Australian mining is currently dominated by China’s increased buying activity across the sector. As this report went to press, the government was considering Chinalco’s US$19.5bn bid to increase its stake in Rio Tinto, alongside China Minmetals Corporation’s AUD2.6bn bid for OZ Minerals and Hunan Valin Iron & Steel Group’s AUD1.2bn for a 16.5% stake in Fortescue Metals Group. On page 8 of this report, we examine some of the reasons why China is buying so many Australian assets, and what that will mean for the industry in the years ahead.

Mixed messages from Swan In the first major mining investment decisions to be taken by the Labor government since taking office in late 2007, Treasurer Wayne Swan has said ‘yes’ to Hunan Valin Iron & Steel Group’s AUD1.2bn bid for a 17% stake in Fortescue Metals, but ‘no’ to China Minmetals Corporation’s AUD2.6bn bid for OZ Minerals. Treasurer Swan vetoed the China Minmetals bid for OZ Minerals on national defence grounds, saying that it could not include OZ Minerals’ key Prominent Hill copper and gold mine as part of the deal. This is because the Prominent Hill mine lies in the Woomera Prohibited Area weapons testing range. Consequently, China Minmetals made a revised offer of US$1.69mn for Oz Minerals assets (excluding Prominent Hill), which is now widely accepted to be approved by mid-year.

These decisions have been closely scrutinised for any lead on what decision Swan may come to on Chinalco’s bid for Rio Tinto, expected by mid-year. However, as this report was going to press, increased investor unease at the terms of the Chinalco bid means there is now an increased chance that the terms of Chinalco’s bid may have to be altered significantly, or even that the entire deal is running the risk of collapse. There has been some media speculation that any future Chinalco stake in Rio Tinto may be limited to just 15%, which may make it more palatable to Treasurer Swan as he makes his decision, expected during mid-June 2009. Were Swan to decide against the deal, then a Plan B solution may be a new rights issue, coupled with asset sales, in order to raise the financing necessary to deal with Rio’s short-term debt obligations.

Hosting a gamut of metals and minerals including iron ore, nickel, bauxite/aluminium, copper, gold, silver, uranium, diamond, opal, zinc, coal and oil shale as well as petroleum and natural gas, Australia continues to be a world leader in mining. Australia lies within the top five for most of the world’s key minerals. It is the world’s leading producer of bauxite and alumina, ilmenite, rutile and zircon, synthetic rutile and tantalum. It ranks second for production of iron ore, lead, uranium, diamonds (by weight) and zinc. It is the third-largest producer of silver and nickel and has also now become the world’s third-largest producer of gold, behind China and South Africa. The country is the world’s largest exporter of alumina, black coal, iron ore, lead and zinc, and figures second in the export of uranium. The mining industry is a significant contributor to Australia’s GDP and the majority of mining activity takes place within the country’s largest state, western Australia. The state’s mining sector is set to benefit from the election of a more business-friendly Liberal government in the wake of September 2008’s early election.

Owing to its exceptional geology, Australia is home to some of the biggest names in the global mining industry. Multinationals operating in the Australian mining industry include locals BHP Billiton and Newcrest, Rio Tinto, US-based Alcoa, China-based Aluminium Corporation of China (Chinalco) and Switzerland-based Xstrata.

Foreign investment rules are liberal and encourage inward investment. Mergers and acquisitions (M&As) are subject to scrutiny by the Australian Competition and Consumer Commission (ACCC). The country has well-defined regulatory bodies and a well-established legal system that can be described as investorfriendly.

In the case of specific mineral exploitation, the authorities now consider uranium mining proposals on a case-by-case basis.

Forecasts for Australia’s mining industry are discouraging, with the industry estimated to have contracted by almost 5% in real terms in 2008. Meanwhile, we forecast an average annual reduction of almost 2% in real terms for the remainder of the forecast period. The main reason for this disappointing outlook is the global slump in commodity prices. However, Australia has also been particularly hard hit by restructuring at the world’s largest miners, BHP Billiton and Rio Tinto. By 2013, the report forecasts that Australia’s mining industry will represent only 3.08% of GDP, compared with 4.26% in 2007.