Pitcher Partners Perth and Baker Tilly International Natural Resources Group Chairman Bryan Hughes looks at how our mining industry is connecting with the rest of the world, and what lies ahead. What do you see as the top three themes facing resources companies globally?
It is very hard to narrow the themes to three, and they change in importance depending on the size of the company. Globally, resources companies are facing a number of rising challenges within the industry.
We’re seeing increasingly short-term investment and return horizons from investors, and increased competition for investment funds. At the same time, investment cycles are being disrupted by trade wars and the uncertainty surrounding those, and there’s a growing focus on responsible investment.
How do those themes apply to companies in Australia?
While the Western Australian mining industry has taken some steps towards recovery, it is certainly not immune to these global trends – and with the ASX becoming an increasingly attractive place for North American companies to list, there is more competition for investment dollars in an already crowded market.
We are increasingly seeing Environmental, Social and Governance (ESG) policy integration as a standard component in due diligence for large funds. As a result of this, Australian mining companies now need to be prepared to offer more to consumers than just a high grade per tonne and return on investment.
In your Baker Tilly role, what is the global view of the Australian resources sector?
The Australian resources sector has a pretty strong track record, with great access to a skilled workforce and low sovereign risk.
But one of our biggest challenges will always be Australia’s isolation and distance from the rest of the world. It means potential investors – including some quite sophisticated and large investors – are reluctant to venture this far to find a home for their funds.
In terms of sovereign risk, we need to ensure that globally we are not perceived as having a higher risk profile, and our State and Federal Governments need to bear this in mind every time they make amendments to rules and regulations.
There is evidence of some cost pressures starting again. We must also be aware that workforces are more mobile, and we are facing competition from other sectors. There are some substantial infrastructure projects underway on the east coast which are affecting labour for some specialisations.
In the 2017/2018 financial year, investors on the ASX came very close to raising more money/capital for resources project development than those on any other global stock exchange. What’s the outlook for this year – will we see that trend continue?
Despite the challenge of rising competition, investors in the ASX are strongly backing the Australian mining industry. In the 2017/2018 financial year, investors on the ASX drew almost level with the Toronto Stock Exchange (TSX) in terms of equity raised for resource projects, which is significant given the gap in previous years. While this performance is unlikely to be sustainable given our size, the Australian mining industry is currently ideally positioned to strengthen its ties with North American capital markets.
A main driver of the improved ASX performance is the number of companies now listed on the TSX and TSXV who are competing for funds, and the competition for funds in North America from other sectors.
Given the number of TSX and TSXV-listed companies, there is a question around whether the pool of investment funds they can access has grown by the same rate as the number of companies – that is, are there more companies competing for the same dollars?
At the same time, the competition in North America from other sectors, such as medical marijuana, has exploded, forcing resource companies to look further afield to raise dollars. We need to look at the models of the exchanges around the world and make sure they are balanced in their approach to increasing the pool of investment dollars they can access with the number of companies they allow to quote on their exchange.
I have confidence the exchanges will continue to evolve and address these growing pains, and we will be heading to North America again to look for funds. But right now is a good time for Australian companies to strengthen ties with North American capital markets by providing additional funds to companies they’re invested in.
There is also evidence that shows that undeveloped gold resources are currently attracting a significant premium on the ASX compared to other exchanges, EV/resource oz of US$41 on ASX vs US$33 on TSX/TSXV. I wonder if that evidence may be applicable to other commodities, which would suggest investors may wish to look elsewhere to pay a lesser price for similar assets.
In your global role, and based on the feedback from your team leaders around the world, what is the most pressing or regular issue mentioned in relation to investing cash in Australia?
There’s a high level of ignorance about our regulatory regime, and most smaller investors want to stay close to home when investing, so education about our market is critical.
What’s the most pressing issue for companies wanting to operate in Australia?
Some countries and cultures have less concerns than others. I think our traditional ties with the United Kingdom and Europe means they have a high degree of trust in Australia, whereas I sometimes sense trepidation from cultures without those traditional ties.
We need to build much closer ties to Asia, given we are part of this region and they are our market. We should be highlighting, and giving greater recognition to, our strong Asian heritage and its significance to the development of this country.
With uncertainties remaining in play for the Australian mining industry within the global space, clear insight and strong leadership is the key to success. Armed with strong local and global industry intelligence, Pitcher Partners is poised to navigate WA mining companies through compliance, tax and cross-border complexities. For more information, contact one of our experts today.