Abstract
Australian mining is currently dominated by China’s increased buying
activity across the sector. As this
report went to press, the government
was considering Chinalco’s US$19.5bn bid to increase its stake in
Rio Tinto, alongside China Minmetals Corporation’s AUD2.6bn bid for OZ
Minerals and Hunan
Valin Iron & Steel Group’s AUD1.2bn for a 16.5%
stake in Fortescue Metals Group. On page 8 of
this report, we examine some
of the reasons why China is buying so many Australian assets, and what
that will mean for the industry in the years ahead.
Mixed messages from
Swan
In the first major mining investment decisions to be taken by the
Labor government since taking office in
late 2007, Treasurer Wayne Swan
has said ‘yes’ to Hunan Valin Iron & Steel Group’s AUD1.2bn
bid for
a 17% stake in Fortescue Metals, but ‘no’ to China
Minmetals Corporation’s AUD2.6bn bid for OZ
Minerals. Treasurer Swan
vetoed the China Minmetals bid for OZ Minerals on national defence
grounds,
saying that it could not include OZ Minerals’ key Prominent
Hill copper and gold mine as part of the
deal. This is because the
Prominent Hill mine lies in the Woomera Prohibited Area weapons testing
range. Consequently, China Minmetals made a revised offer of US$1.69mn for Oz
Minerals assets
(excluding Prominent Hill), which is now widely accepted
to be approved by mid-year.
These decisions have been closely scrutinised
for any lead on what decision Swan may come to on
Chinalco’s bid for
Rio Tinto, expected by mid-year. However, as this report was going to press,
increased
investor unease at the terms of the Chinalco bid means there is
now an increased chance that the terms of
Chinalco’s bid may have to
be altered significantly, or even that the entire deal is running the risk
of
collapse. There has been some media speculation that any future
Chinalco stake in Rio Tinto may be
limited to just 15%, which may make it
more palatable to Treasurer Swan as he makes his decision,
expected during
mid-June 2009. Were Swan to decide against the deal, then a Plan B solution
may be a
new rights issue, coupled with asset sales, in order to raise the
financing necessary to deal with Rio’s
short-term debt
obligations.
Hosting a gamut of metals and minerals including iron ore,
nickel, bauxite/aluminium, copper, gold,
silver, uranium, diamond, opal,
zinc, coal and oil shale as well as petroleum and natural gas, Australia
continues to be a world leader in mining. Australia lies within the top five
for most of the world’s key
minerals. It is the world’s
leading producer of bauxite and alumina, ilmenite, rutile and zircon,
synthetic
rutile and tantalum. It ranks second for production of iron ore,
lead, uranium, diamonds (by weight) and
zinc. It is the third-largest
producer of silver and nickel and has also now become the world’s
third-largest
producer of gold, behind China and South Africa. The country
is the world’s largest exporter of alumina,
black coal, iron ore,
lead and zinc, and figures second in the export of uranium. The mining
industry is a
significant contributor to Australia’s GDP and the
majority of mining activity takes place within the
country’s largest
state, western Australia. The state’s mining sector is set to benefit
from the election of a
more business-friendly Liberal government in the
wake of September 2008’s early election.
Owing to its exceptional
geology, Australia is home to some of the biggest names in the global
mining
industry. Multinationals operating in the Australian mining
industry include locals BHP Billiton and
Newcrest, Rio Tinto, US-based
Alcoa, China-based Aluminium Corporation of China (Chinalco) and
Switzerland-based Xstrata.
Foreign investment rules are liberal and
encourage inward investment. Mergers and acquisitions (M&As)
are subject
to scrutiny by the Australian Competition and Consumer Commission (ACCC). The
country
has well-defined regulatory bodies and a well-established legal
system that can be described as investorfriendly.
In the case of specific
mineral exploitation, the authorities now consider uranium mining
proposals on a case-by-case basis.
Industry Forecast
BMI’s
forecasts for Australia’s mining industry are discouraging, with the
industry estimated to have
contracted by almost 5% in real terms in 2008.
Meanwhile, we forecast an average annual reduction of
almost 2% in real
terms for the remainder of the forecast period. The main reason for this
disappointing
outlook is the global slump in commodity prices. However,
Australia has also been particularly hard hit
by restructuring at the
world’s largest miners, BHP Billiton and Rio Tinto. By 2013, BMI
forecasts that
Australia’s mining industry will represent only 3.08%
of GDP, compared with 4.26% in 2007.
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