L.G. Hancock, “Resource Management in Australia: Is it possible?,” Management Forum, vol. 2, no. 3, September 1976, pp. 141-50.
The Pilbara with its vast wealth of undeveloped raw resources constitutes (together with the Northern Territory) probably the richest mineral resources areas of the world, which, if left undeveloped, provokes possibly Australia’s greatest danger.
It has become popular for all political parties to say that this vast wealth should become Australian-owned and managed by Australians.
Not one political party has the faintest idea how to bring about this result; but they do not mind hoodwinking the public by promising to do so.
For instance, prior to the recent election, one of the contesting parties said it would take: “strong measures to ensure that Australians have maximum control and ownership of our resources and industries.”
Fine words indeed! but not only do the political parties not have a practical answer; they do not even begin to understand the question.
THE FACTS
In the west, our minerals are, for the most part, foreign owned, foreign controlled, foreign financed, dependent on foreign “know-how” for operation and financing techniques.
They are negotiated for by foreigners in terms of foreign currency.
They are paid for in foreign money.
They are manufactured into steel in foreign mills to support the economy of foreign industrial nations, thus enabling those foreign nations to expand and enjoy a still higher standard of living.
To cap it all, they have even been confiscated from Australians and given to foreigners by WA Government action! What, then, is implied when the political publicists talk of “retaining management in Australians hands”?
To give the term any meaning, it should apply the right from the discovery stage through not only to the completion of the development, but to the delivery of goods to the world’s markets and the receipt of payment in this country.
DISCOVERY AND PROVING UP
Let’s deal with discovery first.
Governments and technical men do not find mines. All the great mineral deposits of Australia have been found by untrained individuals. Broken Hill, Kalgoorlie, Mt Isa, etc. and the names of Charlie Rasp, Paddy Hannan, Campbell Miles and many others prove the truth of this statement.
To maintain a continual discovery of orebodies for Australia, absolute security of tenure must be given to the Australian prospector, so that he knows that his discovery will not be confiscated from him by any of the Australian governments. He must be allowed to have the first chance to benefit by his discoveries.
The next step in the security chain is to have the discovery proved-up to be viable. This requires a very high degree of management skill, because it is at this point that many worthwhile mines have been lost.
At this stage expenditure on an average in the vicinity of $30 million has to be risked and spent before an orebody has been selected and proven to be commercial.
Thousands of prospects have been tested, found wanting and then discarded before one has successfully made the grade. If, however, the investigation has been mismanaged by a “name” company then for ever more that prospect is given a bad name and damned.
When dealing with risk capital outlay of this magnitude, we come to the first of the problems as far as Australia is concerned: Regrettably, there is no such thing as an “Australian company” and there is no Australian management prepared to take such risks.
Even if such an animal as an “Australian company” — a company, that is, of major proportion — could be conjured up out of thin air to take the risk, there is still the problem of management of engineering studies to convert this discovery of an orebody in the ground, to a commercial undertaking capable of producing goods for sale in open competition on the world’s markets.
MAJOR STUMBLING BLOCK
It is true we have excellent engineers in Australia. But is there a firm with sufficient management skills to have credibility in the eyes of the world’s bankers, for the raising of risk capital to get the project off the ground?
It is here that the major stumbling block to Australian management control exists.
NAIVE TALK
I think that with Australia being deficient in leadership, in mining, banking and political circles it is really naive to talk of 100% Australian ownership in view of the practical obstacles that have to be overcome before a major project involving some hundreds of millions of dollars of risk capital can be brought into being.
In order to get one of these risk capital mining giants off the ground the sequence of events is as follows:
- Discovery of major commercial orebody.
- Finding someone with enough courage to make the money available to prove it.
- Finding buyers who will issue a long-term take-or-pay contract of sufficient duration and magnitude to make certain that all debts can be repaid.
- Finding bankers who will provide the cash for development when it is proven.
Bankers will only come in if:
- they can hunt in a pack behind a lead banker who has done business successfully for years with the multinational company or consortium of companies involved. In the case of Hamersley Iron it was some 13 American and Canadian Banks including the world’s largest bank, the Bank of America;
- the deposit has been proven by a firm with an international reputation;
- a rail, port and mine engineering study has been made by firms with international reputations who have done good work with very prominent clients of the lead bank previously;
- the firm constructing the above facilities after the engineering has been accepted has an international reputation and a history of successful multi-million dollar construction jobs throughout the world.
