The Mining Sector in Australia - Research Paper Example

The mining sector in Australia By College Level – Accounting Tutor College Department 24th August 2011 1. Abstract This is an accounting research study seeking to identify some of the most prominent mining industries quoted in Australia’s mining sector and how the reports in quarterly accounts and forecasts in the public domain of the mentioned firms’ earnings correlate with the share price movements. The study should be conducted in the entire country of Australia especially in areas where mining is the main economic activity hence cross sectional survey would be the most appropriate. The objectives of the study should be to identify some of the mining companies quoted in Australia’s mining sector and how the reports in quarterly accounts and forecasts of any three of the firms quoted correlate with the share price movements in the public domain and the significance of these results. Open and closed ended structured questionnaires, observation and interview schedules should be applied to gather important information from the miners and/or stakeholders of mining industries. It is hoped that the results of the study can be used to help in the future planning of the industrial operations and in the development of strategies to increase profit margins. 1. Introduction In its widest sense, mining refers to the process by which valuable and useful minerals are obtained/ extracted from the earth’s outermost layers (crust). Mining involves carrying excavations in mines beneath the surface of the earth (underground) and surface/open excavations in open mining pits or open cast mines. Recent technological advancements have made mining even from the ocean floors an economically feasible activity. Mining activities encompass the removal of both rock and earth physically or by any other appropriate means. It should however be noted that substances like petroleum, natural occurring gas, and sulfur in some cases, are produced primarily by drilling which may not be categorized under mining. A mineral on the other hand refers to any naturally existing substance mostly with distinct chemical constituents and characteristic physical attributes that do not vary. An ore on the other hand can be said to be a mineral or a mixture of minerals that can be subjected to certain processes and/or conditions to yield useful substances like metal. 2. Literature review and the development of research questions The mining sector has a very significant contribution to the economy of Australia. Factually, significant increase in enormous profits realized from mining activities in the country has time and again buoyed up movement of people into the country. Australia boasts of numerous and diverse deposits of minerals and ores that can be mined all over the country (Parker & Winslow, 1995, p.67). By and large, mining activities significantly cushioned former colonies in the face of looming bankruptcies. The discovery of silver and later on copper in Southern Australia in early 1840 led to an increased export tonnage of ore to other countries and a mass exodus of skillful and experienced smelters and miners (Parker &Winslow, 1995, p. 73) According to Martin & Clay (2001), Australia’s foremost economic minerals were lead and silver during the first few months of 1841 at Osmond, currently a suburb in the Southern part of Australia. The monetary worth of these mining sites was however outshone when the prospection efforts of copper at Kapunda came to fruition. Australia’s mining sector has for long played a preponderant role in her socio-economic growth and still glitters with brighter development prospects. The discovery of gold in the mid 19th century saw the first big ripple of free immigrants into the country and consequently the establishment of settlements in areas far-flung from the coasts. Since 1971, the country’s mining sector has expanded significantly when petroleum, naturally existing gas, coal and iron ore were discovered. At present, Australia has achieved a lot of self-sufficiency mostly in minerals that have higher economic value like Gold. On several occasions, it has been and still is among the world’s leading net producer and exporter of valuable minerals. The mining sector takes the lions share in terms of exports making Australia the principal supplier of minerals and related resources in world market trade. The country also boasts of having the largest known resources of zinc, lead, uranium and silver, all of which are from recoverable sources. Australia is among the other five countries on top of the world’s list in terms of recoverable resources of copper, nickel, brown and black coal, diamonds, gold, cobalt, ores of iron and manganese among others. According to Gwyn (1992), Australia also enjoys a rich geological assortment of minerals. From time immemorial, the western part of the country is said to have the biggest share by economic value of the overall production of minerals of metallic nature on a national scale (Gwyn, 1992, p. 56). Iron ore and Gold are the most valued minerals since their contribution to the economy of Australia is highly significant. In 1998, 13 percent of the world’s total production in terms of Gold was from Australia. This placed it third according to the global rankings after America and South Africa. Australia is also the leading producer and exporter of gem and diamonds accounting for approximately 40% of the total exports (Hegel, 2002, p. 89). 