The first half of 2018 has seen continued growth for the Australian mining sector across a range of commodities, with sustained increases in commodity prices (particularly for coking coal, higher grade thermal coal and iron ore) and productivity improvements, the combination of which has allowed the sector to realise significant economic gains, driven by structural change and improvements to industry-wide productivity during the difficult economic climate of previous years.
These increased economic returns have supported repayment of debt and returns to shareholders (both through dividends and share buy-backs), and new capital investment in the sector, examples of the latter including the recent approval of BHP's US$3.4 billion South Flank iron ore expansion project (Western Australia) and Fortescue Metals Group's Eliwana mine and rail project (US$1.275 billion), and Rio Tinto's feasibility studies for its Koodaideri project (US$2.2 billion). In contrast to previous investment cycles, the current investment cycle is directed at replacing existing mine capacity and improving grade, as opposed to large-scale increases in overall output. Increased global demand for rare metals used in battery technologies (principally lithium) has also supported capital investment and merger and acquisition activities in that sector, although pricing for those commodities has become more volatile in the past 12 months.
Government policy is generally geared towards fostering a framework in which growth in the mining sector can be encouraged, recognising the critical role mining plays in Australia's overall economic growth and the fact that Australia holds some of the world's largest resources of gold, iron ore, lead, nickel, uranium and zinc.2
i Constitutional framework
Australia is a federal constitutional monarchy under a parliamentary democracy, formed in 1901 as a result of an agreement among six self-governing British colonies, which became the six states (and which later included three self-governing territories). The head of state is Queen Elizabeth II, who is represented by the Governor-General. The Queen appoints the Governor-General on the advice of the Prime Minister of Australia, but has no active role in the day-to-day operations of government. Australia's Constitution establishes a centralised federal government (known as the Commonwealth government) and various state and territory governments. The Constitution also reserves exclusive responsibility for certain matters (i.e., trade, commerce and defence) to the Commonwealth government, and allocates law-making responsibilities among the Commonwealth and the states and territories.
In relation to minerals ownership, the default legal position is that all title to minerals is vested in the state or territory in which they are located. The legal framework around the development of mining projects is, therefore, generally governed by the mining laws of the various states and territories; however, the commissioning of a mining project will require compliance with a range of Commonwealth laws (environmental, employment, foreign ownership and native title) and certain state and territory laws (i.e., resource royalty obligations and stamp duty).
ii Government policy
The current federal government, led by a Liberal-National party coalition, was elected in July 2016. Federal governments in Australia have three-year maximum terms before another election must occur, meaning a federal election must occur within the next 12 months. Government policy at all levels aims to provide a relatively well-defined system of laws and procedures governing the development of mining projects, and a proactive foreign investment regime. Regardless of political persuasion, all governments are aware of the importance that a favourable foreign investment culture provides the impetus for the funding of large-scale mining projects. In this regard, Australia consistently ranks in the top echelon of leading 'inward-investment' destinations according to Behre-Dolbear, which ranked Australia second only to Canada.3
II LEGAL FRAMEWORK
i Legislative overview and jurisdictional separation
Each of the states and territories has enacted its own laws relating to exploration and development of mining operations. While there has been little effort to standardise these laws, they have many common features, and generally Australia has a relatively uniform legal approach to mining. The government of each state and territory is responsible for granting and administering all tenements to explore for and produce minerals within its borders. Depending on its nature, a tenement holder is entitled to an exclusive right to explore, maintain or extract minerals within the tenement boundaries.
All the various legislative regimes have at least two common stages – exploration and mining – with some including a third retention stage, which allows a tenement holder to retain rights over a prospective area after a discovery until commercial production is feasible.
