Contractor

Time for a rational debate

 

The release by government of its long-a-waited stocktake of conservation areas listed in Schedule 4 of the Crown Minerals Act is the perfect time for a rational debate over mining in this country, says MCDOUALL STUART SECURITIES. 

The stocktake of conservation areas listed in Schedule 4 of the Crown Minerals Act was accompanied by a programme of proposed changes to existing arrangements that includes the following main components:

  1. Remove 7058 hectares of land from Schedule 4, including areas of the Coromandel Peninsula, the Paparoa National Park and parts of Great Barrier and Stewart Islands.
  2. Add a further 12,400 hectares (124 square kilometres) to Schedule 4, meaning that on a net basis, land protected under Schedule 4 increases by 5342 hectares (53 square kilometres).
  3. Invest $4 million over the next nine months to gather further information on non-Schedule 4 areas such as Northland and Schedule 4 areas of the Coromandel, Paparoa National Park and Rakiura National Park on Stewart Island.
  4. Future applications for access arrangements to conservation and other Crown land for mineral-related activities be considered by both the relevant land-holding minister and the Minister of Energy and Resources (currently only the Minister of Conservation considers applications for mining access to conservation land).
  5. Create a dedicated Conservation Fund from 50 percent of future non-petroleum royalty streams from minerals extracted from conservation areas, subject to a floor of $2 million per year and a cap of $10 million per year.

Provisions within the Crown Minerals Act heavily restrict mining activity in areas specified in Schedule 4. Areas of conservation estate not specifically included in Schedule 4 is able to be considered for mining on a case-by-case basis. Schedule 4 land totals around 40 percent of public conservation land or 13 percent of New Zealand’s total land area.

Of the five threads to the programme, the above has received the greatest media and lobby attention while the rest of the package has been largely glossed over. That the net amount of land proposed for Schedule 4 protection is actually increasing by an area equivalent to around 40 average dairy farms appears lost on most commentators.

Also lost in the noise has been the broadening of consultation provisions on applications to mine non-Schedule 4 estate to include both the Minister of Conservation and the Minister of Energy.

For the industry, this is an important concession as before now it has only been conservation issues that have been able to be considered in decision making on whether or not to grant mining access to conservation land.


Stakeholder response

The response from stakeholders has been predictably polarised. The pro-mining lobby, which includes mining companies, industry groups Straterra and the NZ Minerals Association and various others, have unsurprisingly pointed to the opportunity to lift income levels and living standards. Those such as Forest and Bird, Greenpeace and the Green Party, which were always going to react in the negative no matter what the extent of suggested change, have also not disappointed.

Some interests reverted to scare tactics to garner opposition, building imagery of mining giants mobilising immediately to carve-up National Parks and send every last cent earned back to their foreign-owned motherships. The imagery is one of Kiwis of both the bird and human variety being spat out along the way.

The problem for government and the pro-mining lobby is that it is extremely difficult to rebut such hysteria. In a shallow New Zealand media pool where the highest impact medium (network television news) tends to be more interested in sound-bites and sensation than meaningful debate, detail around the wider benefits that controlled mining could deliver is simply considered noise. In a two-minute news piece, such detail becomes lost in the much stronger and broadcastable messaging of localised citizen outrage.

That reporting tends to focus on the hotbed Coromandel area (an easy two hour drive from the Auckland television studios) and ignore the less accessible heartland regions where mining is a much bigger contributor to the local economy, is also unfortunate.

A survey of sentiment in places like Westport, Hokitika, Reefton, Macraes Flat, Ohai, Huntly and Taranaki would likely give a very different result to that seen to date.


Is the government crazy? No

In understanding the basis for significant and controversial policy change, it is worth reflecting on why exactly government is proposing what it is. Clearly it is not to lift its popularity among marginal voters – there are few new voters to be won by streamlining processes to facilitate more mining on conservation land. A much safer bet would be to do nothing.

In our view, the answer to the seemingly vexed question of why government is pushing through such controversial change is simple – it is trying to lift living standards.

‘Living standards’ is one of those fuzzy terms that means different things to different people. What it certainly doesn’t mean in this case is significantly greater government revenue. Media has rightly pointed out that the royalty stream from greater mining activity would not on its own justify the effort government is going to (last year, royalties from non-petroleum mining totalled less than

$7 million). Although this ignores what would be a higher royalty and tax take on profits from greater mining activity, the basic principle is correct: government’s end-game is not centred on lifting its own revenue base.

