As the big mining houses just get bigger, junior miners are seeking solutions to some of their issues.
“MINING is a global business, and companies can operate anywhere they like, so if Australia or Western Australia wants to attract exploration, it needs to be competitive at every level”.
That’s the challenge Azumah Resources managing director Stephen Stone puts before Australia’s policy makers, who enjoy being boastful about out strong economy but are not always supportive of the mining sector.
Azumah is one of hundreds of companies in the junior mining sector that often feel squeezed between conflicting pressures.
They are frustrated by the lack of support from government; or more pointedly by the barriers they feel are put in their way.
That can include everything from new and complex taxes to protracted approvals processes for environmental, native title and Aboriginal heritage matters.
At the same time, they have to cope with the cost pressures that flow from the mega projects being developed by global companies in the iron ore and gas industries.
Swick Mining Services managing director Kent Swick, whose drilling company works for many junior miners, is particularly concerned about rising labour costs.
“Wage inflation is the big concern,” Mr Swick told a recent boardroom forum hosted by WA Business News.
“From what I can see in the field, a lot of mining contractors run cost-plus arrangements.
“That’s part of the reason why we pay exorbitant rates in the mining industry, because there are a lot of contractors on cost-plus and they just pay what it takes to get labour.
“The clients are making enough money not to question it too much, and it’s a vicious cycle.”
Mr Swick believes rising costs, combined with weak equity markets and nervousness over commodity prices, are dampening project development by junior miners.
“Whereas if you’re an operator you just sit tight, you are just building your cash reserves,” he said.
“That’s why I don’t think there is a boom happening here at the moment.”
Staff issues
Brett Fraser, who chairs four companies including Drake Resources and Doray Minerals, said the supply of experienced people was a constraint for those in the sector.
“One of the challenges our group of companies face is the scarcity of qualified and experienced geologists,” he said.
“We have to recruit internationally to get someone with a reasonable amount of skill and experience.
“In many cases they are happy to reside where they are, whether it be Africa or Bali, and commute through Perth, which adds to the cost.”
Emergent Resources managing director Nathan Lude said stories of recruiters working the Qantas lounge at the airport, and geologists getting two to three calls a day, were indicators of how heated the market had become.
Another sign that skilled staff hold the whip hand is the introduction of fly-in, fly-out rosters that are more generous to employees.
A recent change at some mine sites has been the move from a nine-and-five roster (nine days on, five days off) to an eight-and-six roster.
Heron Resources managing director Jonathan Shellabear has observed similar pressures in the past, including during his tenure at Dominion Mining.
“It’s a function of the market, you just need to meet the market,” Mr Shellabear said.
Traineeships
Mr Swick has made a big investment in training to try and tackle the problem; last financial year, his drilling company had more than 100 traineeships.
However, he believes the education system has the wrong focus.
“Too many people go to uni and do useless degrees,” Mr Swick said.
“You can’t get plumbers, you can’t get tradesmen; you can’t get anyone to hang onto a spanner.
“They are more valuable than a bunch of professionals pouring out of universities.
“A lot of the gap is being filled by skilled migrants out of South Africa.”
For some miners, hiring contractors rather than employees is part of the solution because it gives them greater flexibility, especially if there is a downturn.
Mr Stone sees that choice as secondary.
“I don’t see a lot of difference whether they are contractors or full-time employees,” he said.
“The real challenge is … finding the right people for your company. Motivating them and retaining them in an extremely competitive environment is extremely challenging.”
Reinforcing the global nature of the mining industry, Mr Stone’s company has found that labour market pressures are not confined to Australia.
“We’re finding that with our African employees as well; their expectations in terms of salaries and employment conditions are increasing quite rapidly,” Mr Stone told the forum.
He said Ghanaians were now looking at international opportunities.
“Their expectations now are expat rates, not in-country rates,” Mr Stone said.
More generally, Mr Stone has also observed a decline in staff loyalty.
“If people see a better offer, it’s easy for them to move around, and they do,” he said.
Layered on top of the issue of rising labour costs is concern over taxes and regulation.
Foremost among these is concern over the Minerals Resource Rent Tax, which was described as the most complex piece of tax legislation ever put forward.