The common types of tenements are summarised below:
|Exploration licence||Retention licence||Mining lease|
|Purpose||Allows the holder to carry out exploration and assessment activities to determine potential prospectivity.||Retains and protects title over a mineral discovery where mining is currently impracticable until commercial production becomes feasible.||Allows for development and commercial extraction and disposal of minerals from the tenement area.|
|Typical term||Usually granted for an initial term of five years (with the right to renew). Often subject to compulsory surrender or relinquishment requirements each year during the term.||Usually granted for an initial term of five years (with right to renew).||Varies depending on jurisdiction (e.g., 21-year initial term in Western Australia and for a variable period in Queensland, usually determined by the mine life).|
A decision at the High Court of Australia in 2017 raised concerns regarding the validity of certain mining tenure granted in Western Australia.4 The Western Australia and Federal governments are working on a legislative change to rectify the issues arising out of this decision, although that remedial legislation is yet to be enacted.
ii Mineral reporting requirements
Generally, most tenements impose conditions requiring the holder to provide the government with annual resource delineation reports, and information about operations being carried out in respect of the tenements, primarily to ensure the government is kept appraised of the activities being undertaken on the tenement and their prospectivity.
iii Public reporting or disclosure requirements for mining companies
Mining companies listed on the Australian Securities Exchange (ASX) are subject to continuous disclosure requirements (imposed by the ASX Listing Rules, which each listed entity must comply with, and the Corporations Act 2001 (Cth)) in relation to both their operations and mineral resource reporting, to ensure fair and informed market participation. There is a range of disclosure obligations imposed by the ASX Listing Rules, but the key principle is that any information that a reasonable person would expect to have a material effect on the price or value of the shares of the company must immediately be released to the market.
There are also disclosure requirements that are specific to mining companies. These require disclosure to be made in relation to all mining, exploration and tenement activities in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code). A company must promptly report on any material changes in its mineral resources or ore reserves (as defined in the JORC Code), and this report must be prepared by a 'competent person' (who must be a member or fellow of the Australasian Institute of Mining and Metallurgy or the Australian Institute of Geoscientists, or both). The key requirements include the following:
- the maiden reporting of mineral reserves or resources (or material changes to previously reported reserve or resource estimates) must include prescribed supporting information and the 'competent person' must consent to the form of the disclosure;
- the consent of the 'competent person' is not required for subsequent disclosure of the same material;
- a listed mining company must include a mineral resource or reserve report in its annual reports, and provide quarterly reports to the market on its activities;
- a feasibility or pre-feasibility study must be carried out prior to the declaration of an ore reserve;5 and
- a mining company can only release production targets, financial forecasts or income-based discounted cash flow valuations if the entity has a 'reasonable basis' for the statement. The Australian Securities and Investment Commission (ASIC) has indicated that this requires (among other things) having 'reasonable grounds' for any assumptions made regarding the availability of funding (if funding is yet to be secured). The assumptions upon which the forecasts are based must be disclosed and the market must be updated if the assumptions materially change or are proven to be inaccurate.6
III MINING RIGHTS AND REQUIRED LICENCES AND PERMITS
The default legal position in Australia is that all title to minerals is vested in the state or territory in which they are located. The overwhelming majority of land available (and prospective) for mining activity is Crown land or public reserves. Mining activities on Crown land or public reserves are regulated by the general mining legislation and controlled by the Department of Mines of each respective state or territory, which is responsible for administering and granting tenements to interested parties to carry out mining activities. The granting of a tenement provides the holder with authorisation from the relevant state or territory to carry out exploration or mining activities in that area. While the state or territory remains the legal owner of the minerals, a tenement holder is entitled to exclusive possession of a tenement area (for mining purposes) and the right to sell and realise value from minerals extracted from a tenement, subject to the payment of a royalty to the government.
ii Surface and mining rights
Tenement holders' rights to carry out mining activities on the land surface usually depend upon the particular mining operations in question, but typically include rights to access water and public roads, to construct buildings, plants, roads and railways, and to conduct primary treatment operations and other ancillary acts.
