A look at recent statistics and reports gives a bleak picture of mining junior explorers.
There has been plenty of coverage on the mining giants and how they cope with the failed Mineral Resources Rent Tax, state and federal red-and-green tape and cost-and job-cuts across the board.
Mining magnate Gina Rinehart criticised the government’s dependence on the mining sector earlier this year, saying the industry has been used like “an ATM”.
Rinehart said the mining industry is not a cash-cow and urged the sector to stand up for themselves.
“Without mining and its related industry this country has no hope of repaying our record debt,” she said.
“It needs to keep reminding Australians this – that without mining and its related industries this country has no hope of repaying our record debt without facing the problems Greece and other countries faced with overspending and consequent debt traumas."
Yet the sector is beleaguered from many sides: investors, environmentalists and the government. They view the sector as a cash cow from the worker on site through to the executive in the boardroom without taking note of the high costs of doing business.
But the fact is mining giants can pick up the pieces and move overseas for better investment opportunities.
For junior mining companies, it is not so easy.
The Australian Bureau of Statistics released figures on Monday saying South Australian mineral exploration plummeted by $100 million in seasonally adjusted terms in the last financial year.
Figures said $229.2 million was spent for exploration in the state for the 2013 financial year, down from $329.2 million last year.
Exploration slumped $899.2 million year-on-year to $3.06 billion Australia wide.
In the May budget this year, the Federal Government reversed a 2001 decision that let major miners write off the cost of buying smaller companies who have carried out exploration activity.
It was estimated to result in $1.1 billion worth of savings over four years.
A report recently said hundreds of mining juniors and explorers could fold by the year end.
Ernst & Young’s annual report Business Risks Facing Mining and Metals 2013-14 said juniors and explorers are short of cash and doing it tough in the wake of the mining slowdown.
Capital distribution and access to funds are biggest strategic risks a miner has to cope with, the report said.
The report examined 350 small mining companies with a market value of $500 million or less listed on the Australian Stock Exchange and found the combined market value had slid one quarter in the year to March
Smaller miners worth less than $50 million slumped 43 per cent until May.
Ernst & Young’s global mining and metals leader Mike Elliot said many junior explorers risk collapse in the second half of the year because they fail to draw investment through capital raisings.
An incentive to explore
In a bid to boost exploration in Australia, the Coalition announced it would introduce an Exploration Development Incentive that will allow investors to deduct the expense of mining exploration against their taxable income.
The announcement was made by senator Chris Back at the Association of Mining and Exploration Companies (AMEC) convention in Perth to a delegation of exploration and mining companies on Tuesday.
The South Australian Chamber of Mines and Energy (SACOME) is pleased with the incentive program, particularly on the back of the state’s disappointing exploration figures.
SACOME chief executive Jason Kuchel said: “This will provide a strong incentive for shareholders to commit capital to the exploration sector, making investment in these juniors attractive and addressing the severe lack of start-up capital in a competitive and difficult market.”
AMEC has been hopeful the Coalition would pledge to introduce the tax concessions scheme it designed and proposed.
“AMEC has been advocating for a proactive tax reform measure that will allow current eligible losses to be passed back to their Australian share owners in the form of a tax credit through the well known franking system,” AMEC CEO Simon Bennison said.
“The Coalition’s comprehensive policy that will scrap the Carbon Tax, scrap the mining tax and introduce an Exploration Development Incentive is a much needed change to increase investment in the Australian resources sector” Bennison said.
The proposal is a modified version of a flow-through shares design in Canada, and was responsible for boosting exploration and discoveries there.
It commissioned KPMG to put together the ‘Impact of Mineral Exploration Tax Credit’ report in July this year, which explains how the incentive would work.
Under the scheme, junior minerals exploration companies with no taxable income can pass eligible exploration expenses on to their shareholders.
The Australian Taxation Office will decide on a portion of costs that investors can claim as tax credits.
The scheme will be capped at $100 million over the forward estimates.
AMEC welcomes Coalition's pledge
Bennison told Australian Mining exploration companies often get trapped when they invest in greenfields because they have no accessible income to offset it.
He said explorers only realise the value out of it when they get taken over by another company.
He is encouraged by this tax concession scheme as it will attract more equity finance into the exploration sector.
“Because there will be that encouragement that if you want to put $1000 into an exploration company you will get a tax credit back, equivalent to a 30 per cent deduction.
“That’s quite an attraction to someone to put money into an exploration company they’ll get tax credit,” he said.
“I think it’ll help put some confidence back into investment and it will be critically important in helping smaller exploration companies go out and raise equity finance.”
Bennison fears revenue will diminish down the track as discovery rates are dropping off to about one a year.
“Australia has really dropped off in the number of discoveries internationally. And we’ve got to bolster that up because new discoveries lead to most new mines, good regional development and revenue flows to governments across Australia,” he said.
Kuchel said Australia has been losing global market share of exploration expenditure over the past few years and is hopeful this program will gradually address this problem.
“We have the resources, we have the demand, and now – potentially – we have the return to a supportive and stable regulatory and political environment to encourage investment,” he said.
Kuchel told Australian Mining the incentive alone will not be enough to boost exploration and the government has to implement other policies to make it effective.
“Together with the Coalition’s commitment to doing away with MRRT and carbon tax, and reducing red and green tape on approvals, we have a suite of policies that stands to reinvigorate our mining sector.”
But he said none of the above policies are useful unless explorers have capital to start exploration in the first place. This is where this exploration development incentive comes in, he said.
The tax losses would be handed out like franking credits in dividends and would come from the company’s audited accounts.
Unlike the Canadian version this model would be less vulnerable to rorting, according to vice president of AMEC Mike Young.
AMEC forecasts government investments of around $50 million in 2016/17, $101 million in 2017/18 and $133 million in 2018/19.
Bennison accepted it was less attractive for investors to receive tax credits gradually through yearly audited accounts, instead of Canada’s upfront deductions system.
But he said Australia’s version would be more welcome for the government given the current political climate.
“The report clearly indicates what it would cost per annum and how it could be implemented over the four years so it wouldn’t be an upfront hit on government.
“This would actually kick in from year three or four and roll out from there,” Bennison said.
AMEC predicts the incentive could contribute a further $2.2 billion in GDP across the mining sector, result in over 4000 additional jobs if discoveries lead to viable mines, and has the potential to provide annual tax revenue stream to Government of up to $283 million.
Bennison is also pleased with the Coalition’s pledge to remove green tape, red tape, the carbon tax and the mining tax.
“The sooner they can establish that if they win government, I think would be a terrific outcome that will reduce cost for the industry, reduce timeline and focus the approvals process back in the regional areas where they can be far better administered,” he said.
“That should have happened in the last year but unfortunately it hasn’t. That’s something to look forward to.”
Bennison hopes more exploration companies will make the most of the exploration initiative, which he hopes will result in more discoveries.
“That will put Australia back where it should be, up among the leaders internationally.”
Western Australian recently announced round eight of the government’s exploration drillingprogram.
The government has allocated about $130 million for explorers by 2016-17.
The Queensland Government recently allocated $30 million over three years for the Future Resources Program.
The exploration funding will help the Geological Survey of Queensland explore for new mineraldeposits in Queensland and secure the future of the industry.