Jamie Freeman - Balance Resources - Infrastructure development – Where to start?


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Jamie Freeman delivered the presentation at the 2014 Mining the Territory Conference.

With record year on year investment in mining developments and exploration in the Northern Territory, the 8th Annual Mining the Territory Conference is perfectly placed to hear latest information on this booming region.

For more information about the event, please visit: http://bit.ly/MiningtheNT2014

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Jamie Freeman - Balance Resources - Infrastructure development – Where to start?

  1. 1. Infrastructure Development Where to start? 21 August 2014 www.balanceresources.com.au
  2. 2. page 2 Disclaimer The information contained herein has been prepared by Balance Resources solely for the use of the recipient. It is confidential and for information and discussion purposes only. The information does not constitute, in any jurisdiction, a recommendation, invitation, offer, or solicitation or inducement to buy or sell any financial instrument or product, or to engage in or refrain from engaging in any transaction. It is not the intention of Balance Resources to create legal relations on the basis of the information contained herein. This information does not purport to contain all relevant information. Nothing in this document should be construed as legal, tax, accounting or investment advice. This document has been prepared without taking into account the objectives, financial situation or needs of any recipient. Neither Balance Resources nor any of its respective affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein. The information may include estimates and projections and involves elements of subjective judgment and analysis. Past performance is not indicative of future results. The information contained herein is of a general nature intended to provide a broad overview of the relevant market and is not illustrative of the proposed transaction. Balance Resources believes this information to be accurate, including the certain parts of this information which have been prepared from third party sources, but Balance Resources does not give any warranty of accuracy or completeness of the information. The information on which the statements are based has been gleaned from public sources or provided to us on a non-confidential basis. To the extent permitted by law, Balance Resources, its related bodies corporate, their officers, employees, agents and members (a) disclaim any and all liability relating to this information, including, without limitation, any express or implied representation for statements and conclusions contained in and omissions from this information; and (b) accept no liability (whether in negligence or otherwise) for any loss, damage, costs or expenses of any nature which may be suffered or incurred by any person relying on any information or statement contained herein or otherwise arising in connection with such information or statement. No part of this document may be reproduced without the prior permission of Balance Resources. All material presented in this document, unless specifically indicated otherwise, is under copyright to Balance Resources. The information contained herein may contain “forward-looking statements”. These forward-looking statements may be based upon certain assumptions. Actual events may differ from those assumed. All forward-looking statements included are based on information available on the date hereof and neither Balance Resources nor its respective affiliates assume any duty to update any forward-looking statement. Accordingly, there can be no assurance that any forward-looking statements will materialise or will not be materially lower than those presented. If you are in any doubt about any of the contents in this document, you should obtain independent professional advice.
  3. 3. page 3 Overview 1. About Balance Resources 2. Challenges for infrastructure development – miners 3. Challenges for infrastructure development – infrastructure providers 4. Necessity for collaboration 5. Role of Government 6. How much regulation should we have? 7. Case Study – Wiggins Island Coal Export Terminal (WICET) 8. NT Infrastructure Status 9. The Infrastructure Working Group
  4. 4. page 4 Balance Resources Balance Resources is a highly respected professional advisory firm providing specialist support and advice to the resources and infrastructure sectors, predominately related to the import and export of bulk commodities. We have a unique blend of strategic, commercial, regulatory, technical and operational capabilities, as well as an unrivalled network of contacts and relationships throughout the infrastructure and resources industries. Together, the above reflects a distinctive ability for Balance to analyse, lead and deliver optimal, and integrated, solutions to our clients. Assess Align Decide Implement Sustain
  5. 5. page 5 Where is Balance? BRISBANE PERTH DARWIN TORONTOSEOUL
  6. 6. page 6 Who are our clients? Three major client bases within the resources and infrastructure sectors, with a focus on bulk commodities, including coal, iron ore, metals and minerals: Resource Companies • Access to infrastructure (rail, port, water, power) • Mine development feasibility, construction and operation • Project & risk management • Value engineering & procurement Infrastructure Companies (incl. Government agencies) • Project structuring and feasibility • Demand analysis & customer alignment • Project & risk management Domestic and International Investors • Identification, analysis and due diligence on resource and infrastructure opportunities