If a tenement holder seeks to engage in these activities on private land, there is an obligation to consult the private landowner and agree access compensation. Consultation usually commences after wider exploration activities are completed (including detailed geological and geophysical surveys),7 leading to an access agreement or arrangement being entered into to enable the pursuit of an application and grant of a mining tenement. Generally, mining tenements will not be granted over privately held land unless some form of access or compensation arrangement has been agreed (and if there is a failure to agree such, there is provision for arrangements to be determined by court process).
iii Additional permits and licences
There are numerous other permits and licences required at each stage of the mining cycle in Australia. The major permits and licences applicable for most mining developments include environmental permits, planning and development approvals, health and safety permits, and rights to use water, electricity and other utilities.
A key issue for many miners currently is the volume of government approvals required to commission mining projects and the duplication of these approvals sometimes required by state and Commonwealth regulators. The federal coalition government plans to address this issue by seeking to eliminate duplication and streamline approvals as much as possible to attempt to assist the mining industry with developing new projects. Definitive plans and policies have not yet been finalised, but Australia has frequently contemplated moving to a centralised approvals system and abolishing the multiple state-based regimes, which cause delay and duplication. However, progress towards this goal has so far been limited.
As an illustration of the regulatory issues facing miners, in 2014 the Gina Rinehart-led Hancock Prospecting commissioned the Roy Hill iron ore project, located in the Pilbara region of Western Australia. The project (a 55 million tonnes per annum greenfield iron ore project) required an estimated 4,000 separate government approvals to reach the final commissioning and construction phase.8
iv Closure and remediation of mining projects
The mining laws in most states and territories require mining lease holders to provide a rehabilitation bond to the Department of Mines, which is returned to the holder once the mined land is fully rehabilitated. (Note that Western Australia dispensed with this requirement in July 2013, moving completely to a mine rehabilitation fund model, and legislation has been tabled in the Queensland parliament to implement such a model into
its financial assurance framework.)9 Additionally, most regimes require a mining lease holder to put in place a detailed rehabilitation plan, which generally requires complete costings of full rehabilitation activities to be submitted to the Department of Mines and regular updates if the scope of operations changes. Mining regulators in Australia are vigilant in their assessment and clarification of rehabilitation plans, and have the power to require changes or adjustments, as well as call for additional funds to be added to the rehabilitation bond if they deem it insufficient to repair the land in question after mining ceases. Mine rehabilitation has also become an increasing focus as a number of projects reach the end of their intended mining life and have been sold to smaller companies for a nominal consideration and assumption of rehabilitation obligations. In November 2017, the New South Wales Department of Planning and Environment released a 'Mine Rehabilitation Discussion Paper' seeking feedback on proposed methods to improve the regulation of mine rehabilitation in New South Wales.10
IV ENVIRONMENTAL AND SOCIAL CONSIDERATIONS
i Environmental, health and safety obligations
Environmental assessment, approvals and compliance with legislative requirements are mandatory for the commissioning and operation of all mining projects in Australia. Environmental assessments and approvals are governed by both Commonwealth and state and territory legislation. Depending on the size, significance and impact of the mining project in question, the regulator may require environmental assessment to be undertaken in respect of:
- minimisation of the effects on flora, fauna and land or habitat;
- environmental pollution and contamination of land; and
- management and use of water resources, including protections against contamination of groundwater.
Health and safety issues are governed by occupational health and safety legislation administered by each state and territory through statutory bodies with wide-ranging powers. The structure of the legislative framework differs across Australia. Many states regulate health and safety at mine sites through a specific piece of legislation that differs from the legislation applicable to industry more broadly. Mine operators should also be aware of the myriad other pieces of health and safety legislation that may regulate certain parts of their operations. Separate statutory regimes exist to govern (among other things) the safe operation of rail infrastructure, aerodromes, the transport of goods by road, electricity, dangerous goods and explosives. Notwithstanding this, the fundamental principles of each piece of health and safety legislation are broadly similar. Each piece of legislation requires the duty holder to take a risk-based approach to safety by identifying hazards, assessing the risks that arise from those hazards and taking reasonably practicable steps to control those risks. A primary duty of care is imposed on the mine operator to manage and control work sites, and to ensure the health and safety of its workers (which includes contractors and other indirect employees). Directors and officers of mining companies also have a personal duty to exercise due diligence to ensure their company is compliant with all applicable workplace health and safety laws. In addition, often quite onerous duties are imposed on the most senior person at a mine to take responsibility for the implementation of the mine's safety management system.
