Podcast Transcript
Velvet-Belle Templeman
Welcome to Grant Thornton's Navigating the New Normal podcast series. My name's Velvet-Belle Templeman, and I'm here talking to Brent Steedman, the Energy and Resource leader at Grant Thornton. Today, we're talking about the role of the resources sector in our economic recovery. Thanks so much for joining us, Brent.
Brent Steedman
Yeah, thank you very much for the invitation, Velvet.
Velvet-Belle Templeman
Now, Brent, you were at the Diggers and Dealers conference just after the Federal Budget. What was the sentiment on the ground?
Brent Steedman
The Diggers and Dealers, it's a world class event where executives from the Australian mining companies, service companies, financiers, etc., they come together once a year to network, share the stories of their company, engage with the media and investors, financiers and matters like that. This year was a little bit different due to COVID because of the border restrictions and particularly the Western Australian borders restriction, Diggers was more limited to the W.A. companies and investors. But certainly the sentiment was very, very positive. The general view was that the mining industry in Australia continues to have significant upside. This is driven by quality of our resources and assets, highly skilled workforce and ever improving technology, which is helping on the geoscience extraction of and processing reserves and all of this has been really supported by the global demand for Australian economies continuing to be relatively strong and expected to be into the future.
Velvet-Belle Templeman
Really, the biggest announcement for the resources sector was the $1.3 billion dollar Modern Manufacturing Initiative, resource technology and critical mineral processing is one of the priority six, right?
Brent Steedman
Yes, it certainly is. The Modern Manufacturing Initiative, it’s a Commonwealth Government Initiative and it's a program that's been put in place to assist specific industry improve manufacturing capabilities and resources is included in this one of the six, which is an excellent outcome for the industry. Now, with respect to the resource sector, it's really a focus on development of resource technology and critical mining and mineral processing. So what the government's going to be doing is providing funding for specific technology based projects. It will be a competitive bidding process, but the funding is available and the objectives of this program is to develop and implement new technology. For example, increased use of data analytics and artificial intelligence to better define reserves and resources. Another example is automation, like robotic vehicles and processing advanced extraction techniques. I see no reason why these objectives cannot be achieved, and I really strongly urge and suggest that companies should apply for these grants and get going. The more difficult and complex issue is the investment in downstream processing, like iron ore to steel, alumina to aluminium. And this is driven really by the really global cost competitive issues we have in some of these type of industries in terms of processing. But there are some early signs of success with respect to lithium, because right now there are building two processing plants in Western Australia.
Velvet-Belle Templeman
So the logic behind the priority six is that we already have a competitive advantage in these areas that we can grow and export. We already do extremely well with resources. Can we even get better?
Brent Steedman
There's no question we can get better. We have significant quantities of our traditional resources like coal, iron ore and natural gas. We have significant quantities of precious metals like gold, copper, zinc and emerging minerals like lithium. Companies need to apply the latest technology, and if this is done successfully, it'll give all the companies the opportunity to both increase production volumes and reduce costs. Resources play a significant role in holding our economy together. Right now. It's played a significant role in the past. It plays a significant role today and it will into the future.
Brent Steedman
If one looks at the emerging opportunities, let's have a look at hydrogen, which can be produced from either natural gas or water. Typically in today about 95 percent of hydrogen is produced from gas. In Australia, we have plenty of gas. It's used in different industries like petrochemicals, but the real opportunity is whether it can be developed as a fuel in a cost effective and safe way. For example, the fuel being used in the engine of your car. Because this provides obviously significant opportunities and also has the ability to significantly reduce emissions compared to traditional fuels. There's many challenges with respect to hydrogen, in particular, large scale safe storage. However, I think it's an ideal opportunity for investors to seek funding for the government's Modern Manufacturing Initiative to try to commercialise hydrogen fuel. As other countries around the world are slowing down their investment due to the COVID issue, Australia has the chance to quickly move forward and gain advantages.
Velvet-Belle Templeman
So what about the future of resources? Iron ore is obviously one that everyone knows. Are there other resources on the horizon that might be as yet untapped?
Brent Steedman
Thanks Velvet. I've spoken about hydrogen, but other emerging opportunities are resources like lithium and Rare Earth minerals, even nickel. You know, lithium and nickel are required for the battery industry. So obviously, this is needed for electricity storage and also to run electric cars. Australia has some 30 percent of the global lithium reserves. This is really a huge opportunity for Australian companies to exploit and process these reserves for this ever increasing industry and requirement. Rare Earth is a bit of a sleeper. It's got various minerals they used and components in terms of computers, loudspeakers, smartphones and the aerospace industry. Currently, China has some 50 percent of global Rare Earth reserves and 80 percent of global production. We all know about the global trade tensions between the US and China and others. And customers will want a diversity of supply and Australia has the opportunity to deliver this diversity.
Velvet-Belle Templeman
And what's the competitive landscape like? From what I understand we compete with Brazil, the US and you mentioned China to a degree. How has COVID potentially changed that dynamic?
