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Industry Submissions
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SUBMISSION
to
Inquiry Secretariat
on
Fuel Tax Inquiry
from
WESTONIA MINES N L
December 2001
TABLE OF CONTENTS
IDENTIFICATION 1
CONTACTS 2
SUBMISSION TO THE FUEL TAX ENQUIRY 3
EXECUTIVE SUMMARY 3
HISTORY OF THE WESTONIA MINING FIELD 4
WESTONIA'S MINING AND TAXATION POTENTIAL 5
ANALYSIS OF IMPACT OF REMOVAL OF THE DIESEL REBATE FOR RENEWED MINING AT WESTONIA 6
CONCLUSIONS 8
APPENDIX
EXCERPT FROM RESOURCE SERVICES GROUP STUDY
IDENTIFICATION
Westonia Mines NL ("WM") was formed in 1995 with the aim of acquiring, proving up and bringing back in to production the historic Edna May gold mining field at Westonia in the Central Wheatbelt of Western Australia.
WM is an unlisted public company which aims to attain a listing on the ASX at or about the time that the Westonia gold deposit is brought back into production - tentatively planned for mid-2003.
The author is Andrew Drummond, the Managing Director of WM. He is a geologist with 30 years' experience in the exploration for, development of, and mining of metallic ore deposits and energy resources. He was the Chief Geologist of the mine at Westonia when it was last in production, and is currently an Executive Councillor of the Association of Mining & Exploration Companies. He has been Managing Director of ASX-listed mining companies.
CONTACTS
The author and the company he represents for this Submission can be contacted via the addresses on the letterhead.
SUBMISSION TO THE FUEL TAX ENQUIRY
EXECUTIVE SUMMARY
Via AMEC, WM has become aware that submissions made to the Fuel Tax Inquiry ("FTI") to date have been weighted - in quantity if not in quality - so that an impression may be gained that the mineral industry is not particularly concerned about the fate of the diesel fuel rebate ("Rebate") that it can presently generally attain. That is, there is a potential for loss of that rebate under the introduction of the proposed energy Grants (Credits) Scheme (EGS), effective from 1 July 2002.
This Submission endeavours to provide to the Inquiry an actual example of how loss of that Rebate could so effect the economics of the planned resumption of gold mining at Westonia that, under current metal prices and the resultant increased costs, it would decrease the likelihood of the project obtaining funding for construction and it would seriously shorten the projected lifetime of the mine.
Any gain to the Federal Government by abolition of the Rebate would be more than offset by tax losses in other areas - both during the mine's operation, and also by a decreased mine life.
The loss of jobs in general; jobs in the struggling rural sector in particular; loss of export income; and loss of downstream wealth creation opportunity are a major price for introduction of what would essentially be a new tax impost.
HISTORY OF THE WESTONIA MINING FIELD
The Westonia mining field has experienced three periods of gold production. The first two were old underground mining operations of WWI and WWII vintage and will not be mentioned again. The last is analogous to our company's plans in that it involved an open cut mining and milling operation.
Relevant statistics from that last phase (all costs in 1990 dollars) are:
- Gold production: 273,000 ounces.
- Value of production (averaged realised price $700/oz): $192 million.
- Export earnings at $500/oz, $137 million.
- Construction and exploration cost, $18 million.
- Employment on site peaked at 140 (1987-1988) and averaged 100.
- The usually accepted industry employment multiplier effect is 3.0, so the mine was effectively generating an average of 400 jobs.
Production ceased in 1991 because of exhaustion of the easily mined and easily milled oxide, or weathered ore.
WESTONIA'S MINING AND TAXATION POTENTIAL
Since 1995, Westonia Mines NL has been gradually increasing its data base and endeavouring to seek new ways to justify a renewed mining operation.
Apart from exhaustion of the "easy" ore, WM has to find ways to overcome the combined, subsequent assault on project economics since the last mining phase occasioned by:
- a State gold royalty
- FBT and GST
- Federal taxation on gold
- a vastly weakened world gold price which is only partly offset by the weakening AUD
- cost increases in fuel and equipment caused by that weak dollar
- uncertainty caused by the possible loss of the DFRS
- a decade of cost inflation.