Legislative reform in this area is frequent. In 2015–2016, new mine safety legislation was introduced in New South Wales, a process of assessing options to modernise the mine safety legislation in Western Australia is continuing, and reforms were made to rail safety and legislation governing the transport of goods by road in several states. In 2017, Queensland introduced additional legislation relating to a statutory compensation regime for sufferers of coal miner's pneumoconiosis.
ii Environmental compliance
Companies wishing to commission mining projects must prepare (sometimes in conjunction with the relevant environmental regulatory body) an assessment of the anticipated environmental impact of their project. That assessment is generally opened for public consultation or comment. A determination is then made by the relevant environment minister and the grant of environmental approval is generally subject to conditions that aim to minimise the overall environmental impact of the mining project.
In addition to obtaining state or territory government approval for a project, assessment and approval under the Commonwealth Environmental Protection and Biodiversity Conservation Act 1999 (Cth) is required to take an action that will affect 'a matter of national environmental significance'. Generally speaking, 'matters of national environmental significance' involve sensitive areas or species (e.g., the Great Barrier Reef) but matters that affect Commonwealth lands, waters, protected flora and fauna and other politically sensitive actions, such as large-scale mining projects (particularly uranium projects), are also caught.
While there is provision for the Commonwealth to delegate authority to the states or territories in certain circumstances, in practice this rarely occurs – especially in relation to large-scale or high-value projects. This potential duplication of environmental approvals between state and Commonwealth regulators is another key issue for mining companies to navigate and one that causes significant delays in some projects.
iii Third-party rights
Until 1992, the legal system did not recognise that Australia's indigenous inhabitants had any rights or interests in relation to land or waters. The Mabo decision at the High Court of Australia11 recognised the 'native title' rights of Aboriginal people in relation to land in which those rights survived the acquisition of sovereignty by non-indigenous people. Native title law in Australia is complex and cannot be covered extensively here, but generally speaking, the key provisions in respect of native title rights are set out in the Native Title Act 1993 (Cth) (NTA), which aims to:
- protect and recognise native title rights;
- provide for the validation of past acts and intermediate past acts;
- establish ways in which future acts affecting native title may proceed; and
- establish a mechanism for determining competing interests.
The NTA also confirms that certain grants (mainly freehold grants and leases conferring rights of exclusive possession) have extinguished native title rights. Where native title is not extinguished, the NTA protects those rights by imposing a firm regime, which governs any 'act' (i.e., the grant of a mining tenement) occurring after 1 January 1994.
Generally speaking, any grant of a mining tenement after 1 January 1994 will be valid provided that it complies with the NTA regime. In most cases, the proposed grant triggers a 'right-to-negotiate' process, whereby the Department of Mines, the proposed tenure-holder and the native title-holder are required to negotiate in good faith the process by which a mining tenement can be granted. These agreements commonly include compensation to the indigenous community, provision of employment or community benefits, and protection for areas of cultural heritage significance. If the parties cannot reach agreement, there is an adjudicated process that can be accessed under the NTA. A full Federal Court decision in 2017 raised concerns regarding the valid execution of such agreements where not all members of the claimant group had signed the agreement.12 However, the federal government promptly amended the legislation to rectify the issue.13 The federal government also released a native title Options Paper in November 2017, which may result in amendments to the NTA to improve the native title system. Public consultation closed in February 2018 and attracted a wide range of submissions from industry, academia, native title groups and government.
Crucially, in most cases, a right of veto does not arise; however, the process can be time-consuming and costly, and depending on the proposed area, certain projects cannot proceed without an agreement with the indigenous native title-holder (this is usually dictated by state and territory legislation rather than the NTA).
There are also Aboriginal cultural heritage rights that may exist on certain land independent of any native title rights that may arise, and there are defined mechanisms (usually enshrined in state and territory legislation) that govern this.
V OPERATIONS, PROCESSING AND SALE OF MINERALS
It is rare for governments or government instrumentalities to participate in mining operations. Project development is generally carried out by commercial parties, who gain authorisation to conduct mining activities through the grant of mining tenements.
i Processing and operations
The importation and use of earth-moving, construction and mining machinery is strictly regulated because of the threat it can pose to the environment by introducing soil, plant material and other quarantine risks. The Australian Quarantine and Inspection Service is responsible for monitoring importation and use of such mining machinery. Typically, new machinery does not require an import permit to enter Australia, but may be subject to an inspection to ensure it is free of contamination. All used machinery requires an import permit and may be subject to quarantine restrictions upon arrival. Regardless of whether new or used, all machinery imported requires a cleanliness declaration stating the machinery is clean and free of all soil, plant and animal debris.14 Port and rail infrastructure is typically privately owned (often by mine operators) and access to infrastructure is regulated by state and federal competition laws. A recent example of this is the successful Federal Court proceedings taken by Glencore to have the Port of Newcastle 'declared' for the purpose of national competition law, allowing the national competition regulator to arbitrate prices and access terms.15
ii Sale, import and export of extracted or processed minerals
There are generally very few legislative restrictions in place in relation to the processing, exporting or sale of Australian minerals. As a signatory to the Nuclear Non-Proliferation Treaty, Australia has generally sought to restrict the sale of Australian uranium to countries who are also signatories to that treaty (although India is a recent exception to this general rule), and where Australian uranium is exported, Australia has required purchasers to track the material (more closely than is required by the International Atomic Energy Agency) to ensure it is used only for peaceful purposes. In recent times, Australia has sought to take an active role in policing the use of exported uranium, and has participated in international sanctions by banning exports to certain countries. Certain Australian states have prohibitions on the uranium mining.
Other than the foregoing, and an overarching requirement to have export clearance, there are generally no legislative export controls or limitations in place for extracted or processed minerals.
iii Foreign investment
Foreign investment is overseen by the Foreign Investment Review Board (FIRB), a Commonwealth government body responsible for administering the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act) and examining proposals by foreign persons to invest in Australia. The FIRB is responsible for reviewing such proposals and making recommendations to the Australian Treasurer on whether they should be approved in accordance with the Act; however, the Treasurer has the ultimate decision to approve or reject a proposal (and does not have to accept the FIRB's recommendation). On 1 December 2015, the Act was significantly amended to update Australia's foreign investment legislative framework and to ensure that Australia continues to maintain a welcoming environment for foreign investment that is not contrary to Australia's national interest.
In considering proposals, the FIRB assesses whether it is 'contrary to the national interest'; however, the Act does not define 'national interest'. This is intentional and allows proposals to be assessed case by case, recognising that national interests change over time and flexibility is necessary to account for variable economic and industry conditions. This flexibility has been brought into focus with the recent decision by the Australian Treasurer to block the proposed bids for a 99-year lease of 50.4 per cent of the NSW electricity distributor Ausgrid by Chinese state-owned company State Grid and Hong Kong-based Cheung Kong Infrastructure (CKI), although a subsequent acquisition of a gas pipeline business by CKI was approved.
Generally, when considering whether a proposal is in the 'national interest', regard is given to broad topics contained in Australia's foreign investment policy (such as national security, data protection, competition, and other government policies (e.g., tax or environment) that affect the economy and broader community) and the 'character' of the proposed investor.