Brent Steedman
Compared to other countries in the world, Australia's management of the COVID issues has been very, very good. I think this is a competitive advantage. So, you know, we have to ask why? And the reason is, is a key requirement of customers that buy commodities is security and reliability of supply. Australian suppliers have demonstrated the ability to deliver through the COVID epidemic. For example, Brazil has not been able to keep up its iron ore production volumes. Iron ore prices have risen. Australia delivers. And we reap the financial benefits from that. I believe that even after the COVID epidemic issue was resolved, global customers or commodities know that Australian producers deliver. So when the next crisis happens, whatever it may be, and whenever it happens, customers want to be prepared in advance. And this really is a COVID opportunity for Australia to be prepared.
Velvet-Belle Templeman
Brent, what about the Australian investment in exploration? Have there been enough changes to regulation to enable explorers outside of the biggest resource companies to develop some of those sites?
Brent Steedman
In my view, further work is required in the exploration and project development game. Overregulation is a key issue to the resource industry. It applies to both the biggest and the smallest resource companies. The industry accepts the importance of regulation. It is the complexity that is the issue, where you have federal and state governments overlapping on requirements, you often have multiple departmental approvals required within each jurisdiction, and you often have multiple different landowners. This is a priority for the government. It must be simplified.
Velvet-Belle Templeman
And how does FIRB play into this? Obviously, some of the biggest resources companies in the world are Australian, but what is the role of international resource companies or investors in Australian mining and resources?
Brent Steedman
Foreign investment in Australian resources has been significant for many years and it provided both the capital, the people and technology to advance many major projects. An example is the investment in the nine LNG export facilities built in recent years at a cost of over $250 billion dollars. The Australian LNG industry did not have the capabilities to make this happen on its own. Partnershiping with foreign companies have provided the ability to build these projects and has provided significant local benefits in terms of improving local capabilities, access to skills, access to technology, and has driven the success of a whole number of Australian service companies that service these projects. And it's also provided significant tax benefits to the Australian government and the people of Australia. COVID has not helped foreign investment situation as international resource companies have effectively bunkered down at this time. So how does the Foreign Investment Review Board fit into this? The Foreign Investment Review Board has the responsibility to approve all transactions and investments over certain monetary thresholds. And they can also apply a national interest test to reject transactions that they do not see as in Australians interest. Shell's attempt to take over Woodside a number of years ago is an example of this. Due to COVID, the monetary thresholds and foreign investments has been temporarily reduced to zero value by the government. The purpose of this policy was to stop foreign companies taking advantage of buying Australian assets in a depressed market. Fortunately, this depressed market has not happened. I would expect in due course the monetary thresholds will be increased back to the previous levels and the previous policy. There is two ways you can look at this, too. You know, Australian companies can use this slowdown in foreign investment to now acquire Australian assets from foreign companies. So this is an opportunity for Australian companies.
Velvet-Belle Templeman
If you're in the resources sector right now, what do you think some of the things are that might be helping or hindering you in the current environment?
Brent Steedman
Yeah, thanks for that question. A key hindering factor that's emerging is the access to skilled workers. International borders are closed, the current state borders have restrictions, you know, like Western Australia is effectively still closed. The resource industry is highly dependent on skilled labour, whether that be geologists, engineers or machine operators. FIFO was also a problem for many companies getting people to and from mine sites. This is strictly in their people and it's not sustainable in the long term. There's no simple solution to this problem, but in the long term, we must increase our investment in our universities, colleges, educate and or train our people in the skills that the industry needs to meet their demands. So that's really the hindering factor. I think what's really helping the industry, is I’d say as a whole, the resource industry has done a marvellous job of operating in a COVID safe way. Yes, there are additional processes and procedures required and some additional costs from that. But these are all non-negotiable as safety and health is the most important priority. The governments, the companies, the employees and contractors, industry bodies and land owners have worked magnificently together to achieve where we're at today. Having COVD safe operation is a global competitive advantage and we should take advantage of this opportunity. We should be using it to pursue new markets, increase market share for our traditional commodities, and also to develop our emerging minerals.
Velvet-Belle Templeman
And finally, Brent, we're certainly resource rich. Could any change in policy results in Mining Boom 3.0? And what might that look like?
Brent Steedman
Change in policy, you know, I have already talked about the need to simplify regulation. This is a must. So we can increase the pace of exploration and development. I think the industry will continue to invest in technology to improve performance. They've done this in the past and they will continue to do it going forward. Whether we're in Mining Boom 3.0 right now or not, you know, it is debatable. If you look at the mining industry, the resource mining industry, some would argue, say it's already started and it's already happening, you know, with respect to metals like iron ore and gold. But the oil and gas industry is struggling and it's struggling to lower global demand and such. So it's kind of a hit and miss. But I think the biggest opportunity we have is, is to exploit all of our natural advantages and I've talked about many of them already. And this includes the quality of our resources, we have low sovereign risk and we have the ability to optimise technologies. Resources have been a key part of our past success all the way through the COVID crisis and will be going forward.
Velvet-Belle Templeman
Brent, thank you for your time.
Velvet-Belle Templeman
Thank you very much, Velvet.
You can find further information on how COVID-19 might affect your business and assistance is available to you on the Grant Thornton COVID-19 hub at www.grantthornton.com.au/covid19. If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton Australia on iTunes, Spotify or SoundCloud. I'm Velvet-Belle Templeman and you're listening to Boardroom.Media.
-End-
