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Australia's mining sector in the balance

Firm News
17 September 2012
Baker & McKenzie launches global report examining the challenges and  opportunities facing the world's key mining destinations

Australia, 17 September 2012 - Baker & McKenzie has launched a report highlighting significant concerns about the future of Australia's mining sector.

The Firm surveyed more than 300 senior industry leaders across six key mining jurisdictions - Australia, Brazil, Canada, China, Indonesia and South Africa - and the research suggests that investors in Australia are more pessimistic about the future of mining investment in this country than those investing in the other jurisdictions surveyed.

Of the executives commenting on Australia, 75% said that investing in the mining sector has become more complicated and costly due to factors such as increasing regulatory and environmental obligations, complex and uncertain project development requirements and the rising costs of mine development and operation.

The level of Commonwealth and State Government involvement in the Australian mining industry is also causing concern to investors, with 61% of respondents believing that the Government is too involved in the industry and 72% believing that sovereign risk is on the increase.  

Australia's recent Minerals Resource Rent Tax and Carbon Pricing Mechanism were viewed as discouraging investment by 76% and 70% of respondents respectively.  

Baker & McKenzie's Global Head of Mining, David Ryan, said Australia needs to look much more seriously at the issues impacting the competitiveness of the industry.

"Getting a project across the line in this country is now harder than it should be. If we want to remain globally competitive and continue to attract investment in the mining industry, we need to look at reducing the complexity of mining regulation and sovereign risk, otherwise we risk companies deploying their capital elsewhere.

"We have already seen a number of high profile projects shelved in recent weeks.  Much of this is due to falling commodity prices and the high Australian dollar, but last week’s announcement of increases in Queensland coal royalties has only added to the perception that Australia is now also an expensive and risky jurisdiction for mining investment," Ryan said.

Ryan called for a clearer process for project approvals and a more uniform approach to mining regulation across the Australian states and territories.

"Mining is an industry which involves large, up-front capital investments and long project lives.  Investors crave certainty, and miners need more certainty regarding the application of taxes and royalties and land use restrictions."

While the Firm's research shows investors are comforted by Australia’s security of tenement rights, political stability and enforcement of contracts, Australia is currently seen by some investors as presenting greater sovereign risk than lower cost jurisdictions like Indonesia and South Africa.  

"We may start to see a greater call for fiscal stability arrangements like project-specific state agreements," Ryan said.

Canada stood out from the six jurisdictions surveyed for its competitive tax structure, stable political landscape and well-developed capital markets. Of the executives commenting on Canada, 73% said there was about the right amount of government involvement in Canadian mining.

Brazil, China, Indonesia and South Africa continue to face issues addressing crime and bribery and corruption.

"While Australia has world-class resources potential, it cannot afford to be complacent about its competitiveness.  Mining is too important to the Australian economy.  Global players decide where to deploy their scarce capital on a global basis - very few jurisdictions are truly off limits. In addition, more and more Australian junior explorers are looking to Africa and Latin America for their investment opportunities given the barriers to entry for smaller investors are also on the increase," Ryan concluded.

Mining Investment - local challenges, global implications is Baker & McKenzie's fourth report in its Global Business Challenges series and was launched on Monday 17 September 2012 across the Firm's offices in Australia, Brazil, Canada, China, Indonesia and South Africa.
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