Under Australia's foreign investment framework, certain foreign investment proposals require approval irrespective of their value. All direct investment in Australia by foreign governments and their related entities, including state-owned enterprises and sovereign wealth funds, require approval. Acquisitions by foreign persons that are valued at or above certain relevant monetary thresholds also require approval. The table below sets out the relevant thresholds for acquisitions by foreign government investors, all non-government investors other than investors from certain countries (including China, New Zealand, United States, Chile, Japan, South Korea, Singapore and Thailand) to which Australia has agreed different thresholds pursuant to certain free trade and other agreements (agreement country investors, not including foreign government investors) and all other investors (foreign persons).
|Investor||Relevant threshold for acquisition (indexed, as at 1 January)|
|Foreign persons||Exploration tenure: Approval generally not required
Mining or production tenure: A$0
Acquisitions in operational or producing mining projects: A$57 million
|Agreement country investors*||Exploration tenure. Approval generally not required
Mining or production tenure: United States, New Zealand and Chile – A$1,094 million; all others – A$0
Acquisitions in operational or producing mining projects: A$1,134 million
|Foreign government investors||Exploration tenure: A$0
Mining or production tenure: A$0
Acquisitions in operational or producing mining projects: A$0
|* Investors from Singapore and Thailand are subject to lower thresholds|
In addition, approval may be required for acquisition of an interest in an Australian land corporation (a company having more than 50 per cent of its assets consisting of 'Australian land'). As interests in Australian land also include interests in mining and production tenure, these interests must be taken into account in considering if an entity in which a foreign investor is proposing to acquire securities in is an Australian land corporation.
In addition, if the proposed acquisition is by a foreign government investor, the acquisition of an interest in an operational mine will require approval, irrespective of the value of the investment. For agreement country investors and other foreign persons, the threshold for approvals for acquisitions of interests in operational mines is higher (A$1,134 million for agreement country investors and A$57 million for foreign persons). The lower thresholds for agreement country investors can only be relied upon if the entity making the investment is an 'enterprise' or 'national' of the relevant agreement country.
Generally speaking, an application for a new mining tenement (or a transition from an exploration to a mining tenement) will generally not trigger any FIRB approval requirement, as the granting of property rights by a government will not constitute an 'acquisition' for the purposes of the Act. The only exception to this is in the case of a foreign government investor, who must seek approval for conversions of tenements from exploration to mining, to acquire an interest in tenements directly from the Australian government or to acquire an interest of at least 10 per cent in the securities of a mining, production or exploration entity.
Royalties are payable to the Crown on extraction of minerals, although the amount and calculation varies depending on the location and the mineral. Typically, royalties are either flat-rate (i.e., the cost per tonne), ad valorem (a percentage of the value of minerals recovered) or profit-based. Private royalties may also be payable when the mining rights have been transferred between private parties subject to the payment of an existing private royalty.
General duties and taxes are payable in the same manner as for any other business within Australia, such as local government rates and fees, stamp duty, goods and services tax, capital gains tax or income tax. The Commonwealth government has recently introduced a Junior Mineral Exploration Tax Credit, which allows tax losses from greenfield exploration to be distributed as a refundable tax credit to Australian resident tax shareholders who subscribed for shares in the entity during the relevant income year. The total exploration credits available for issue during the scheme is capped at A$100 million over a four-year period. This is intended to replace the Exploration Development Incentive Scheme that ended in May 2017.