At the date of writing, WM has in hand an independent mining and economic study (the "Study") excerpts from which are attached and quoted hereafter.
Based on the positive findings of that Study, the shareholders of WM have just decided to commission a Bankable Feasibility Study ("Feasibility") as the basis for gaining the necessary funding to capitalise construction of a new mine and mill. This Feasibility will cost about $1.0 million and should be finished in mid 2002.
Prior to completion of that Feasibility, WM can only estimate the likely effect of loss of the DFRS and that is that the project would have:
- an increased capital cost
- increased operating costs
- markedly reduced mine life
- markedly reduced cashflows.
So, that which would be lost to our company, the government and the Nation by the abolition of the Rebate would be:
- Loss of potential to initiate mining of an independently estimated resource base of about 800,000 ounces.
- At an assumed constant dollar present gold price of $535/oz, export income of AU$430 million.
- Loss of an average direct 100 jobs over the expected mine life of 10-15 years, and the additional 300 multiplier effect indirect ones.
- Loss to the WA Government of $10.7 million based on the 2.5% royalty regime, and of additional myriad State taxes (petrol, stamp duty, payroll, insurance, etc).
- Loss to the Federal Government of 10-15 years of company tax and the plethora of additional taxes which afflict the industry (eg GST, FBT), as well as income taxes on the direct and indirect employees.
ANALYSIS OF IMPACT OF REMOVAL OF THE DIESEL REBATE FOR RENEWED MINING AT WESTONIA
This section will refer to Table 2-1 from the Study (wrongly titled "Mt Rawdon" instead of "Westonia").
The base case therein is an AUD gold price of $525, which is about $10 less than that at the time of writing this Submission. However, royalties (State and private) need be taken into account and, when this is done, the Rows 1.2, 2.2, 3.2 and 4.2 are the relevant ones - reflecting a nett income of $500/oz.
Scenario 4 is the basic one for this Submission in that it represents the ore reserve and mining parameters situations for which the current drilling data allows the highest level of confidence in estimates. That is the confidence level which will be required for project financing.
Industry operating experience is that more reserves will be proved up and mined during an operation, but a bank will not lend on that.
So compared with the original indicated discovered resources, namely 800,000 ozs (but say 744,000 ozs at an average 93% recovery), only for 220,691 ozs or 28% can an appropriately robust case be made for project finance at this time.
Scenario 3, compared with Scenario 4, examines the case where future drilling can define more ore. The ability to do so will be dependent upon the Scenario 4 initial mining being able to generate sufficient cashflow to fund the work needed to discover and prove up the additional ore. In other words, the fewer the available funds, the less of the more lucrative Scenario 3.
Scenarios 1 and 2 individually have the same relationship to each other as do 3 and 4. Collectively, 1 and 2 examine the situation where, on the basis of the efficiencies of scale, the mine can operate at a marginally higher unit cost (last rows of Table 2-1) but with vast increases in mine life, total recovered ounces and total profitability. However the ability to attain this optimum situation for everyone (mine owners and State and Federal tax recipients) is very leveraged to costs, as can be inferred from comparing Rows 1.1 and 1.2. A drop in gold price of $25/oz (4.8%) (or an increase in production cost of $25/oz) reduces undiscounted cashflow from $59.2 million to $48.7 million, or 18%.
For the constrained Scenario 4, the 4.8% cost/price difference causes an 8.4% drop in cashflow.
The obvious conclusion is that, as the company cannot control gold price, but if it can keep costs down, and if the Government effectively defers its take via the lost Rebate until company tax time and PAYE, Westonia can generate a much bigger operation with larger revenue streams for all concerned.
The Study's Section 3: Sensitivity Analysis, is attached.
The Study therein notes: "a 10% change in the mining cost results in a change of approximately $3.5 million (9%) in the undiscounted cashflow". Mining costs are generally recognised to have three approximately equally weighted components viz fuel, labour and equipment/overheads. Removal of the Rebate would increase fuel costs by almost 50%, at current prices, and so mining costs would rise by around 15%. By extrapolation, cashflow would be down about 13.5%.
