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Dryblower on the high cost of boasting

BOASTING is never attractive, but Dryblower suspects most readers will be surprised to learn it c...

Tim Treadgold
Dryblower on the high cost of boasting

To understand just how expensive, consider three examples of boasting about mining. While you may be inclined to laugh about the last one, don’t, because it may prove to be the worst of all. The three examples are:

Gold miners worldwide claiming low cash costs as part of a process designed to mask their true and much higher total costs, with the unintended side effect of attracting higher government taxes.

Iron ore miners in Australia, especially those extracting low-grade magnetite ore, claiming to be high-grade producers after processing, with the same unintended side effect of attracting higher government taxes, and

Australia’s top finance man, Treasurer Wayne Swan, caught boasting about how much his Mineral Resources Rent Tax (MRRT) would raise, only to find it has been a dud, so far.

Gold first, because it has seen some of the world’s top investment-fund managers lash the gold sector for telling porkies.

First to slate the gold sector was Evy Hambro, managing director of the natural resources funds at one of the world’s biggest fund management companies, BlackRock. He told delegates to the Mines and Money conference in London late last year that investors were tired of the poor performance of the gold sector.

“When we are misled on volume aspirations and misled on costs we can’t tolerate that in terms of the way we invest our money,” Hambro said.

It was a strongly worded attack that cut to the heart of a problem.

How are investors supposed to make informed decisions if they are not being told the truth about a company’s cost of production on a per ounce basis when they can clearly see the price per ounce?

It annoys Dryblower to think about how many younger journalists have been fooled by companies claiming costs of, say, $US600 an ounce, when the true cost after taxes, royalties and other charges is closer to $1000/oz.

Cleaning up the gold sector’s bad habit of misleading investors appears to be underway.

Some of the world’s biggest gold miners are working with the World Gold Council to devise a new, industry-wide standard, called an “all-sustaining cash cost”, that will more fully define what it costs to produce an ounce of gold.

It cannot come soon enough. With gold prices remaining close to a record high at $1667/oz, and governments around the world scrambling for additional sources of revenue, it is awfully tempting to say that any miner claiming to be producing at $600/oz is obviously earning a profit of $1000/oz, so let’s increase the tax take.

Blame for any higher tax therefore falls on no one else’s shoulders than the miners who misled investors and government.

Australia’s magnetite iron ore producers made the same mistake in a bid to be taken as mainstream players in the business, despite having much higher cost structures, as well as hating the description of them as being miners of low-grade ore.

So loud were their objections, that when the Australian Government designed its super-tax on iron ore and coal, it included the magnetite miners because they had so clearly said they were mainstream producers of a high-quality product and would be handsomely profitable.

Hoisted on their own words was one way of describing the magnetite miners’ dilemma – a charge that can now be laid at the feet of Swan, who been caught playing the same boastful game of claiming the country would enjoy a vast inflow of tax revenue to pay for social welfare handouts, when that is now clearly not the case.

With just $A126 million raised so far from the iron ore and coal sectors, the super tax has a long way to go if it is to hit its 2013 target of $2 billion.

The inclination for everyone in the mining industry is to shout at Swan “we told you so”. But that may not be wise as he will continue in his role as Treasurer until at least September 14, when there may be a change of government.

That gives Swan, along with his more extreme colleagues in the government and its friends in the Green Party, time to turn nasty and do what has been feared, widen the MRRT to catch all forms of mining, breaking every promise made over the past three years in the name of trying to find an election-winning strategy.

While this may sound like politics at its worst, it may also be enough to suck the billionaires who campaigned against the tax in the first place into the pre-election political debate.

The sight of super-wealthy miners demanding lower taxes just before an election could be a major turn-off for average voters.

The unleashing of the king and queen of Australian iron ore, Andrew Forrest and Gina Rinehart, into the election campaign could be game-changer – in favour of the parties that want to further increase the MRRT.

So take care in saying “I told you so”, it’s almost as bad as boasting.

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