The cause in this case is a more noble one: more jobs, higher wages and a stronger export sector. Individually, each would deliver a stronger local macroeconomy, however if they were compounded, the lift in per-capita living standards could be both rapid and steep.

This is precisely the sort of shot-in-the-arm the government is likely to be looking for to help make good on its target to close the gap in living standards against peer developed nations, and particularly Australia (the specific focus of the 2025 Taskforce).


Living standard economics 101

In examining the merit or otherwise of the government’s macroeconomic rationale for change, it is worth reverting to some basic economics.

‘Living standards’, ‘national income’, ‘national wealth’, ‘national prosperity’ – call it what you like, fundamentally these and other labels like them are simply variations on per-capita GDP. At its simplest, macroeconomic growth centres on lifting gross national value-add per head of population.

This, in turn, requires policymakers to think hard about the tools they have available to them to achieve higher levels of wealth. That’s where the mining sector comes in. Currently the contribution of the local mining sector is not only low, but has been falling in real terms for almost two decades. Compared to the contribution of the mining sector in other resource-heavy developed nations, the current contribution of the local sector is extremely low, and inversely proportionate to the natural endowment.

Lifting living standards means lifting factor productivity. The challenge of improving living standards requires a nation to achieve stronger performance outcomes from the inputs it has available to it. At a macro level, this means getting greater productivity out of the four basic economic factors of production: land, labour, capital and entrepreneurship.

In respect of land, mining is an extremely effective use of factor input. Compared to alternative uses, and depending on the type of mining operation involved (for example, gold mining is significantly more value-accretive than coal mining), land productivity of mining dwarfs that of traditional alternative land uses.

In respect of gold mining, gross returns are on average more than 300 times those available from sheep and beef farming, and more than 50 times those of dairying.

A clear practical example of this lies with OceanaGold’s Macraes operation in Central Otago. Although already a mature site comprising eight open pits with an underground extension, the area affected by mining at Macraes totals just 850 hectares, which is around half the size of an average sheep and beef farm in the area. In 2009, Macraes produced 213,000 ounces of gold, generating revenue at current prices of  $330 million. For FY09, OGC returned EBITDA of US$106 million. Operations at Macraes support more than 200 onsite staff. Comparing these metrics with those of any of the numerous sheep and beef farms in the close vicinity of Macraes would, we suspect, make for some sober reading. Looking to labour, because of its deep capital-intensity, the mining sector presents as extremely labour productive.

In the 2001-2005 period, per-capita national income (i.e. GDP) produced per mining sector employee averaged more than $360,000, ranking it the highest contributor of any sector – higher than the agriculture and hospitality sectors, which averaged just $59,000 and $27,000 of GDP per employee respectively.

In direct terms, workers in the mining sector average an income of $60,000 per employee, over double the national average.

Turning to capital, the capital intensity of the mining sector means that on a per-unit of factor input basis, capital efficiency does not present as strongly as it does for other sectors (for example, professional service sectors are naturally very labour-intensive, meaning that return per unit of capital stock employed is very high). Despite this, mining remains a more productive use of capital stock than both the utilities and property sectors.


Entrepreneurship

Finally to entrepreneurship, or as many prefer to call it, ‘free enterprise’. This refers to the entrepreneurial spirit and risk taking essential to drive innovation, development and, ultimately, prosperity. Without entrepreneurship, the relatively few but hugely touted local success stories such as TradeMe, 42 Below and AJ Hackett simply would not have happened.

Despite its proud history of leadership in innovation in some areas, New Zealand in general is made up of an extremely risk averse investor base. Our shallow equity capital markets make for very slim domestic pickings, making it difficult for investors to get the diversity they need and should want in their portfolios.

This has two effects: Local investors end up overweight with blue chips and lacking important portfolio diversity; and those investors that do seek out diversity look to overseas markets, particularly Australia.

The corollary of this is that international investors who do understand the resources sector face relatively light competition in picking up potentially very strong local mining-focused investment propositions. McDouall Stuart has raised capital for a number of local resource companies needing to access the local capital markets, but sadly it is usually international investors that we end up connecting with local projects, primarily because local investors haven’t the appetite to move first.

 


Q&M  Vol.7 No.3  June-July 2010
All articles on this website are copyright to Contrafed Publishing Co. Ltd.

Related posts

Don’t try this on the motorway

Contrafed PUblishing

Parting words from Jeremy Sole- a final column

Contrafed PUblishing

Crushing big time

Contrafed PUblishing