The purchaser of the ore will only issue a contract if he is satisfied of the standing of the companies that have proven the ore, that have made the engineering studies and have undertaken contracts to build the projects.
All of these firms must have a history of international success related to financing that the banks have already done. They need also to be clients of those banks who are putting up the money.
Even though their efficiency may be much greater than foreign companies, Australian engineering and service companies have not got the international performance reputation to command banking and market backing on the scale required.
A.I.D.C.
John Gorton, as Prime Minister, realised the impossibility of having Australian financial institutions assume such risks without the leadership of foreign multi-national companies.
He decided to overcome this situation by going along with the formation of the McEwen Bank, known as the AIDC.
Mr Gorton had certain safeguards written into the charter of the McEwen Bank with a view to limiting it to financing genuine Australian companies, but up to the present time it has been unsuccessful — perhaps by design — in carrying out this dream of Australian nationalism.
We now see that the Labor Cabinet’s Economic Committee had rewritten the charter of the AIDC according to Dr Cairns who announced that many of the restraints put on the AIDC by Gorton’s Government would be removed.
These measures, if implemented, allied with a 33.33% no interest retention on foreign money, would put extreme power in the hands of the AIDC — power which is outside the control of the Prime Minister to regulate — would make this government agency the most powerful instrument of socialist dictatorship that anyone could devise.
It will do nothing for Australian ownership because it will not support (any more than private banks will) any project that has not been vouched for by foreign companies of international repute.
But what it will do to Australian participation in a major venture is penalise the Australians by limiting their borrowing capacity to leans raided by the AIDC.
The reason being that the AIDC under its new powers could be exempt from the 33.33% retention and could borrow overseas at the same rate as private Australians (and they are allowed to do so) and then add a surcharge for its own profit.
In the case of the major minerals like iron ore, coal etc, it has been customary to negotiate a long-term “take-or-pay” contract with the Japanese.
This starts with a “Letter of Intent” from the buyers, saying it is their intention to buy the ore. Armed with this “Letter of Intent”, an approach can be made to the banks of the world for sums ranging, say from $300 million to $1,000 million (as in the case of Hail Creek coal).
If a leading bank can be interested, it then forms a consortium of a dozen or so banks, who demand complete geological, engineering and financial studies of the projects from beginning to end.
In these three important spheres, there is no management in Australia with a worldwide reputation of sufficient standing to interest international banks, so it is obvious that the political stipulation of “Australian management and control” is no more than an irresponsible ploy, to hoodwink the Australian public into thinking that such an unattainable goal can be reached simply by placing a ticket in the ballot box.
The world’s financial institutions will only risk this kind of money when they know that the project is going to be managed in all its stages, by firms that have had a consistent worldwide track record of success for some of their major clients, who themselves have a successful track record with the banks in borrowing or repaying multimillion dollar sums of money for decades.
HANCOCK AND WRIGHT
It may be of interest at this point to explain how Hancock and Wright have endeavoured to face up to this problem.
Having exhausted all possibility of achieving the impossible with Australian firms, we canvassed overseas.
In the case of Marandoo, for instance, we went into partnership with Texasgulf Inc of the United States, whose management records have been outstandingly successful.
We negotiated an agreement with them whereby we are 50/50 partners, and they have a management contract to operate the venture at cost.
Further to this, and in order that the Australians may have some chance of financing their 50%, we are able to negotiate with Texasgulf to make us a capital contribution, to form a financing catalyst for us.
Now it is obvious they could not pay this capital contribution to Hancock and Wright as a premium in exchange for half of our orebody, because an Australian government of any creed (which professes itself to be very anxious to retain Australian ownership) would immediately gobble up 66.67% of the premium in tax, making it quite impossible for us to finance our equity.
This capital contribution, therefore, must be paid into the project itself at the commencement of the construction.
Such a contribution — provided by the foreigner — forms the financing catalyst for Hancock and Wright to build the maximum amount of loan funds available from banking consortiums.
In this respect it is not impossible to get a gearing of six to one.
Hail Creek, for instance, is spoken of as having obtained a gearing of 10 to one.
In this case the $15 million nest egg provided by the foreigner can be built on, to make available sums of up to $150 million on loan funds, to be used in development of the project, without having to sacrifice any further Australian equity.
This is the type of financial management which must be left in private hands, unrestricted by costly government interference. In the USA, for instance, the cost of government interference in industry has been computed to reach $A50,000 million.
