A ray of hope on Abbott's western front

A mini-mining-boom is just what the struggling Abbott government needs in 2014. If it were going to choose a state in which it would happen, its first pick would be Western Australia.

As detailed previously, the Abbott government needs some good news in that state ahead of a highly likely re-run to the WA half-Senate election (A hideous beast awaits Abbott’s return, January 7).

How fortunate, then, that the Indonesian government has followed through in recent days with its ban on ore exports that will hit nickel ore and bauxite exports to China in particular.

Having supplied the Middle Kingdom with around 25 per cent of its bauxite, Indonesia will now force Chinese smelters, which in the space of a decade have gone from 10 to 50 per cent of the world’s smelting capacity, to find new seaborne bauxite supplies.

And that’s one thing WA should be able to help with.

Perth-based Bauxite Resources has been out and about trying to convince investors that it’s the firm to get bauxite (as opposed to refined alumina) exports happening.

In an interview last month, Bauxite Resources (BAU.AX) chief executive Peter Canterbury explained that with plenty of existing rail infrastructure to service the ports of Kwinana and Bunbury, bauxite exports in WA offer a “low capital start-up” compared with other sites around the world.

That’s true. WA’s south-west region bauxite – as this columnist was told by Alcoa on numerous mine site visits during his WA school years – is pretty much lying around, ready to be scooped up.

It’s typically covered by two metres of top-soil, which canny miners have learned over the decades to put to one side and then replace when the resource has been extracted. That makes it easy to negotiate leases with farmers.

As bauxite prices react to the Indonesian negative supply shock, it looks likely that the 4,000 nautical mile export of the ore to China will become economical. Similar resources in Africa face an 11,000 mile journey.

Canterbury told the ABC last week: “The combination of both the price but also the exchange rate and I would think in the order of $60 a tonne and a 85 cent exchange rate would probably work in terms of creating a long-term mining opportunity to support the development.”

Moreover, says Canterbury, one of his firm’s Chinese joint-venture partners, Yankuang Resources, is looking at developing its own alumina refining capacity to compete with Alcoa’s long-established refineries.

China’s ongoing urbanisation requires a lot more aluminium in construction than developed nations – about a third of national consumption is in construction work, compared with just 11 per cent of aluminium construction in the US.

This is good news for the struggling Barnett government and for the Abbott government in any Senate re-run.

At present, the stakes are low. Bauxite Resources has a market capitalisation of just $27 million, with $43 million in cash on its balance sheet and no debt.

However, to see the potential of this mini-boom, it’s worth noting that up to 200,000 jobs are thought to be in jeopardy in Indonesia following the export ban.

Those numbers would not be replicated in a high-wage economy, of course. But for the time being, the development can be sold by both state and federal governments as a source of job creation at a time when much larger resources sectors – particularly iron ore – are winding down their construction phase.

Moreover, because of the small amount of capital required to get the first shipments organised, the right price/exchange-rate signals are more likely to actually turn into exports. In more capital-intensive sectors, the risk of Indonesia reversing its somewhat capricious decision would make the risk of developing deposits too high.

So the political message is clear: let’s make jobs while the sun shines. It’s a ray of hope that both state and federal Coalition governments would be wise to capitalise on.