“You need to hire someone from NASA to model its effect, it’s a nightmare,” PCF Capital director Liam Twigger said.
An added concern is the possibility that, under pressure from the Greens, the federal government may widen the tax’s scope beyond large iron ore and coal projects to gold and other industries.
“Instead of looking at the mining industry as an opportunity, it’s almost looked upon as a cancer,” Mr Lude said.
Encounter Resources managing director Will Robinson said taxes and regulation, including lengthy approvals processes, added a double cost.
“It’s not just the cost issues, it’s the time delays,” he said.
Mr Stone shared this concern.
“There is a real dollar cost, but there is an opportunity cost, because it engages management time more and more,” Mr Stone said.
“You have less time to run your business.”
Mr Shellabear has no doubt about the impact of the MRRT.
“Its scaring investors away from Australia, full stop,” he said.
Mr Fraser said the big tax changes in Australia had created a larger issue around sovereign risk.
“One of our clients is doing an IPO at the moment and they are seriously debating putting the sovereign risk of Australia in the risk profile. It’s live and it’s real,” Mr Fraser told the forum.
Compliance
While current tax issues inevitably attract most attention, mining companies still carry the legacy of past decisions that weigh heavily.
One example was the legal change two years ago that made it much more difficult and expensive to offer stock options.
“That hit the junior sector particularly hard because offering stock options was the one thing we could offer to get people out of big companies,” Mr Robinson said.
He said the legal changes made the task a lot more complicated, and created a much larger compliance burden.
Fly-in, fly-out
For most mining companies, large and small, operating a fly-in, fly-out workforce is the norm.
There are many contributors to this trend, including social factors such as the desire of families to live in larger cities, and in a cooler climate than afforded by the Pilbara.
There are also commercial drivers, none more so than the introduction of the fringe benefits tax in the mid 1980s.
This required mining companies to pay tax on subsidised housing, adding substantially to the cost of a resident workforce.
“The reason people went to fly-in, fly-out was because of the FBT,” Mr Shellabear said.
“That was the key driver.”
Mr Stone recalls the FBT having an immediate impact.
“That’s it, it was an overnight change,” he said.
Mr Swick remains keen for governments to invest in the development of mining towns, particularly in the Pilbara.
“We need affordable housing in those regional towns and infrastructure put in place to attract families, otherwise operating costs will go through the roof and we won’t be able to compete,” Mr Swick said.
“The government will get their head around that at some point in time.
“They are better off doing it now than later.”
Exploration
An issue that is always uppermost for the junior mining sector is exploration activity.
Without exploration success, there are no development opportunities – and history tells us that Australia has achieved very modest exploration success for a long time.
“Outside iron, coal and gas, if you look at base metals, precious metals and the quality of the resources in Australia, they have declined considerably over the past 20 years,” Mr Robinson said.
“There has been a dearth of tier-1 discoveries and unless we start being more proactive to make greenfields discoveries, that industry is going to be a lot smaller in 20 years’ time than it is today.”
The flow-through share scheme employed with great success in Canada is the benchmark for any debate around this topic.
“Its definitely worked extremely well in Canada,” Mr Stone said.
Essentially the scheme allows shareholders in loss-making exploration companies to claim a share of the losses against their own income.
A push to introduce a similar scheme in Australia has failed to gain traction.
The WA government has made its own effort to boost exploration spending, with its exploration incentive scheme proving matching funding for greenfields exploration.
Mr Robinson is a fan of the scheme.
“It’s got a lot of holes drilled in greenfields terrain that wouldn’t have been drilled,” he said.
“It’s only been going for a couple of years.”
Mr Swick also commended the work done by the Deep Drilling Cooperative Research Centre, which is led by the CSIRO and includes his company as a participant.
“That’s one area where the government is thinking ahead, they are putting money into deep drilling technology,” Mr Swick said.
He likened this investment to a similar investment made in the past for the offshore oil and gas industry, which can now tap wells in much deeper water than previously had been possible.
As Mr Robinson told the forum, this type of investment can deliver a lot of upside.
“The outcrop terrain is very mature, it’s the other 60 to 70 per cent where the opportunities lie,” he said.