A government with the nation’s interest at heart should hasten the transition from the point where the minerals lie useless in the ground in the cocoon of “State ownership” to the point where the right to them is transferred to people who can develop them, and to the suppliers of risk capital to enable them to be worked as speedily as possible, thus turning them into a live asset for the benefit of the people of the State.
SECURITY OF TENURE
In order to achieve these desired results, uninterrupted security of tenure, right from the prospecting to the mining stage, must be granted and guaranteed.
In Western Australia the Liberal Government set up a committee to make recommendations for the forming of a new Mining Act.
The free enterprise would was shocked when the committee said:
In the first-place and perhaps fundamentally, the paramount right of the State to all minerals … must be recognised. This means no individual or company has any rights to minerals other than those which the State is prepared to grant. It is for the government of the day to REGULATION THE PRODUCTION OF MINERALS in what it considers is in the best interests of the people of the State both present and future.
Surely this is about as dangerous a statement as could ever be issued to a western-thinking world; it has its origins in the teachings of Karl Marx.
Undoubtedly the “State” has a very solemn duty to see that the minerals within its borders are economically worked — repeat worked — for the benefit of mankind, and to a lesser degree the people of Australia and Western Australia.
But any government which prevents the economic working of minerals by imposing pegging blankets, or creating ministerial reserves, or by imposing export embargoes or exacting excessive taxation, must surely be guilty of betraying a sacred trust to humanity.
Just imagine a modern world without steel, aluminium, glass and power etc. derived from mineral sources.
Governments consume wealth — they do not create it. So why does the Commonwealth Government believe it is acting in the national interest in acquiring ownership of these risk capital ventures when it is already more than a 50% silent shareholder without risking one farthing of the taxpayers’ money by virtue of the fact that the Commonwealth already takes 45% of all profits, plus the tax on all the employees, plus the indirect taxation flowing therefrom.
Already in the pipeline to yield additionally such colossal tax returns for the government — (returns yielded without any capital contribution by the government) are the following projects in which Hancock and Wright have managed to retain 50% Australian ownership:
- Wittenoom/Marandoo
- Rhodes Ridge
- McCamey’s Monster
- Hamersley Iron/Hanwright Pilbara steel mill
- Joint venture proposal offered to the WA Government.
Incidentally, the above deposits include the world’s largest single deposit of hematite. Collectively they represent the world’s largest source of high-grade iron under one control — at present that is Australian and private.
WA GOVERNMENT MISMANAGEMENT
It is here that the WA Government has displayed a classic example of mismanagement and interference, for it is essential such vast quantities of ore be transported the minimum distance possible.
Fortunately, these projects are geologically and economically tied together, as it should be obvious that any transportation distance further than necessary will impose a penalty of hundreds of millions of dollars on the industry during its life.
Also, any rail route that requires extra h.p. due to raising the load unnecessarily is also a constant penalty.
With these points in mind Hancock and Wright have proposed a joint user railroad and port in the Depuch area that all producers can participate in, utilising the Fortescue and Sherlock valleys for the rail route.
This route has the advantage that there is no climbing required to cross the Chichester Range. The new route could serve all producers and link the existing railroads.
It should be noted that the existing producers could, by sharing the common railroad and a large ship port, continue to use their existing ports to capacity for smaller ships and ship their expanded production in larger ships from the common large ship port.
When Western Australia production reaches 200,000,000 tons a year it is assumed that, as well as new producers opening mines, existing producers will have also expanded by opening mines such as the Hamersley/Koodaideri deposits.
This common railroad would also link the existing ports with the possible rail link from the south through Mt Newman and Meekatharra thus giving a completely integrated rail system.
The WA Government has chosen Legendre Island.
Hancock and Wright have studied alternatives to Legendre and the Depuch as possible port sites. The distances from Wittenoom, a common point on the joint user railroad are:
To Legendre via railroad on peninsular — 227 miles.
To Depuch-Ronsard — 137 miles.
BIG SAVING
Hence, compared with all rail routes to Legendre Island, saving on transport to Ronsard Island is 90 miles.
At the direct cost rate of 0.5 cent per ton/mile, 90 extra miles amounts to 45 cents a ton and hence on each 100,000,000 tons is $45,000,000.
When it is realised Western Australia could be selling 200,000,000 tons of ore a year in the foreseeable future, the magnitude of this cost become apparent.