75% of Australia’s gold output and approximately 96% of her iron-ore output is mined in the Western part. The country exports most of its gold to Switzerland, Hong Kong, Japan and Singapore. Japan is the major importer of Australia’s iron ore output and nearly all of this iron ore is supplied to Japan. Other rich and thriving markets for this mineral are South Korea, China, Taiwan and Germany. According to Mintrell (1999), in late 20th century, Australia was one of the largest net exporter of one of the principal sources of aluminum (bauxite). That Australia’s mining sector contributes about 5.6% of its GDP. This is an improvement up from a paltry 2.6% in the year 1950, which was again down from the GDP of over 10% in 1900. Contrary to expectations, the total exports in Australia’s minerals contribute approximately 35% of exports (Mintrell, 1999, p. 87). With a closer look at the developed countries, only in Norway and Canada does mining activities and prospection exercises for mineral resources play a preponderant role in the development of their economies. In Canada alone, 3.6% of the economy is accounted for by mining while in Norway where the mining industry is heavily dominated by petroleum mining, it accounts for approximately 19% of its GDP and 46% in exports. Regardless of this immense contribution, Australian mining industry employs only a paltry 1.3% of its total workforce. Research Questions Why is mining the most significant sector in Australia’s economy? What are some of the mining companies quoted in Australia’s mining sector? How do the reports in quarterly accounts and forecasts of any three of these firms correlate with the share price movements in the public domain? Mining companies in Australia Large mining companies operating in several countries (multinationals) have dominated Australia’s mining sector. These mining companies include but are not limited to the following: BHP Billiton, Rio Tinto, Alcoa, Newcrest, Xstrata, Alcan, Chalco and Shenhua which belongs to a mining company from China alongside several others. Many small mineral prospection and/or exploration and mining companies are also not left behind and are listed in the country’s stock exchange. BHP Billiton This is a global gas and oil mining company with its headquarters in Melbourne and a major London-based management office in the UK. With due regard to its revenue, it is ranked the first place as the largest prospection and mining company in the entire world. By its capitalization in the existing markets, it is ranked third in the world. This mining company was kick started in the year 2001 following a merger between BHP and a Dutch company. This resulted in a double listed company boasting of its most important listing exchange securities, both in Australia and London. This multinational mining company has been and still is the largest mining and prospection company in the entire Australia going by the extent at which it has capitalized the existing markets. In 1885, this multinational company came into operation, operating lead and silver mines, mainly in the western part of Australia. In the year 1915, it threw its weight behind the manufacture of steel by primarily basing its operations in Newcastle due to technological shortcomings in its earlier sites. This company started petroleum prospection and/or exploration in mid 1960s. It is from here that it spread its tentacles to other countries often with an array of projects. For instance in Chile and Canada with copper and diamond mines respectively. The ineffectiveness of BHP’s steel works in New Castle, which by benchmarks set by the watchful eye of the global community, was small, made the operations of BHP to slide into the doldrums leading to its closure in 1999. The merger between BHP and Billiton (a mining company) in 2001 led to the formation of BHP Billiton, which became the most treasured mining company world over. The Rio Tinto Is an Australian and British multinational company. It has its group of resources both in Melbourne and London, respectively. It was unveiled in 1873, when a consortium of multinational investors bought a mining complex on river Tinto. Rio Tinto previously belonged to the government of Spain before it was put in the hands of these private developers. Since time immemorial, this mining company has continued to grow over a long and convoluted series of acquisitions and mergers with other related companies. This has securely placed it top in the list of some of the leading countries in the world as far as channeling of majority of its commodities of coal, iron ore, diamonds, copper and uranium is concerned. Even though its main focus was on the mining and extraction of minerals elements, Rio Tinto has also came up with other varied and manifold operations that include but are not limited to the refinery of certain minerals especially iron ore and bauxite. Rio Tinto boasts of operations in almost all the world continents most of which are concentrated in Canada and Australia. It is said to own assets valued at 81 billion Dollars in gross according to its complicated chain of subsidiaries owned partly and wholly. In 2007, it was rated at $148 billion. The company’s main offices are in Westminster city in UK, while the Australian one is situated in Melbourne city. This Group of mining companies as a result of several mergers enjoys the dual listing on security exchange of Australia and the stock exchange of London with higher FTSE indexes. It was rated as one of the largest mining companies listed publicly in the entire world with huge market shares and revenues and has established a tradition of producing amazingly lucrative and profitable operational results and investment on returns. Newcrest Mining Limited Is rated as the most prominent and the leading multinational gold mining company. It is said to be one of the producers of low cost Gold in the entire world. However, it is ranked as one of the largest producer of Gold and features in the list of the top 10 mining companies world over. Ever since it was incorporated (in 1980) in Victoria, it has now spread its tentacles outside the borders of Australia and into other countries like Indonesia making it an internationally acclaimed company. The company has also embarked on the present and past prospection activities so as to further its interests in Europe, Asia and US. By the virtue of the large extent at which it has capitalized its market, BHP Billiton will realize a much reduced profit margin by the end of this year as compared to 2009 and 2010. 