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The anatomy of the resource boom tells us it's only going to get better for taxpayers

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By Expert Panel 12.11.2012

By Jeffrey Wilson, Murdoch University

It seems no-one is quite sure what to think of the resource boom anymore.

Long considered the factor that saved Australia from the GFC, the suspension, delay or scaling back of a number of mining projects has led many to question whether the resource boom is turning into a bust. Even the recently-issued Asian Century White Paper (gently) expresses concerns at a national over-reliance on mining exports and the need to diversify into new economic sectors.

However, much of the rhetoric around the supposed mining bust rests on dubious analysis. By attempting to read the tea leaves for an entire industry on the basis of individual projects, such claims may not fully capture the broader direction in which the Australian mining sector is heading.

Indeed, by looking at the mining sector as a whole – and considering the three distinct stages which mining projects pass through – we can see that the reality of the sector today is more nuanced than simply being a boom or a bust.

The three stages of mining development

Developing mining projects is a complex process, but in simplified terms can be thought of as having three stages. Each stage is distinct, and offers a particular set of benefits and payoffs to the economy that hosts it.

The first is the design stage. After deciding there is unmet global demand for a certain mineral, mining companies begin planning mining projects through detailed processes of geological exploration, mine design and economic feasibility studies. This stage concludes when a mining company decides whether (and what) it wants to build.

While most exciting to investors, the design stage generally brings the fewest benefits to the host economy. Beyond the creation of a small number of jobs for technical staff in geology, engineering, and business analysis, only minimal amounts of employment generation and investment occur.

The second is the development stage, where a company actually builds a mine. Investment capital is raised through financial markets, a large number of construction and engineering workers are employed, and the mine and any required infrastructure (such as ports and rail) are built.

This stage offers more benefits to the host economy, but they are somewhat limited to mining regions. As the most labour-intensive part of a resource boom, the development stage creates many jobs, particularly in the regional towns which host the associated workers. It also generates what are known as ‘backwards multipliers’ in the form of demand for inputs, particularly from engineering and mining equipment suppliers.

The third stage is the operational stage – when a mining project is completed and begins producing minerals for export. For mining companies this stage is the ultimate goal, as it is the point where they start earning revenue on sales and making financial returns on their investments. In the operational stage the benefits from mining projects increase again, but their distribution also changes significantly.

On one hand, fewer workers are needed to operate a mine than construct it. The number of employees falls, which can pose major difficulties for regional communities which find themselves with either a suddenly reduced population, or less demand for services to sustain local businesses.

On the other, the operational stage is the point at which the broader community begins enjoying a significant share of benefits from the resources boom. Investors earn dividends, state governments collect royalty payments, and the Commonwealth government obtains company tax (and in some sectors MRRT payments) from mining firms. Recycled through the fiscal system and used to fund a range of public projects, it is the revenues generated at this stage that offer the highest level of benefits to the broader Australian community.

Where are we now?

Thinking about the resource boom in this way allows us to more clearly understand the transformation occurring in the Australian mining sector today. At any point in time most mining companies maintain a suite of projects, each at varying stages in the design-development-operation process. But in general, what we see happening today is not a bust per se, but rather a shift from the second to third stages.

In the middle of the 2000s, Australia was in the grip of the first stage of the resources boom. It had become clear that Asian demand for mineral was soaring, and companies scrambled to plan new projects to meet this demand. Then in the later years of the 2000s came the development stage – foreign investment flowed in, boots were put on the ground, and construction began.

Now, the Australian mining sector is moving into the operational stage, as construction finishes and new entrants to the industry – such as Fortescue Metals – go from being builders to operators. At this point, it becomes clear that some of the projects envisaged back in the heady days of the boom are not economically justified, and their sponsors inevitably must consider winding them back. BHP’s recent shelving of the Olympic Dam project is a typical example.

Boom, bust or something else?

This transition to the third stage of the resource boom has three important implications for Australia.

First, the resource boom is not turning to bust. Rather, the investment- and employment-heavy development stage is winding up. Announcements of new capital expenditure by mining companies will become less frequent, while cost saving exercises will become more common. But this is hardly the alarmist scenario that some in industry and the media have portrayed.

Second, the distribution of benefits is going to shift. For the broader Australian community, this is the stage where the real benefits of the boom are reaped. Company revenues translate into mineral royalties and tax payments, which give individuals and communities not directly tied to mining a share of the industry’s spoils.

Of course, for mining-dependent communities the end of the development stage is difficult, as large influxes of construction workers leave. It therefore becomes important to think about ways to use the largess of the boom to support mining communities during this transition.

Third, and perhaps most importantly, this transition was inevitable. There is a limit to how many new mining projects are needed to supply resource markets in Asia, and the Australian mining sector simply could not expand forever. In essence, we may be fretting over what was always going to occur. Indeed, this shift to the operational stage will allow the broader community to reap the benefits of the large amount of local and foreign investment that the boom has brought.

 >> Click here to read other articles from this week's newsletter

Jeffrey Wilson does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation. Read the original article.

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