Every extra mile would add $1,000,000 to the annual bill, or a total of $90,000,000 annually.
The cost of 0.5 cents a ton/mile is slightly in excess of costs today, but it is anticipated that with rising fuel costs and railroad maintenance costs that the rate will be applicable in the foreseeable future and almost certainly when the export rate is 200,000,000 tons a year.
The commonsense of the matter is that people who are subscribing five or six hundred million dollars risk capital for development projects would hardly be prepared to risk that kind of money on the whim of some civil servant (or group thereof from one or even a multitude of government departments) whose knowledge of the matter in technical and practical terms, for obvious reasons, must be less than nil squared.
In short, the harbour, which becomes a national asset, will only be sited where the engineers of the firms subscribing the capital say it is economic to do so, otherwise no harbour or project will be built. The end result is that the nation misses out on jobs and the Treasury misses out on taxes.
In a true free enterprise society this matter is left with the people supplying the money and the expertise.
These giant projects (each one with a potential to be larger than anything at present operating in the Pilbara) will only be brought into being if there is a minimum of government interference and a wholesale effort on the part of Australia’s financial institutions to make the necessary loans.
The challenge is being squarely laid at the door. If they don’t rise to the occasion and finance the 50% that Hanwright have been able to obtain for Australian ownership, then the Australian people and their governments, of any complexion, can cast their idle dreams of Australian ownership overboard for the next 20 years or so.
Political propagandists, as well as a host of opportunists in a variety of fields, are hopping on the foreign policy bandwagon in search of mileage, hoping to curry favour with the public.
They repeat such platitudinous phrases as “the minerals belong to the public”, “the paramount right to the ‘state’ to all minerals”, “it is for the government of the day to regulation the production of minerals”, “we must conserve them in the public interest”, etc.
Unfortunately, such people do not put their money where their mouth is in order to get the dormant minerals into production.
It is also noticeable that they do not say which people, which public, which state.
This is perhaps just as well because it could be argued, at the point of a gun, that some of the great powers with teeming millions of population to support, may have a stronger claim than we have to the mineral that we delight in calling our own.
THE LESSONS OF HISTORY
Australian governments should remember that platitudes, theories and international treaties did not count for much when Germany invaded Norway.
Germany needed 16 million tons per year of iron ore in order to prosecute the war. It only had three.
Hence, it was morally right in German eyes to invade — without provocation — and conquer Norway in order to hold the iron shipping port of Narvik so as to guarantee supplies of iron.
A further illustration of this point can be seen with the more recent invasion of Goa by India in order to obtain Goa’s flourishing iron export industry, when its own was languishing through government meddling.
All Mahatma Ghandi’s teaching of peace and non-violence went for naught when his chief disciple, Prime Minister Nehru, discarded moral scruples to obtain rich iron ore deposits by right of conquest, a right which no other country seemed to dispute.
Please do not tell me that other great powers would not follow the German and Indian patterns with regard to Australian riches of basic materials, if they were denied access to them by any short-sighted socialist policies of Australian governments.
In other words, we are now dealing with international not national minerals.
DEFENCELESS AUSTRALIA
It should not be overlooked that we are defenceless on our own. It would be tempting providence to believe that Britain or the USA would defend us just because we speak the same language. They would only come to our aid if their own treasure and industrial existence were at stake.
Taiwan or China could conquer us with ping pong bats, while Japan, Indonesia or India could take us by telephone (unless we protect ourselves with a complete F-111 weapons system equipped with a nuclear warhead — which seems UNLIKELY).
It is therefore foolhardy in the extreme for a militarily weak nation like Australia, populated with a mere 14 million Europeans, living in isolation on the edge of a vast Asian region, to “regulate the production of minerals”, by deliberate government action, thus depriving other civilisations (with far larger economies supporting hundreds of millions of people) from access to raw resources.
Supposing the world retaliated by denying us access to oil, capital, sophisticated machinery and know-how. Surely this would be the ultimate in resource management.
Australia has within its shores an abundance (in some cases the world’s largest deposits) of the world’s major industrial minerals, namely iron, bauxite, uranium, coal, beach sands, etc., but is at present dependent upon the multinationals for their development.
Therefore, it would seem sensible for us not to erect any artificial barriers in the way of that development.
GOVERNMENT INTERFERENCE FOOLISH
We are not likely to run out of minerals, but we can very easily run out of economic opportunity through foolish government intervention. Time will show if in fact this has not already occurred with North-West gas and the uranium deposits.
