The recent global economic turmoil has had its impact on all sectors of the Australian economy — including the previously buoyant minerals sector.
In the past few months, excessive debt levels and the non-availability of debt and equity capital have seen a number of mining and minerals processing projects cancelled, and major debt reduction strategies deployed.
These measures have resulted in significant job losses and cutbacks in forward-looking, ‘non- core’ mining activities such as exploration.
The effects of this exploration downturn are already visible in the latest ABS statistics.
Despite the current financial crisis, demand for mineral commodities from the emerging economies of China and India is projected to grow over the longer term, and Australia is well positioned to prosper as our neighbours strive to improve their standards of living. However, this is entirely contingent on this country continuing to make discoveries that will underwrite new projects and expansions. The health of the junior exploration sector is critical to ensuring that these discoveries take place.
In order to secure the current and future health of the minerals sector, The AusIMM has renewed its call for the Australian Government to introduce a flow-through share scheme as a priority in the next Budget, due to be released in May 2009.
The Labor Party committed to this policy prior to the 2007 election and much recent work has been done by the government and industry to develop an effective structure that will encourage smaller exploration companies (the “juniors” in mining parlance) to maintain or even increase their exploration activities while ensuring the scheme is not open to abuse by unscrupulous investors.
This encouragement is more important now, at a time when traditional sources of finance and investment have been strangled by fear on the financial markets, than at any time in recent memory.
A flow-through share scheme will provide a buffer for junior exploration companies, which are the engine room of one of our economy’s most lucrative industries, from the worst impacts of the economic crisis.
The rationale for a flow-through share scheme is to rectify a current anomaly in taxation law that adversely affects junior explorers. Currently, the Income Tax Assessment Act (ITAA) provides for a tax deduction for exploration expenditure, presumably on the basis of it being a high-risk activity with recognised benefits to the common economic good. However, junior exploration companies (which make up more than 70% of companies engaged in mineral exploration within Australia) generally do not generate sufficient taxable income to be able tot claim the deduction.
A flow-through share scheme would smooth out this anomaly by allowing companies which cannot use the deduction themselves to pass it through to shareholders, who are then able to use it to offset their own tax liabilities. Thus, a flow-through share scheme achieves twin objectives of rectifying a tax anomaly and increasing the attractiveness to investors of junior exploration companies (thereby providing those companies with the capital to maintain or increase their exploration activities).
The industry has long advocated the introduction of a flow-through share scheme for Australia, not only because it would ensure that the tax deduction achieves its intended aim, but in order to increase Australia’s competitiveness as a destination for exploration and mining investment in a global industry. It would also give Australia policy parity with Canada, which has had a successful flow-through share scheme in place since 2000. The effectiveness of the Canadian scheme can be seen by the fact that, within a year of its introduction, Canada displaced Australia as the secondlargest spender on exploration (by region).
On 5 November 2008, The AusIMM, in conjunction with other mining associations and the ASX and Australian Shareholders Association, made a submission to Resources Minister Martin Ferguson urging the implementation of a flow-through share scheme. A flow through share policy is now essential to the survival of an important part of Australia’s minerals sector.
The primary market has become a very difficult place for raising exploration capital, and the shortage of capital has potentially devastating implications for junior exploration companies.
Many companies have shelved their listing intentions because of volatility and a lack of investor support.
In the nine months to 30 September, there were only 84 initial public offerings with a total market capitalisation of less than $2.3 billion. It is clear that the numbers for the full 2008 year will fall far short of the figures for 2007, which were 313 and $19.9 billion respectively.
The quantifiable losses across the short term — jobs, exploration spending and new IPOs — are significant. However what the bare statistics fail to capture are the longer term economic impacts — loss of talent and of geoscientific knowledge about Australia’s terrain, and loss of infrastructure.
These losses will directly impact upon our ability to restock Australia’s mineral inventory through exploration. Without forward looking and effective policy measures in the 2009-10 Budget, decisions that are made in the next 24 months could do irreversible damage to the economic sustainability of the minerals sector for decades to come.
So as we go into a new calendar year, and the government enters an intense phase of Budget decision-making, it must implement policies that support the most productive and sustainable sectors of our economy.
Far more than any ‘economic stimulus’ package aimed at family shoppers, the very real stimulus of a flow-through share scheme would ensure that exploration capital — the lifeblood of the minerals industry — keeps flowing.