The Study also states "A 10% change in the fixed cost results in a change of approximately $6.2 million (15%) in the undiscounted cashflow'. It has not been possible in the available timeframe to quantify the effect on Fixed Costs of the removal of the Rebate as many of the components are indirect, eg the impact on freight costs, the utilisation of diesel by subcontractors and suppliers, etc. Assuming a 5% change in Fixed Costs as an estimate, then cashflows are down 7.5%.
Capital costs ($15 million in the Study) would certainly rise strongly if the Rebate were removed as freights, mobile plant (cranes, etc), earthmoving, power generation and pre-strip mining are major components of it.
CONCLUSIONS
1. In summary, due to unfavourable changes in fixed cost and mining cost components, removal of the Rebate would seem to lower operating cashflow surpluses by about 20%.
2. That reduced cashflow will result in:
- a general decreased growth opportunity for the company
- lesser money available for exploration and for increasing the mine's reserve status (ie decreased likelihood of moving from Scenario 4 to Scenario 3)
- increased costs will also decrease the opportunity to move to the lucrative Scenario 2 and, particularly, Scenario 1.
3. CAPEX will also rise, and so make loan funding more difficult to obtain and to repay.
4. The reduced cashflows will decrease the ability to create a long term mining operation, and hence a long term taxing of the company and its direct and indirect employees. Most of the gold will be economically sterilised and will not be mined.
5. Any back of the envelope calculation will easily demonstrate that PAYE receipts from the direct and indirect employees far outweighs the Rebate.
Apart from keeping about 400 people off the dole, each year of additional mine operation rendered possible by the lowered costs of maintaining a Rebate will generate much more tax from PAYE alone than the income foregone by the Rebate.
6. With respect, this company's recommendation to the Inquiry is that it is better for everyone concerned that it be able to develop a long term mining operation which can generate a larger overall, and more long term, tax base, rather than it be forced into a short term, highly taxed operation.
APPENDIX
Excerpt from Resource Services Group Pty Ltd report for Westonia Mines, titled "Summary Report Resource Estimation and Pit Optimization",
November 2001
Pit 30 reaches a level of 1,180mRL, approximately 160 ms below surface.
The undiscounted cashflow is $40.9 million, whilst the worst case discounted cashflow is $30.3 million and the best case discounted cashflow is $34.0 million.
The pit shell with the maximum average discounted cashflow is pit shell 27. Pit shell 27 contains 3.7 million tonnes of mill feed at a grade of 2.2g/t Au, for approximately 246koz of recovered gold. Some 12.2 million tonnes of waste are contained within the pit shell, with a waste to ore strip ratio of 3.3:1.
Pit 27 reaches a level of 1,180mRL, approximately 160 ms below surface.
The undiscounted cashflow is $40.7 million, whilst the average discounted cashflow is $32.4 million.
SENSITIVITY ANALYSIS
The sensitivity of the project to a change in gold price, processing cost and mining cost were evaluated through Whittle Four-X. Table 2_1 summarises the results.
The sensitivity analyses show that the pit optimisation based on the 0.9g/t indicator result in higher cashflows. This phenomenon is more pronounced at lower Au prices. This is to be expected with lower Au prices resulting in higher grade cutoffs.
The project is most sensitive to a change in the Au price, followed by fixed cost and mining cost.
A $50/oz (9.5%) change in the Au price results in a change of approximately $13.4 million (32%) in the undiscounted operating cashflow.
A 10% change in the fixed cost results in a change of approximately $6.2 million (15%) in the undiscounted operating cashflow.
A 10% change in the mining cost results in a change of approximately $3.5 million (9%) in the undiscounted operating cashflow.
With best regards
RESOURCE SERVICE GROUP
_____________________________________
Harry Warries
SENIOR MINING ENGINEER
Brett Gossage
SENIOR CONSULTANT GEOLOGIST
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