Australia can ill afford to wait four years until 2015 before the Federal Government honors its commitment to review the contentious issue of incentives for greenfields mineral exploration. The stand has been taken by the Australian Institute of Geoscientists (AIG) which today described as “highly disappointing” the scope of the recommendations of the Government’s mining tax focused “Policy Transition Group” (PTG). In its first formal assessment and public comment of the PTG’s findings n the Government’s proposed Mineral Resource Rent Tax (MRRT), the Institute said the Government and the PTG’s consultative process and subsequent recommendations had “completely missed the point” by excluding any action on greenfields exploration initiatives.
“There were no recommendations by the PTG to have any initiatives for mineral exploration in the new mining tax system, despite the fact that tax rebates for exploration expenses had been included in the forerunner to the MRRT, the resource super profits tax,” AIG Vice President, Andrew Waltho, said today. “There is an extraordinary ongoing lack of appreciation or understanding of the direct link between generating growth in mining revenues, which can then be taxed to deliver higher government income – and the need to secure the foundations and growth in our resources inventory and associated employment, by ensuring ongoing minerals discovery,” Waltho said.
“The PTG and the Government have been lulled into thinking that the current, so-called, ‘resources boom’ and flush of new resources-based floats is sustainable in the long-term. Most of these IPOs are for overseas projects. In September alone, 85% of the capital raised in mining floats was for offshore projects, and the average for the past six months is nearly two-thirds of funds raised being for overseas projects. Furthermore, the balance of the IPOs are invariably for brownfields projects rather than for greenfields exploration. As AIG has repeatedly pointed out, there is significant market failure to undertake the type of exploration work needed to make the new discoveries in Australia’s highly prospective terrains. AIG strongly believes fiscal incentives are the appropriate mechanism to address this market failure in Australia’s long-term national interest.”
Waltho said that what the market is now seeing are project owners undertaking rapid brownfields exploration or raising capital through quick IPOs, to take short-term advantage of the current strong prices in mineral commodities. “This does not build long-term growth – only new discoveries through greenfields exploration can do that – yet the PTG’s mining tax recommendations have failed to lock in that necessity,” he said.
“The AIG is most disappointed at the PTG’s reliance on the Geoscience Australia report on Australia’s Identified Mineral Resources, shown to be misleading in the AIG-sponsored paper The Australian Mineral Exploration Industry: The Case for Fiscal Incentives. The Geoscience Australia report discusses Australia’s mineral resource endowment, and paints a robust picture of industry viability. “The flaw in the report’s logic is that economic viability is not adequately accounted for, resulting in resources forming only a portion of the nation’s mineral inventory. This has profound implications for the manner in which the report’s findings have been used by the PTG. If the MRRT comes into being, we face a scenario of government taking maximum taxation drawdown on Australia’s downstream mining sector but not ensuring the biscuit jar is filled back up through fiscal exploration initiatives.”
The AIG called today for the Federal Government to act to both promote greenfields exploration and reduce volatility in exploration investment as part of any new mining tax regime. The AIG said it strongly supports an Exploration Tax Credit model, wherein tax credits, dividend imputation and a flow through shares scheme are combined to produce a targeted response to the market failure to undertake greenfields exploration. This exploration support should be funded from Consolidated Revenue and not tied to MRRT proceeds.
Investment going offshore
Waltho warned that amid the mining tax imbroglio, there was mounting evidence of the movement of greenfields exploration offshore from Australia, with west Africa, Mongolia and South America favoured destinations, despite questions of sovereign risk and viability. “The pace of this offshore movement is being exacerbated by increased delays in accessing land for exploration in Australia,” he said.
“It is the Institute of Geoscientists’ experience that high commodity prices and the temptation to develop brownfields deposits to gain advantage from the peaks of a commodity price cycle, are short-lived. Greenfields exploration has a longer lead time, generally spanning the commodity price cycle and this requires a different approach for the discovery of new mineral deposits to occur. The highly cyclical nature of exploration investment impedes the effectiveness of exploration efforts by disrupting project continuity through loss of key personnel and corporate knowledge.
“The Institute urges the Government to consider immediate fiscal initiatives for mineral exploration, in particular greenfields exploration, as part of any new mining tax legislation introduced this year. The importance of mining to the Australian economy requires a long term response, that will underpin the sector, rather than opportunistic revenue raising.”
More than 85% of Australia’s geoscientists, professional geologists and geophysicists work in the exploration, mining and energy resource industries.