DEPENDENT
The great industrial nations of the world (equipped as they are with nuclear powered armaments and comprising the dominant fighting forces of the world), are becoming increasingly dependent for their very existence on obtaining unfettered access to mineral resources from places such as Australia.
Even Russia with all its riches is not self-sufficient in minerals and, along with several European countries, is deep-mining some three thousand feet underground grades of iron ore similar to those we have in abundance on the surface in WA.
In Russia minerals are State managed. Heaven help us if they become State managed in Australia. Yet we know the AIDC, the National Investment Fund, the PMA, etc. were government institutions aimed at achieved government ownership.
It is widely accepted in Australia, in communist countries and in most dictatorships that the minerals legally belong to the “State”. But who legally “owns” the minerals while they remain unworked in the ground is of academic interest only.
If their value if known or even guessed at, they are a liability, not an asset, to the “State” until worked, whether private or government owned.
It has been the custom on this globe since time began, for minerals, property, territory and even people to belong to a particular “State” by right of conquest alone and not by the right of some comfortable socialist theory.
Seeing the minerals were formed in the ground some tens of millions of years before human beings inhabited this earth, is it not promoting rather a tenuous claim to say they belong to a particular “State” rather than to mankind as a whole?
This claim is surely resting on somewhat shaky ground when it refers to Australia, which has only been populated for some two hundred years by Europeans and even then in minimal numbers.
SUICIDAL FOLLY
Surely it is flying in the face of providence to mismanage the development of these resources. Surely it is suicidal folly to allow the eco-nuts to frustrate the development of these resources.
The eco-nuts are loud in proclaiming the ecological damage done by mining — the real source of their wages and standard of living — and equally loud in the praising of the glories of nature, yet one natural cyclone does more damage to the environment than centuries of mining could ever do.
Surely the ultimate folly in mismanagement is to have our natural wealth stymied by government regulation enforced by a multiplicity of departments, including the Department of the Environment.
Look at Australia — each State Government has a Mines Department, which really should have no function other than to register titles for private people and companies, yet this is duplicated in the Commonwealth sphere by the Bureau of Mineral Resources, the Minerals and Energy Department, the AIDC, the PMA and so on.
GOVERNMENT MISMANAGEMENT
The greatest examples of mismanagement of our resources can be seen from the actions of the various governments over the years:
- The 30-year embargo on the export of iron ore on the false pretext that we needed it for our own use. This was a socialist-type restriction imposed by the Menzies Liberal/Country Party Government.
- The WA State Liberal Government’s imposition of a blanket on the securing of titles to rights to mine, after the Commonwealth Government had seen the error of its ways and lifted the export embargo.
- The Labor Government’s imposition of 33.33% no-interest-bearing deposit on much needed developmental capital. In other words, for a project requiring $300 million, one was forced to raise $400 million out of which $100 million was to be loaned to the government, interest free!
- Revaluation by the McMahon Government, followed by two more revaluations by the Whitlam Government, wiping out $700 million from the sum of Western Australian-written iron ore contracts alone, and reducing some of the world’s biggest iron mines to a state of almost non-profitability.
- A declaration by the Liberal Government of WA to the world that they would not honour the security of certain mining tenements, which resulted in a worldwide lack of confidence in Australia.
- The imposition of export licences. This is probably the greatest single threat to our nation’s existence. We have all seen the damage that was done when this type of power resided in the hands of one man, even though that man was fanatically Australian in his outlook and would undoubtedly do the best for Australia, according to his short-sighted manner of thinking. Just consider what would happen if a man who held this power of export licensing was a subversive, intent on destroying Australia. Apart from the dangerous aspect of a government having power to impose an export licence, think of the absurdity of it. In the Pilbara there are 125 billion tons of iron ore, sufficient to last the whole world for centuries — certainly longer than Europeans will occupy Australia — yet we have to have a licence to export it to people who want it!
- Governments passing restrictive legislation to please the eco-nuts. Without mining, the world’s civilisation cannot be carried on at any level above that of the caveman, and yet we have in our midst people who are hellbent on destroying mining. Admittedly some of them are so misguided as to honestly believe that they are acting in the nation’s interest. But if they were capable of thought at any level, they would come to the conclusion that the nation can only expand, raise its standard of living and defend itself, if mining is left unfettered and encouraged to yield up the resources that mankind must have to give life, light and energy.
