region of the country will get a big economic boost. For doing that Kingsgate gets its first eight years tax free, and a bonus five years at a 15 per cent rate of tax.

If the same investment were made in Australia, which it so obviously will not be, the tax rate from day one would have been around 54 per cent.

The Kingsgate example illustrates why Chile’s minister for mines, Laurence Golborne, said last week that our tax fiasco was “a chance to strip market share from Australia”, adding that “just because you have resources doesn’t guarantee investment”.

Rare opportunity

FINALLY, a little good news to finish. Fortress America, that curious condition into which the US retreats when stressed, could be just the shot for Australia’s rare earth explorers and wanna-be miners.

In about three months, the US Army will release a study into the “national security risks due to rare earth material dependencies”.

The primary focus will be on the fact that every advanced weapon in the world, from missiles to rocket-propelled grenades, uses a little rare earth – and that currently 97 per cent of global production of the stuff comes from China.

Many older investors have been burned in the past by promises of an Australian rare earth boom.

This time, given US fear of China, the talk might deliver some action.

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“Wealth, in even the most improbable cases, manages to convey the aspect of intelligence.”

John Kenneth Galbraith

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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