Dean Smith (WA, Liberal Party) Share this | Hansard source

I also rise this afternoon to speak on this very important piece of legislation, the Treasury Laws Amendment (Junior Minerals Exploration Incentive) Bill 2017. It's important because it's of a particular policy significance to my home state of Western Australia. It's hard to overstate the significance of the mining industry's contribution to the Australian economy. The Australian minerals industry's contribution to local communities, regions and the nation is substantial, wide-ranging and enduring. This contribution flows from exploration and development right through to production and ultimately mine closure. It's an industry that contributes at least 10 per cent of the GDP in Australia; provides more than 200,000 highly paid, highly skilled jobs, mainly in regional and remote Australia, and many hundreds of thousands more in supply and service industries across our economy; has also developed productive and rewarding relationships within Indigenous communities across Australia; and is committed to leading practice in innovation, safety performance and environmental management.

However, although Australia has the world's largest reserves of lead, nickel, uranium and zinc, KPMG says:

The mining industry remains heavily dependent upon past discoveries.

This is particularly so in the mine development for new tech metals such as lithium, which is used in smartphones, laptops, digital computers and cameras. Also from the KPMG report, University of Western Australia researchers:

… estimated that within 7 to 18 years, if there are no new discoveries or extensions, about half of Australia's current non-bulk commodities mines will be exhausted.

The UWA paper, called Where are Australia's mines of tomorrow?, says:

Although world mineral exploration expenditure for non-ferrous commodities has been recovering strongly from its low in 2009 and is back on the rising trend which commenced in 2002, Australia has continued to lose ground relative to other global and competitive exploration destinations. Australia's share of global exploration for non-bulk commodities has virtually halved from its peak of 21% in 2002 and it now stands at a mere 12% of the total, while that of Canada, for instance, has increased from 14% to 18% over the same period.

And the KPMG report continues:

The ongoing sustainment of the mining sector's performance will be reliant on sufficient greenfields mineral exploration to enable the development of the "mines of tomorrow".

In addition to this alarming statistic, the Australian Bureau of Statistics has said mineral exploration expenditure was $1.6 billion in 2016-17, up from $1.4 billion in 2015-16. My home state of Western Australia contributed over a billion dollars of this spend, with the gold and iron ore sectors attracting the largest share. Gold exploration expenditure in Western Australia increased significantly from $385.9 million in 2015-16 to $509.5 million in 2016-17. Iron ore exploration also increased, but only marginally at $281.6 million.

However, KPMG also said:

The state of greenfields mineral exploration activity in Australia is not as healthy as the headline figures might suggest. While there has been growth in expenditure, the level of drilling activity in this sector has remained flat over the last decade.

According to figures released by the Australian Bureau of Statistics last week, total metres drilled in the search for new deposits fell by nine per cent from 841,600 in the September quarter to just 766,100 in the three months to the end of December. Total metres drilled in brownfields also fell by 2.9 per cent from 1.45 to 1.1 million. The falls in drilling come despite a 4.4 per cent rise in exploration expenditure to almost $500 million. As AMEC's chief executive, Warren Pearce, was quoted in The West Australian:

… the fall in greenfields exploration as particularly worrying given it was the area from which big new discoveries would emerge.

The fall in metres drilled was also concerning given big new discoveries were more likely to be found at depth, with most shallow deposits already in production or mined out.

Mr Pearce said while the overall picture was positive and he expected the figures to improve this quarter, the pipeline of new projects coming online in the next few years was not strong.

He noted a continuing bias towards exploration around existing deposits, with 67 per cent of drilling happening in already-explored brownfields locations.

"This imbalance must be addressed if Australia is to find the mines of the future," he said.

The KPMG report also said:

A lack of growth in Australian greenfields mineral exploration and deteriorating world market share, both signal an emerging threat to the long-term growth of the Australian mining industry … without some sort of catalyst for greenfields mineral exploration, the level of future mining activity in Australia may—

continue to—

be constrained.

Exploration for minerals involves significant expenditure and risks. While larger established mining companies are generally in a position to fund such activities from their own profits, smaller companies focused solely on exploration are dependent on attracting investment to fund their activities. Such smaller companies are also more likely to engage in more speculative mineral exploration in greenfield areas, rather than focusing on the development of their existing resources.

Part of the problem is that the banking sector has all but disappeared from the junior exploration market, due largely, still, to the fallout from the European debt crisis, forcing many junior miners to seek financing from larger miners or from outside investors. David Harquail, chair of the World Gold Council and chief executive of international mining investment company Franco-Nevada, said:

Since the global financial crisis, the number of project lenders in the mining industry dropped to where you can count them on your fingers. What’s happening now is all the European banks now have just dropped off …

He also said:

Just as big pharmaceutical companies rely on small biotechs to discover new drug candidates, big mining companies need junior explorers to find new deposits.

But just as investors have gone cold on pharmaceutical companies that invest in early-stage drug discovery, so too have they abandoned junior exploration.

So says David Harquail, a clear expert when it comes to the funding and financing of resource exploration.

Arguably, the tax arrangements have not encouraged investment in Australian greenfield mineral exploration projects to date. This junior mineral exploration tax credit arrangement is an incentive for shareholders investing in greenfield exploration companies who undertake new capital raisings. The key benefit of this initiative will be for the ability of certain companies to undertake greenfield exploration, to renounce their losses and, instead, pass future tax deductions to Australian resident investors. Alternatively, companies can choose to retain their tax losses for utilisation when they make profits from a successful mine. The junior minerals exploration tax credit will be capped at $100 million and will be available on a first in, first served basis. Companies undertaking greenfield exploration can elect to give up a portion of their tax losses relating to eligible exploration expenditure in an income year and pass on tax credits to their Australian resident investors. Tax credits capable of being passed to investors are expected to be the lesser of the explorer's tax loss or the greenfield exploration expenditure for the previous income year, multiplied by the corporate tax rate for that year. Similar to the franking system, the credit will flow through to investors and be available for the income year following the one in which the eligible expenditure is incurred by the company. Access to tax credits will not hinge on the investor having taxable income in the relevant year, as excess tax credits are expected to be refundable to certain Australian resident investors.

Unlike the previous Exploration Development Incentive scheme, eligibility for the junior minerals exploration tax credit is limited to investors that purchase newly issued shares and is allocated between eligible exploration companies on a first come, first served basis, subject of course to necessary integrity requirements. The previous EDI was typically applied to all shareholders, which diluted the benefit of the scheme. I think that was widely recognised as a significant flaw in the success of the original model.

Given exploration companies have a choice to use the junior minerals exploration tax credit at the time of capital raisings, it's suspected that companies will be required to make a declaration to the market of the company's intention to retain exploration related losses or to use the JMETC. If successful, the incentive should attract much-needed capital investment to junior explorers undertaking greenfield exploration and, importantly, open up the potential for new discoveries by encouraging explorers to venture into areas they otherwise may not have considered.

As a senator for Western Australia, I support the bill, which will go a long way to securing continued investment in greenfield mineral exploration. I look forward to playing my part in working with colleagues to ensure the Australian mining industry remains a strong and significant contributor to our national economic prosperity and to resource based states like my home state of Western Australia for many decades to come.