time to fastrack

China tax could iron out investors' country risk concerns
Kate Haycock, 19 May 2010

Mauritania port ... Sphere Minerals boss Alex Burns says Australia was already becoming a less attractive place to invest in iron ore.
THE iron ore industry has been quick to rise up against the Rudd Governments new mining profits tax plan, claiming it will make investing in Australian projects much less attractive and drive resources and iron ore investment offshore. In this climate of uncertainty, this would seem to be a good time for iron ore plays with overseas assets to draw attention to their projects.

Among the majors, Rio Tinto has already announced it would be spending $A400 million on the restart of its Canadian iron ore project, although the company did not make it clear if this move was entirely prompted by the proposed new mining tax.

And both Rio and BHP Billiton have publicly said all future operations, including their iron ore expansion plans in Australia, are being reviewed, suggesting if the tax goes ahead both companies will prioritise offshore projects over Australian expansions. Both companies have large exploration projects in Guinea: Rio has Simandou and BHP also has large tenements in the Africa nation. Neither company has yet signalled if their African assets have been moved up the development ladder.

While most of the iron ore explorers on Australias bourse are focused on tenements in Australia, there is a small cohort of smaller companies looking overseas for iron assets.

Among the explorers, Cape Lambert Iron has already publicly upped sticks from Australia. Only days after the new mining tax was revealed, Cape Lambert chief executive Tony Sage announced his company was shelving its Australian iron ore exploration plans in favour of its Sierra Leone assets.

Then theres Sundance Resources which has one of the larger offshore iron ore projects belonging to a junior company with its 2.5 billion tonne Mbalam project in Cameroon.

Sundance managing director Don Lewis told HighGrade he expected there would be more interest in his companys project from both investors and potential offtake partners as the impact of the new mining tax on the Australian iron ore industry became clearer.

Its only happened in the last couple of weeks, but we do anticipate that as it settles over the next six months, the recognition of primarily the uncertainty in Australia will throw the focus of major international players onto offshore projects, he said.

Were already seeing questions coming from parties we are talking to I was in China last week, were progressing discussions there and they did ask the question, what is this going to mean?

Lewis said these potential investors in the iron ore industry saw the resource super tax as almost being a tax on China.

They were quite concerned that the tax base would make Australia less competitive and also lead to further price increases in iron ore, he said. As an Australian I dont support the position and it is very worrying for me but from a purely selfish point of view in developing a project overseas it will enhance the attractiveness of our project.

The company is currently at the bankable feasibility study stage at Mbalam with a view to starting construction in 2011, but as with so many smaller iron ore plays that all depends on securing an investment partner such as a Chinese state-owned enterprise.

Another African iron ore hopeful, Sphere Minerals, is also seeking investment partners to develop its Mauritanian magnetite projects but managing director Alex Burns said he wasnt seeing any direct increase in interest in the companys major Guelb el Aouj or Lebtheinia projects.

We havent had new enquiries from companies since the tax was first spoken about, he said.

Burns said while the tax would be a black mark for Australia in the eyes of potential iron ore buyers and investors such as Chinese steel mills, most of the potential offtake and development partners he was speaking with had already done a lot of work to choose which projects they were interested in.

Australia was already becoming a less positive place for iron ore companies long before the proposed new taxation scheme was even dreamt up by Ken Henry, Burns added.

There were already plenty of other disincentives cost of labour, delays, red tape and green tape, the fact that foreign companies cant get ownership, he said. And the majors have already held the best assets in Australia for over 40 years, and there are other assets that are better quality offshore.

Burns pointed out Vales move into Simandou a fortnight ago - Vale has entered a joint venture over the half of the Simandou project which was taken from Rio last year - as an example of the need the majors felt to secure the worlds high quality iron ore projects beyond traditional iron ore provinces in Australia and Brazil.

The big catalysts are the rise in the iron ore price, concerns about the Rio-BHP joint venture, and more fundamentally, moves within the industry to secure the remaining high quality opportunities, he said.

With iron ore projects in Peru that have attracted the interest of unnamed major parties, Strike Resources managing director Ken Hellsten told HighGrade it was a bit too early to have seen any real impact for companies such as his. He had no doubt though that his project would, under the proposed tax, appear much more attractive in Peru than it would in Australia.

As all three pointed out, it is still early days for the proposed tax and whatever impact it may have on mining companies both in Australia and offshore.

And as Spheres Burns said, for an iron ore project to appeal to both investors and potential partners, it has to be a quality project and have decent access to infrastructure.

The fundamental driver of the interest in iron ore projects outside Australia is iron ore demand, the quality of the project, and the desperate search for large-scale iron ore by Chinese and the others. Thats the overwhelming driver for partners looking at our project,