Resource Exploration Rebate Falls Well Short

The Australian Institute of Geoscientists (AIG) is a not for profit professional institute representing geoscientists employed in all sectors of industry, government, research and education throughout Australia. AIG members are individual geoscientists. The Institute does not have, and does not allow, company members.

"More than 85 percent of Australia's geoscientists, professional geologists and geophysicists work in the exploration, mining and energy resource industries", according to AIG Vice President, Mr Andrew Waltho, with the majority of AIG's members working in exploration roles.

"As a professional institute we are very concerned about the ramifications of changes to Australian taxation law for exploration activity in Australia" said Mr. Waltho. "Exploration activity already suffers from significant volatility, with increasingly exaggerated cycles of boom/bust affecting geoscientists' careers and their ability to find the next generation of orebodies".

AIG says whilst it welcomes the concept of a Resource Exploration Rebate (RER), as announced by the Commonwealth Government in its response to the Henry Review of the Australian taxation system, AIG believes that the RER falls well short of past Government promises and of what the Australian resource exploration sector needs.

Furthermore, there is a real risk that negative reactions stemming from the Government's proposed Resource Super Profit Tax will badly affect the level of exploration activity within Australia, and this negatively impact the jobs and careers of AIG members.

"The proposed RER will enable companies to carry forward a proportion of exploration expenditure to be offset against future income, which will be of benefit to companies actually developing new mining projects," AIG Vice President, Mr. Andrew Waltho, said today.

"However, it falls well short on what is needed to help reduce volatility in exploration investment, an issue that remains a serious impediment to greenfields resource discovery in Australia."

AIG's stance on the rebate follows its recent report "Market Failure in the Australian Mineral Exploration Industry" that assessed several mechanisms to promote greenfields exploration investment and address the systemic inability of current market financing to adequately fund the type of exploration necessary to sustain and grow Australia's resource sector into the future.

AIG, in conjunction with other resource industry groups, has consistently promoted the adoption of a Flow-Through-Shares (FTS) scheme as a model that could be applied effectively in Australia to address the market failure in exploration funding.

"The RER proposal appears to be based on a very shallow understanding of the exploration industry," Mr. Waltho said. "Companies are simplistically presumed to either make a discovery, that becomes a new mine, in which case the RER provides a benefit, or to fail - but this is not how the exploration sector works."

"Successful exploration requires geoscience professionals to interpret and test the natural systems responsible for mineral and energy accumulations, and these rank amongst the most complex natural systems on Earth," Mr. Waltho said.

"Major resource discoveries are characteristically made by companies that are the third, fourth or later holders of exploration tenure over the deposit, but rarely the first."

"Companies which fail to make a discovery, still tangibly contribute to future discoveries Rreporting and open access to past exploration information that exists in all Australian states. The RER proposal does not acknowledge this important contribution but more appropriate investment incentives do."

Mr. Waltho explained that "the return on capital from a project must compensate for all the related ‘failed' exploration expenditure (at the scale of a company or of a sector), not simply the capital investment in the project of concern. This is a key issue that appears to be completely ignored in the Government's analysis."

The other important factor affecting exploration is the likely negative impact of the so-called Resources Super Profit Tax (RSPT). Mr. Waltho said, "the Resources Super Profit Tax removes much of the fundamental incentive for high risk investment in mineral exploration, making it more difficult for exploration companies to raise funds for greenfields exploration".

"This dramatic reduction in incentive for investment will not be compensated for by any exploration tax rebate scheme."

A particularly unfortunate aspect of all of this is that, purely unintentionally, the greatest negative impact is likely to be felt by Australia's base metal and gold industries, rather than the major bulk commodity industries (iron ore, bauxite and coal) that the RSPT appears to primarily target.

"Our analysis is that Australia's base metal and gold industries will suffer major "collateral damage" if the Resources Super Tax goes ahead in its current form" Mr. Waltho said.

"The reasons for this include:

Base metals, and to a lesser extent gold, are commodities with significantly more volatile pricing than iron ore or coal. Therefore, the return on investment in these industries is much more strongly tied to a "few good years". WA's nickel industry is a particularly good example of this dynamic. Historically these mines spend a significant part of their life as either unprofitable or very marginal operations.
Unlike the bulk commodities (where the location of many of the significant, yet to be developed deposits are known), a significant and sustained investment of risk capital in exploration is required to sustain the base metals and gold sectors with the discovery of new world class deposits.
As demonstrated in the report recently released by the AIG, the base metal and gold industries in Australia are already showing significant signs of decline in both production rates and truly economic resource inventory, despite recent high metal prices. They are clearly in a fragile state for the long term if resources are not replenished by exploration, illustrating the concept of an "exploration pipeline". The removal of incentive for exploration for these commodities will inevitably accelerate this decline."

"The Henry Review's comment that ‘there are no strong grounds to believe that exploration generates unusually large positive spillovers that would justify a subsidy' are demonstrably ill-informed and based on a shallow understanding of the sector."

Mr. Waltho said, "detailed economic modeling has shown that effective investment incentives for exploration have significant economic benefits in the short term, many of which are delivered to regional and remote Australia, as well as the major contribution new deposits bring to the economy as a whole. It looks like these impacts are currently being overlooked in the resource-related tax debate and changes".

"Quite simply, the Government needs to implement effective measures to promote resource exploration investment in Australia. The exploration rebate, as proposed, appears unlikely to be able to achieve this critical outcome for Australia's resource sector."

Click here for a copy of the release (pdf file)

27 May 2010

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