Australia Mining Report Q4 2009

The big news for the mining sector over the summer months of 2008 was the collapse of the Aluminium Corporation of China's (Chinalco) US$19.5bn bid to increase its stake in Rio Tinto. Rio decided to end talks with its Chinese rival in the wake of massive shareholder antipathy towards the deal, coupled with strong public opinion, particularly in Australia, that was not in favour of selling to Beijing.

China did not react well to the rebuff. Within one month of the deal's collapse, four Rio Tinto executives working in China were arrested on espionage charges, with the authorities claiming that Rio had been obtaining commercial secrets about the domestic iron and steel industry. There has been speculation that the arrests have been politically motivated, especially as they came so soon after the collapse of talks.

As for Rio Tinto, the company has moved quickly to raise US$15.2bn of new capital via a rights issue and has also agreed to combine its iron ore business in Western Australia (WA) with that of rival BHP Billiton. BHP is reportedly paying Rio US$5.8bn as part of the deal.

Hosting a gamut of metals and minerals including iron ore, nickel, bauxite/aluminium, copper, gold, silver, uranium, diamond, opal, zinc, coal and oil shale as well as petroleum and natural gas, Australia continues to be a world leader in mining. Australia lies within the top five for most of the world's key minerals. It is the world's leading producer of bauxite and alumina, ilmenite, rutile and zircon, synthetic rutile and tantalum. It ranks second for production of iron ore, lead, uranium, diamonds (by weight) and zinc. It is the third largest producer of silver and nickel and has also now become the world's third largest producer of gold, behind China and South Africa. The country is the world's largest exporter of alumina, black coal, iron ore, lead and zinc, and figures second in the export of uranium. The mining industry is a significant contributor to Australia's GDP and the majority of mining activity takes place within the country's largest state, WA. The state's mining sector is set to benefit from the election of a more business-friendly Liberal government in the wake of September 2008's early election.

Owing to its exceptional geology, Australia is home to some of the biggest names in the global mining industry. Multinationals operating in the Australian mining industry include locals BHP Billiton and Newcrest, Rio Tinto, US-based Alcoa, China-based Chinalco and Switzerland-based Xstrata.

Foreign investment rules are liberal and encourage inward investment. Mergers and acquisitions (M&As) are subject to scrutiny by the Australian Competition and Consumer Commission (ACCC). The country has well-defined regulatory bodies and a well-established legal system that can be described as investorfriendly.

In the case of specific mineral exploitation, the authorities now consider uranium mining proposals on a case-by-case basis.

Industry Forecast BMI's forecasts for Australia's mining industry are discouraging, with the industry estimated to have contracted by almost 5% in real terms in 2008. Meanwhile, we forecast an average annual reduction of almost 2% in real terms for the remainder of the forecast period. The main reason for this disappointing outlook is the global slump in commodity prices. However, Australia has also been particularly hard hit by restructuring at the world's largest miners, BHP Billiton and Rio Tinto. By 2013, BMI forecasts that Australia's mining industry will represent only 3.08% of GDP, compared with 4.26% in 2007.