4. Methodology Describes the target population and data collection instruments. In this type of research, cross-sectional survey will be the most appropriate owing to the fact that all the corners of the country must be sampled. The respondents will be required to use both the past and present knowledge to respond to the questionnaire. The study population should comprise of the members and the stakeholders of Australia’s mining community. The study population should be drawn from all the parts of the country. The study should sample at least 80% of the residents in mining near mining areas so as to generate a more concrete idea regarding what is going on in the public domain based on the stratified method of sampling. This study should use both primary and secondary data to gain an insight into the most successful firms in the mining sector together with their net earnings. Primary data should be obtained using questionnaires, observations and interviews while the secondary data will be obtained from text books, handbooks, manuals, internet, company web sites and newspapers. 5. Results and findings Quarterly accounts and forecasts in BHP Billiton’s earnings with the share price movements BHP Billiton’s earnings Income statement (figures in million US Dollars) Revenue Sales revenue $20,438 Operating Expenses Cost of goods sold $7,943 Administrative, General and selling expenses $8,172 Depreciation and maintenance costs $960 Miscellaneous $138 Total operating costs $17,213 Operating income $3,225 Non operating income $130 Earnings before Interest and Taxes $3,355 Net interest expense/income $145 Earnings before income taxes $3,210 Net income $1,027 $2,183 Source: World Bank, Statistical Manual (2011). GDP–final output for countries by companies as at July 2011. Switzerland. Forecasts in BHP Billiton’s earnings for the last 3 years Year Earnings 2009 US$ 9,238 million 2010 US$12,722 million 2011 US $ 13,800 million(At most) Source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 403.) BHP Billiton’s share price information Price 1,878.50 Bid 1,878.50 Ask 1,879.00 Change 0.99% 0.00 Volume 6,709,947 Open 1,840.00 High 1,918.66 Low 1,838.16 Close 1,878.50 Currency GBX Source: London south east (2011). BHP Billiton Share Price (BLT) [online] Available from (accessed 22 August 2011) BHP Billiton’s share price movement has been on a down ward trend since July 2011. As was witnessed earlier on, a bottom up integration with respect to every step necessary in the company’s production process was the order of the day. Despite enormous profits accrued year in year out, efficiency of the company seems to be on the wane despite the fact that the company is paying colossal sums of money to the contractor who is entrusted with a lot of responsibilities of well over 70% of the total production in terms of mineral resources. BHP is also faced with the challenge of offsetting its $80 billion in capital expenditures estimated to accrue for the next half decade despite the fact that asset prices seem to fall. Rio Tinto Rio Tinto’s earnings and revenues have achieved a substantial growth especially from the mid 2003 to date. Despite the fact that the company’s operational margin has been and still is impacted primarily by the fluctuating prices of its mineral resources, it has remained profitable over the last few years and the cash flows realized from its operations have been positive and consistent. Forecasts in Rio Tinto’s earnings for the last 3 years Year Net Earnings(US$ millions) 2009 6,298 2010 13,987 2011 At most 23,000 Source: World Bank, Statistical Manual (2011). GDP–final output for countries by companies as at July 2011. Switzerland. Rio Tinto’s share price movements Price 3,421.00 Bid 3,421.00 Ask 3,423.00 Change -0.31%0.00 Volume 4,307,817 Open 3,373.50 High 3,510.65 Low 3,373.50 Close 3,421.00 Currency GBX Source: London south east (2011). Rio Tinto Share Price [online] Available from (accessed 22 August 2011) Newcrest Mining earnings As at the end of June this year, Newcrest mining had an annual profit of AUD 1,058 million up from the profit of AUD 776 million realized 1 year ago. Forecasting 2009/10 AUD 776 million Current spot AUD 1,058 million 2011/12 Projected at AUD 1,500 million The increasing profit is attributed to the ever increasing production of Gold and the climbing prices of commodities in the world market. With an in-depth analysis of this kind of trend by those in the public domain, Newcrest mining will continue to reap enormous profits for the coming years. It also expects to spend only AUD 9 million in its projected capital expenditure for its next 5 financial years. 6. Conclusion Australia's labour costs and regulations about safety reminiscent of the first world, a rich and distinctive/unique geology, and the significance/ importance attached to extensive researches and prospection by multinational corporations, businesses and consecutive governments has contributed enormously to Australia’s technological advancement in the mining sector. Majority of the mining corporations/multinationals use internationally accredited software developed by the Australian government. Trend analysis of BHP Billiton, Rio Tinto and New crest mining’s share price movements seems to be on a downward trend. This can however be attributed to high maintenance costs and depreciation of machinery and increased competition in the world market. References Gwyn, S. (1992) Mining in Australia; A Historical perspective. Harper Collins: 1992, p. 56 Hegel, R. (2002). Impacts of the mining industry on the economy of Australia. London: Rutledge. 2002, p. 89. London south east (2011). BHP Billiton Share Price (BLT) [online] Available from (accessed 22 August 2011) Martin & Clay (2001) "Classifying Exchange Rate Regimes: Deeds vs. Words." London: Australian, European and the US Economic Review. 2004, p. 91 Mintrell (1999). World Economic Fact Book. London: OUP. 1999, p, 87 Parker, N & Winslow. (1995) The World’s Most Successful Mining Economies. New York: HarperCollins Juvenile. 1995, p. 67 World Bank, Statistical Manual (2011). GDP–final output for countries by companies as at July 2011. Switzerland. Read More