WA growth hopes pinned to diversified resources base

Commodity price assumptions, as historically has been the case, have again underpinned a positive outlook for the Western Australian budget, handed down today. But refreshingly Treasurer Ben Wyatt has adopted a highly conservative approach to the widening variety of metals in the royalties revenue basket to complement the traditional hard rock staples of iron ore and gold, and of course LNG.

The old reliable bit-players of nickel, copper and alumina look again like shouldering their fair share of royalty weight from (modest) increased production and forecast royalties over the forward estimates of the budget, following unpredictable demand levels triggered by the global financial crisis more than a decade ago.

However, the new glittering hope of a further diversified royalty base for the Government long into the future is the burgeoning lithium spodumene concentrate production from the State’s endowment of hard-rock pegmatite deposits in the Pilgangoora, Forrestania and Greenbushes mineralised districts.

Where spodumene concentrate is good, downstream processing of the material into battery grade lithium hydroxide is the real long-term prize up for the taking, as Greenbushes Lithium Operations’ partners Tianqi (China) and Albemarle (USA) progress construction of separate refineries in Kwinana and Kemerton respectively.

An earlier budget announcement flagged an investment of $5.25 million in a new access road to the Kemerton Strategic Industrial Area to support the circa $1 billion Albemarle plant. This is a small portion of the massive $2 billion allocated for regional road projects and maintenance over the next four years from an overall $4.2 billion set aside as part of the Royalties for Regions funding program.

Although not as advanced, the Mt Holland Lithium Project’s proponents SQM (Chile) and Kidman (Australia) plan to join the refining ranks with their own hydroxide chemical plant in Kwinana. The prospects of that integrated project getting up recently attracted WA industrial major Wesfarmers to launch an acquisition for Kidman in its entirety.

Mr Wyatt said the unexpected boost to our iron ore royalties in the 2019-20 financial year to $5.43 billion was as a result of a global supply shock from the tragic Vale tailings dam incident in Brazil. This catastrophe has resulted in an iron ore price spike of around $US20 per tonne since January.

However, the Treasurer was quick to ensure he avoided the mistakes of the previous Government, by not budgeting on the assumption that these high prices will continue. The iron ore price forecasting methodology has been adjusted to assume that the price will return to around $US66 per tonne by 2020-21.

“In particular, we assume a quicker transition from market-based forward contract prices to medium-term consensus forecast prices compared to the 2018-19 mid-year review, resulting in lower forecast prices for 2019-20 and 2020-21 than using the previous methodology. Despite the surpluses now in prospect, we will not rest. We recognise there is further work to be done,” Mr Wyatt said.

Revenue from lithium royalties is forecast to grow from the $93 million collected in 2017-18 to a forecast $157 million in 2019-20, then growing considerably across the forecast estimates to more than $202 million in 2022-23.

This growth reflects the bullish and highly supportive stance on the lithium and battery chemical sector taken by Minister for Mines and Petroleum Bill Johnston since he took on the portfolio, along with Premier Mark McGowan and a swathe of regional parliamentarians keen on the flow-through benefits of further developments in this sector to their local electorates.

Although the Government has not gone anywhere near royalty rate discussions in this budget, other than to note the removal of the extra revenue forecast previously from the failed attempt to lift gold royalties, the only possible future hiccup in strong existing government and industry relations in the lithium sector may arise down the track if the existing secondary (metal) processing discount rate is not applied to hydroxide production.

Western Australian lithium-spodumene concentrate export volumes are expected to rise from 1.2 million tonnes in 2017-18 to 1.9 million tonnes in 2018-19, and further increase to 4.6 million tonnes by 2022-23. As most people in society would now be aware, increasing production is being driven by growing demand for electric vehicle batteries.

The Budget Papers note: “Resource sector continues to be a strong contributor to the Western Australian economy, recording record sales of $127.4 billion in 2018. This was a 16% increase on 2017 due largely to increasing LNG sales.

“Direct employment in the mining sector also grew to more than 120,000 people, while royalty receipts totalled $6.1 billion in 2018. Investment in the sector remains strong with an estimated $113 billion worth of resource projects in the pipeline.

“The Government will continue the successful Exploration Incentive Scheme (EIS) from 2019-20 onwards. The EIS supports exploration activity and acquisition of precompetitive geoscience data crucial for the identification of new resources and the longevity of the resources sector.

“As part of the 2018-19 mid-year review, the Government announced an extension of the Magnetite Financial Assistance Program by 12 months until 31 December 2019. For the first six months, January to June 2019, the royalty rebate continues at 50% and, for the final six months of the program, July to December 2019, it reduces to 25 per cent.”

Spending on large scale iron ore projects by the major three, designed to replace production volumes over time from existing operations nearing the end of their project life, and the resulting export volumes, were identified as a key driver in the State’s economic growth going forward, and also play a key role in employment growth projections and a likely direct flow-through to greater household spending.

On the LNG front, the McGowan Government has announced a $10 million contribution across 10 years to help develop a world-first microscale LNG plant as part of an LNG Futures Facility in Kwinana.

The proposed facility, according to released information, would be in cooperation with the University of Western Australia and the LNG industry, and designed to reinforce Western Australia as a global leader in the development and testing of new technologies and processes relevant to its core resources industries. Apparently, it has the potential to create up to 1400 jobs as well.

As the budget returns to surplus, so too the fortunes of WA miners are on the rise.

Michael Cairnduff is a Director in Cannings Purple’s market-leading, bipartisan Government Relations team and an expert in the resources sector and in helping clients navigate channels of government at all levels. Contact Michael.

More Cannings Purple news: