Miners facing uncertain times

Countryman

With the recent weakness in some of the resource stocks, I thought it worthwhile touching on a growing concern for Australian companies - skyrocketing costs from government interference.

When the mining tax debate first arose, a friend from one of the major mining companies informed me that their employer was going to continue with advanced Australian projects, but cease any new developments due to the uncertainty of the Australian Government plan.

At the time I thought this to be quite premature considering the tax still had to pass through parliament and with "the boom" well and truly underway, they had more to gain in at least continuing their plans than just scrapping them.

However with hindsight I have realised that the mining tax was only the tip of the iceberg in relation to pressure on project costs.

The introduction of the carbon tax and the growing power that unions have gained through recent state and Federal Government contract decisions have led to many planned Australian projects simply being too expensive to develop, regardless of strong commodity prices.

So last week, as the European crisis began to escalate and China showed further signs of slowing, it came as no surprise that rumours (and most probably facts) emerged of major mining projects being scrapped.

If projects are not been yet underway with construction contracts signed prior to the shift in union power, many companies may simply shelve construction.

This is even more likely for multinational companies who have similar projects offshore that they can develop at a fraction of the cost.

BHP chief executive Marius Kloppers this week said the miner's development options would be closely scrutinised especially in context of increasing capital and operating cost inflation.

Meanwhile Rio said it would go ahead with planned iron ore expansions in WA, but also indicated that beyond this the focus was definitely offshore.

With these glaring examples, the hope would be that our Government might start to support our resources companies rather than continually expecting more from them.

Most Australians know all to well that the mining boom has provided great wealth and stability to the country, allowing it bypass the devastating shocks of the global financial crisis.

There is no need to panic just yet as current levels of committed mining investment will continue to increase over the next few years.

However beyond this, the warning bells for the future are ringing loudly.

·If you would like to subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 08 9225 0020 or email afarrall@sentinelgroup.com.au .

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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