External Analysis

Political Factors

The Election

Mineral Resource Rent Tax

RSPT – Resource Super Profit Tax (it was part of the Henry Tax Reviews commissioned by
the Rudd government in 2008 & published in 2010). The Resource Super Profits Tax which
was planned to start on July 1, 2012 was a 40% tax on mining profits in addition to the
proposed company income tax at 28% (Cole Latimer July 2010).

Opposition to the tax was believed by many commentators as one reason for the overthrow of
the former Prime Minister Kevin Rudd, in June 2010.

Soon after Gillard's appointment as Prime Minister, the Government reached an agreement
with several of the largest mining firms on changes which were announced on 2 July 2010.

RSPT was replaced by MRRT (Mineral Resource Rent Tax) which included the reduction of
the super profit tax from 40% to 30% on super profits (10 year government treasury bond)
and it only applies to mined iron ore and coal. Also the proposed company tax at 28% will
now be at 29% (James Grubel 2010)

Implication to the industry:

Major mining companies might need to review their existing projects due to reduction in after
tax profits needed for expansion.
For example, FMG would have used cash flows from its Chichester hub as a base to build
equity for the Solomon hub, however under the new tax, it may take FMG longer to build
equity to develop new projects, therefore also effecting thousands of potential jobs.
MRRT may drive up construction and farming costs due to the increased taxes of critical
material and could also influence Australian reputation as an investment destination as the
after tax profits which the dividends is paid out of could reduce substantially.
 Environmental Law:

Emissions Trading Scheme

Australia's Commonwealth, State and Territory Governments commissioned the Garnaut

In response to Garnaut's draft report, the Rudd Labor government issued a Green Paper on 16
July 2008 that described the intended design of the actual trading scheme.

Subsequent to this, the emission trading scheme proposed by the Government was defeated in
the Senate, with the Opposition, the Greens and two independent senators opposing the
proposed legislation.

Carbon Pollution Reduction Scheme

The Government has committed to a long-term goal of reducing Australia’s greenhouse gas
emissions to 60% below 2000 levels by 2050. The national emissions trajectory is the rate
and timing of emissions reductions to achieve that target. The 2020 national emissions target
range and the indicative trajectory have two important functions: signalling to the world the
efforts that Australia is making to reduce emissions (including compliance with existing
international obligations), and allowing all Australian businesses and households to develop
strategies to manage their energy use and efficiently reduce their emissions (Climate Change
2010)

The basis of a Carbon Pollution Reduction Scheme is a cap and trade system, and is a way of
limiting greenhouse gas pollution, as well as giving individuals and businesses incentives to
reduce their emissions (Department of Climate Change, 2008, 11).

There are two definite elements of the cap and trade scheme: the cap itself, and the ability to
trade (Department of Climate Change, 2008, 12). The cap is the limit on greenhouse gas
emissions imposed by the Carbon Pollution Reduction Scheme. The system aims at achieving
the environmental outcome of reducing greenhouse gas emissions, the idea being that
capping emissions creates a price for carbon and the ability to trade assures that emissions are
reduced at the lowest possible price (Department of Climate Change, 2008, 12). Setting a
limit means that the right to emit greenhouse gases becomes scarce, and scarcity entails a
price. The Carbon Pollution Reduction Scheme will put a price on carbon in a systematic way
throughout the economy.

Implication to the industry:

On 27 April 2010 the former Prime Minister, Kevin Rudd announced that the Government
has decided to delay the implementation of the Carbon Pollution Reduction Scheme. This
scheme is now not likely to come into effect until at least 2013 however its implications
should not still be disregarded (Allens Arthur Robinson 2010).

Apart from coal mining, it is not expected that mining operations will attract a significant
direct liability under the CPRS. Coal miners will attract a direct liability chiefly in respect of
fugitive emissions of methane.

All miners, however, may experience significant additional operating costs due to the
operation of the CPRS. These will come principally in the form of higher prices for electricity
and fossil fuels, but may also impact the costs of labour and domestically produced
machinery.

Transport fuels will attract a CPRS liability. Although the White Paper proposes that the fuel
excise and equivalent customs duty will be reduced ‘cent for cent’ to compensate for the
increased carbon-price component of the cost of these fuels, this will not assist businesses
who are eligible for fuel tax credits. However, as a special measure of assistance, some
vehicles will be eligible for a ‘CPRS fuel credit’ equal to the amount of the fuel tax cut. This
measure will be reviewed after one year of the scheme’s operation. A partial CPRS fuel credit
will also be applied for compressed natural gas and liquefied natural gas for one year and for
liquefied petroleum gas for three years, of the scheme’s operation (Australian Policy Online
2010).

Miners will need to review supply contracts that continue into the CPRS compliance period
to assess the degree to which they will be able to pass through the additional costs to them of
the CPRS to the off takers under those contracts. This may be a significant issue in relation to
some contracts.
Economic Factors

The mining industry is one of Australia’s most important export sectors and makes a
significant economic and social contribution to the Australian economy. Mining and minerals
activity currently comprises 8 per cent of the Australian economy and 40% exports. The
mineral and minerals processing sector has contributed to over $500 billion directly to
Australia’s wealth over the past two decades, supporting more than 320,000 Australians.

Australia's iron exports are estimated to increase 5% in 2010 to 348 million tonnes. This
steady increase is due to both external and internal factors.

External: China's high demand accounts for the stable growth in iron production,
certain domestic developments contribute on a smaller, yet considerable scale.

Internal: The joint venture between BHP Billiton and Rio Tinto and a continued
ramp-up of Fortsecue Metal Group's Pilbara operation, since beginning exporting in
2008, is set to improve Australia's combined iron productivity.

According to the Reserve Bank of Australia's quarterly review of the economy, iron ore
prices are projected to rise, emerging from the economic downturn with an increase in price
by 10 to 20 per cent (Sean Farrell and Robert & McDermott 2010).

Implication to the industry:

Taking to account the above factors the mining sector looks promising for years to come,
mainly due to high demands for natural resources by developing countries such as China and
India.

Technological Factors

Australia leads the world in the development of new mining technologies and has a vibrant
industry that markets this technology to the global mining industry. Given the importance of
the mining industry to the nation's economy, it is vital for this important industry that
Australia maintains and strengthens its position as a technology leader.

CRC Mining

CRC Mining is a fully incorporated joint venture between industry and university partners,
and the Commonwealth government.

In 2008-09 CRCMining’s research projects were organised into five programs:

Coal Production is improving the availability, performance and safety of major equipment
used in the coal extraction process.

Shovels, Trucks & Electrical Power aims to increase the productivity, enhance the safety, and
reduce the operating costs associated with mining shovels, haulage trucks, and electrical
power systems (CRC Mining 2010).

Smart Mining Systems is developing:

 Planning and scheduling tools that better manage uncertainty

 Production control technologies that reduce production variance

 Sensing, analysis, communications and modelling technologies to provide

Geoengineering is developing technologies that provide geological vision, allowing miners to

Mining Technology Australia

The MTS sector continues to produce innovative technologies for the successful existing
businesses. R&D has helped transform mining and processing into a high technology activity
incorporating the latest developments in ICT ‘information and communication technologies’
(Mining Technology Australia 2010).

Legal Factors
 Mines Safety & Inspection Levy

In the recent years the focus has been on hazards and risks rather than regulations and
compliance, mining companies would be compelled to improve safety or face the
consequences.
The Mine Safety levy was passed in November 2005 in NSW and the first levy collection
period began on 30 January 2006. The same Act commenced on 1 October 2008 in QLD
(DPI 2010).

On 26 November 2009, the Western Australian Parliament passed the Mines Safety and
Inspection Amendment Bill 2009.

The new system will be implemented in WA in 2010 and will charge companies a fee of up
to $250 a worker per year, raising an estimated $8 million this financial year and up to 35
million dollars each subsequent year.

The levy will allow the Department of Mines and Petroleum to double the number of mine
safety inspectors by adding an extra 37 inspectors to its ranks (Kevin G Brown 2010).

Implication to the industry

As of today there are no extra inspectors at this point and the government has yet to collect a
single dollar from its safety levy.

"The changes are expected to take two to three years to be fully implemented. However,
significant changes will be occurring and will be reported on as each stage is implemented"
(Andrew O'Connor 2010).
References:

Websites

NSW Government, Industry & Investment, viewed 10 August 2010, < www.dpi.nsw.gov.au
>.
World Socialist Web Site, viewed 15 September 2010, <www.wsws.gov.au>.
Gadens Lawyers, Viewed 8 July 2010, < www.gadens.com.au>.

Australian Coal Association, 2010, viewed 10 July 2010, <www.australiancoal.com.au/

Department of Commerce 2010, Viewed 9 September 2010,

Journals

Minerals Council of Australia, 2009, ‘Vision 2020 Project: The Australian Minerals
Industry's Infrastructure Path to Prosperity’, pp 10-25, viewed 23 September 2010.

Safety and Health Division, Queensland Department of Mines and Energy, 1997, ‘Proposal
for Queensland Mines and Quarries Health and Safety Legislation: a discussion paper for
circulation and comment’, viewed 23 September 2010.

International Monetary Fund, 2006, ‘Staff Report for the 2006 Article IV Consultation’, IMF
Country Report’, p 15, viewed 10 July 2010.

Andrew Maurer and Alexandra Lynch, 2006, ‘Iron ore and steel Outlook to 2006-07’, p1,
viewed 14 August 2010.

Andrew O’Connor, 2010, ‘A new approach to mine safety in WA: will it save lives?’, viewed
7 October 2010.