VII OUTLOOK AND TRENDS
i Competitiveness and productivity
Australia is considered an attractive environment for domestic and foreign investment, benefiting from a climate of relatively low interest rates, low inflation, a competitive currency relative to other global currencies and geographical proximity to key Asian markets. For the year ended 31 December 2017, foreign direct investment in Australia across all sectors increased by 3 per cent to A$3,266.4 billion, drawing on capital inflows from major trading partners such as the United States, the United Kingdom, Belgium, Japan, Hong Kong and Singapore.16
In 2017 and 2018, a combination of productivity improvement, cost reduction and investment in output started delivering economic benefits to the mining sector thanks to a sustained increase in demand for Australia's premium seaborne commodities (principally iron ore, metallurgical coal and thermal coal), resulting in a stabilisation of prices and a corresponding increase in economic returns to industry participants. Exploration expenditure has also increased, with the seasonally adjusted estimate for mineral exploration expenditure increasing by 11 per cent (A$51.4 million) to A$516.7 million in the March 2018 quarter, an increase of 24.4 per cent from the March 2017 quarter estimate.17
ii Innovation and technological change
There is a growing awareness among mining companies that technological innovation, which can enable mining companies to streamline production, reduce bottlenecks and reduce labour costs, will be critical in keeping rising operational costs in check and increasing productivity. Automation, in the form of remote operations technologies, is already an increasing feature of larger mining operations, with Rio Tinto recently completing its first delivery of iron ore using its 'Autohaul' autonomous train system.18 We expect this trend to continue and that the use of mining technology will become more widespread as costs decrease over time. Willingness to innovate and embrace new technology to enhance productivity and operational efficiency has given a competitive advantage to early adopters.
As mining companies embrace these changes, they will need to be alive to the cyber and data protection risks that accompany the use of new technologies. Inadequate cybersecurity exposes mining companies to a number of potential outcomes, including damage to a company's reputation, equipment or profits, production and workforce challenges or delays to change, as well as serious safety and security problems. Large companies are particularly vulnerable targets owing to their significant role in global supply chains and national economies. Many mining companies have adopted vigilant cybersecurity policies and, in response, have educated staff on managing risks to enhance cybersafety.
iii Commodity prices and demand
The markets for Australia's key mineral exports, coal and iron ore have recovered from previous historic lows and, combined with spikes in gold and lithium prices, have generated greater market activity. This is particularly the case for Australia's production of seaborne coal and iron ore, which are generally of a high grade and quality, allowing producers to realise a price premium and meet the requirements of customers seeking higher grade products to achieve productivity and environmental targets in their own operations (and a corresponding decrease in demand for lower grade iron ore and thermal coal products). Demand for lithium, of which Australia is one of the world's major suppliers, continues to be driven by investment and research and development by battery producers and carmakers seeking to secure supply for future developments.
iv Access to capital
Increases in commodity prices and commercial returns from mining operations have increased the attractiveness of mining stocks, with the daily net asset value of the VanEck Vectors Australian Resources Exchange Traded Fund increasing from A$20.19 to A$26.47 in the past 12 months. However, the increase in the prices of mining stocks is yet to translate into a corresponding increase in equity capital markets activity for the sector.
Debt funding for greenfield mining projects continues to be challenging, although there have been a number of successful project financings for Australian gold and lithium developments. As a result, the smaller miners continue to assess the viability of non-traditional financing arrangements, such as metals streaming, private royalties and other forms of innovative financing. Offtake partners have also been a source of debt and equity funding for greenfield development projects (particularly in the lithium space).
For major miners, increased cash flow from existing operations has allowed capital expenditure to be funded from retained earnings, although those miners have also had to navigate competing demands from shareholders for available cash to be returned to shareholders via dividends and share buy-backs.
Private equity funds continue to show interest in the Australian mining sector and have been linked to a number of potential merger and acquisition transactions within the sector, although the number of mining projects acquired or funded by specialist mining private equity funds has increased, particularly in the coal and gold sectors.
v Corporate consolidation in the mining sector
Two key trends in mining mergers and acquisitions continued during 2017, namely offshore investment and consolidation in gold and rare metals (principally lithium), and major multinational miners looking for opportunities to divest assets that are considered 'non-core' to their global portfolio (principally in relation to thermal and metallurgical coal). The largest M&A transactions in the mining sector in 2017–2018 were Rio Tinto's divestment of its Queensland metallurgical and thermal coal assets to Glencore (US$1.7 billion), Adaro/EMR Capital (US$2.25 billion) and Whitehaven Coal (US$200 million), Yancoal's and Mitsubishi's divestment of a 49 per cent interest in Rio Tinto's Hunter Valley Operations thermal coal mines to Glencore (US$1.1 billion) and Wesfarmers' divestment of its Queensland metallurgical and thermal mine to Coronado Coal (US$700 million). Herbert Smith Freehills acted for either the buyer, the seller or a potential buyer in relation to each of these transactions.
