Alex St John
The 2014–15 Budget brings only relatively small changes for the mining and resources sector. The Government is preparing an Energy White Paper, which is expected to be released in September 2014.[1] It is likely that the Government will not release any further substantial policy measures for the sector until after that process is complete. However, there are two initiatives in the Budget which will be welcomed by mining and resources companies.
The Exploration Development Incentive
The principal resources initiative contained in the 2014–15 Budget is the allocation of $100 million over three years to provide the Exploration Development Incentive (EDI) for ‘greenfields’ mineral exploration. [2] The allocated $100.0 million will be made available to eligible companies as follows: $25 million in 2014–15, $35 million in 2015–16 and $40 million in 2016–17. This measure is intended to enable small mineral exploration companies with no taxable income to provide exploration credits to their Australian shareholders as a refundable tax offset. [3]
Currently, small mining exploration companies incur losses in the initial years of operations and carry these losses forward to be set off against future profits if the company’s discovery results in eventual commercial success. The ability to immediately distribute refundable tax offsets to investors could make investing in a ‘junior explorer’ more immediately attractive. According to the policy design consultation paper released by the Treasury, the tax credit will be aimed at the so–called ‘junior explorer’ sector, primarily small companies with no current mining activities. [4]
Junior explorers rely almost exclusively on issuing stock to fund their activities, and because the vast majority of resources companies are loss-making, cannot often distribute profits to their investors.[5]
The Coalition had committed to an EDI at both the 2010 and 2013 elections; the Labor Party had raised the idea before the 2007 election but had not moved to implement it.[6] Resources bodies had lobbied for an EDI-type scheme, and say that an EDI will ‘… provide a strong incentive for shareholders to commit capital to the exploration sector, making investment in these juniors attractive and addressing the lack of start-up capital in a competitive market.’[7] A report prepared for the minerals industry in July 2013 suggests that there is little growth in minerals exploration in Australia, and that Australia’s share of world exploration expenditure is diminishing, particularly in comparison to Canada.[8]
However, there are several key details of the policy that are not yet clear. Firstly, the scheme is a tax expense but, unusually for a tax expense, it is capped. This means that eligibility for the tax offset will have to be restricted in some way; it seems that a likely way for this to occur is for the taxable losses to be ‘modulated’ so that each company reporting a taxable loss would receive a portion of the available tax credits, commensurate with total demand for the scheme. The Government has not yet decided if this modulation will be based on actual or expected losses.[9]
Secondly, it has also not been decided if the credit will be available to all Australian shareholders of a company, or holders of newly issued shares only. If the intent of the measure is to stimulate exploration activity in Australia and attract capital to the sector, this would only be achieved by the latter option. If the tax credit was made available to holders of existing stock as well as newly issued stock, the potential for the scheme to incentivise capital raising and inject new funds for companies to use to explore would be diluted. Should this occur, the tax credit could simply represent a subsidy for owning shares in junior explorers.
The existence of junior explorers is important for the continued success of the Australian resources sector. Larger resource companies have previously withdrawn in-house exploration capability from Australia in response to lower commodity prices, and preferred to direct their efforts to ‘brownfields’ exploration, leaving junior explorers to search for new deposits.[10] However, the case has not yet been strongly made that the EDI is necessary for the continued existence of the sector, or that exploration is not appropriately incentivised through normal market forces. The narrative around the EDI is mainly concerned with ‘building confidence’ in the resources sector.[11]
Stimulating greenfields exploration through an incentive for junior explorers could be a cost-effective way of stimulating the mineral resources sector at large. If a junior explorer discovered a new mineral resource that could be developed with attractive economics, this would then attract investment from a larger mining company, bringing economic benefit. The actual cost of stimulating the junior explorer would be relatively small. However, there is also the possibility that no discoveries could be made, despite any additional capital being invested as a result of the EDI. There is also the possibility that if the design of the EDI did not effectively target junior miners or greenfields exploration, taxpayers may not receive a satisfactory return on their investment in a highly risky industry.
In the context of a tight budget scenario, the EDI must be carefully designed to ensure that it incentivises only new and additional exploration activity; genuine stimulation of the sector is a justifiable policy outcome, but only if it is conducted in an efficient and cost-effective fashion.
Offshore petroleum activities environmental approvals
As part of the Government’s policy to streamline environmental approval processes, the assessment and approval of offshore petroleum activity under the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) is now the responsibility of the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA).[12] Previously, offshore petroleum developers were required to submit an environmental plan to NOPSEMA, and also seek separate approval under the EPBC Act (where necessary) from the Environment Department. This streamlining has been welcomed by the resources sector.[13]
Although this move has been less controversial than the plan to delegate some other EPBC Act approval functions to the states and territories, some environmental groups have reportedly criticised the initiative, as taking the approval process out of public view and away from the Parliament.[14] The 2014–15 Budget provides that the Department of Industry will spend $0.3 million in 2014–15 to conduct an independent evaluation of the effectiveness of the new arrangements.[15]
[3]. Ibid.
[4]. Department of the Treasury, Exploration Development Incentive: policy design, 13 March 2014, accessed 16 May 2014.
[5]. T Williams, ‘Exploration and the listed resource sector’, Bulletin, Reserve Bank of Australia, September 2012, accessed 16 May 2014.
[9]. Department of the Treasury, op. cit.
[10]. T Williams, op. cit.
[15]. Australian Government, Budget paper no .2, op. cit., p. 189.
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