The lithium sector has continued to be active, with major lithium producers General Lithium, Jiangxi Ganfeng Tianqi and Ablemarle all holding interests in jointly owned Australian projects. They were joined by Sociedad Química y Minera (SQM) in 2017–2018, via its acquisition of an 50 per cent interest in Kidman Resources' Mount Holland Project, through both equity investment and underwriting long-term offtake contracts to support those projects as they ramp up production, and the development of downstream processing capacity in Australia. Herbert Smith Freehills advised SQM in relation to this transaction.
vi Sustainability and community
As automated technologies and lean business models are introduced to reduce costs and improve productivity, access to capital becomes limited and the market adjusts to lower commodity prices, which will affect the communities built around mining.
Stakeholders are calling for increased transparency in the way mining companies work with communities and manage the environmental effects of operations. Mining companies withdrawing from communities and scaling down operations will need to manage potential reputational damage and how this affects local economies, including social dislocation. Activist organisations are increasingly litigious and savvy with their use of social media and other corporate accountability mechanisms, such the complaints investigation processes through the National Contact Point for the OECD Guidelines for Multinational Enterprises. To meet increased expectations, mining companies will need to maintain open communication, proactively seek to minimise adverse outcomes and collaborate with a range of stakeholders.
1 Jay Leary is a partner and Geoff Kerrigan is a senior associate at Herbert Smith Freehills. They gratefully acknowledge the assistance of Jo Kwok, graduate at Herbert Smith Freehills, in the preparation of this article.
2 Geoscience Australia, 'Australia's Identified Mineral Resources' (www.ga.gov.au/minerals/mineral-resources/aimr.html).
4 Forrest & Forrest Pty Ltd v. Wilson  HCA 30.
5 Australian Securities Exchange [ASX], 'Update on JORC Code/Listing Rules changes' (https://www.asx.com.au/regulation/compliance/asx-mining-reporting-faqs.htm).
6 Australian Securities and Investment Commission [ASIC], 'Information Sheet 214: Mining and resources – Forward-looking statements' (http://asic.gov.au/regulatory-resources/takeovers/forward-looking-statements/mining-and-resources-forward-looking-statements/).
8 Hancock Prospecting Pty Ltd announcements (https://www.royhill.com.au/wp-content/uploads/2016/05/Roy-Hill-Wins-PMI-Project-Award-1.pdf).
9 Mineral and Energy Resources (Financial Provisioning) Bill 2018 (QLD). For further details, see https://www.herbertsmithfreehills.com/latest-thinking/qld-rehab-reforms-roll-on-with-potential-impacts-for-liquidators.
11 Mabo v. Queensland [No 2] (1992) 175 CLR 1.
12 McGlade v. Native Title Registrar  FCAFC 10.
13 Native Title Amendment (Indigenous Land Use Agreements) Act 2017.
14 Department of Agriculture, Importing Machinery into Australia (www.agriculture.gov.au/import/goods/vehicles-machinery/regulations).
15 Port of Newcastle Operations Pty Ltd v. Australian Competition Tribunal  FCAFC 124.
16 Australian Bureau of Statistics, '5352.0, International Investment Position, Australia: Supplementary Statistics, 2017'.
17 Australian Bureau of Statistics, '8412.0 - Mineral and Petroleum Exploration, Australia, Mar 2018'.
18 Media Release: 'Rio Tinto achieves first delivery of iron ore with world's largest robot', 13 July 2018, available at https://www.riotinto.com/media/media-releases-237_25824.aspx.