  7. 7. page 7 Why is Balance different? Balance is a boutique consultancy which offers services unique to the resources industry No other consulting firm offers what we do: • Specialised focus on complex multi-owner and multi-user supply chains within the resources sector • Knowledge of the resources and infrastructure sectors derived from working in, and not on these businesses • An unrivalled networks of contacts enabling us to connect with the right people to achieve the right outcomes Balance is not an accounting, engineering or management consulting firm with side-services in infrastructure - infrastructure and resources are the basis of our business
  8. 8. page 8 Challenges for Infrastructure Development - Miners Drilling / Concept Prefeasibility Study Feasibility Study APPROVALS FinancialClose Construction Operations CommittoInfrastructure The ‘Good Old Days’: • Easier to move from explorer to producer • Timely approvals • Infrastructure commitment made upon completion of Feasibility Studies • A reasonable degree of certainty regarding infrastructure – strategy, pricing and capacity
  9. 9. page 9 Challenges for Infrastructure Development - Miners Concept Study Prefeasibility Study Feasibility Study FinancialClose Construction APPROVALS Operations Committo Infrastructure The New Reality: • Complex and onerous • Longer environmental approvals • Explorers must commit to infrastructure before proving the mine is feasible • Little certainty regarding infrastructure – strategy, pricing and capacity
  10. 10. page 10 Key Challenges for Infrastructure Providers • Access to funding • Proving supporting projects are viable (JORC resources / feasibility studies) – difficult with multiple parties at different stages of development • Government and other approvals • Contractual misalignment (project / rail / port) • Competing interests of multiple parties • Coordination of work streams Strategic (critical and dynamic) Technical Commercial Government / Regulatory Funding
  11. 11. page 11 Key Challenges for Infrastructure Development Overall challenge for multi-user developments is the “Chicken & Egg” nature of infrastructure: A mining project is not “bankable” without an economic infrastructure solution BUT … How can funding be secured for an infrastructure solution before proving the mining project is “bankable”? No single or easy answer, but the solution will be when all work streams are past “the point of no return”
  12. 12. page 12 Necessity of Collaboration Major infrastructure developments and expansions require a high level of cooperation and alignment amongst resource participants Opportunities • Ability to start afresh rather than ‘patch’ legacy systems • Leverage collective experience in designing new infrastructure • Design well written contracts that promote the best interests of each participant in the supply chain • Achieve greater transparency in supply chains Reality • Unlikely to achieve utopian outcomes, but great opportunity to improve upon the past and build a better future
  13. 13. page 13 Role of Government “Good Old Days” – possibility of funding / underwriting / building the infrastructure as a ‘build it and they will come’ approach. “The New Reality” – not nothing, but not everything, so what is the new role for Governments in Australia? • Provide clarity on matters of strategy and policy • Establishment of a workable and stable process (for example, access policy regimes) • Assist to clarify parties’ roles and responsibilities • Encourage better communication and collaboration between users, service providers and the government • Have a light hand – the less interfaces the better
  14. 14. page 14 Level of Regulation • The ideal is somewhere between none and ‘too much’ • If none, monopoly power could be exercised by infrastructure owners (the natural counter argument is ‘why shouldn’t they exercise that power, as they paid for it’) • If ‘too much’, then like all other red tape and green tape, it’s a natural disincentive to any investment • Either way too much, or too little, regulation can reduce competition and restrict growth • What is key for stakeholders is that the level of regulation is: • ‘Fit for purpose’ • Provides clarity on process, pricing and access • Equitable – balancing price and risk • Incentivises and fosters sector growth
  15. 15. page 15 Regulation Challenges Consequences of poor regulation (perceived or otherwise): • Can be worse than no regulation • Economically inefficient • Increased sovereign risk • Decreased incentive to invest in Australia • Reduced competitiveness of export supply chains • Inbuilt inefficiencies – policy framework drives unintended outcomes …… need the right balance for sensible commercial outcomes
  16. 16. page 16 Development Alternatives There are a number of different funding models that can be utilised when developing infrastructure projects: In an age of reduced Government funding for major infrastructure projects, there has been a significant rise in the incidence of user- funded infrastructure developments Government (State and/or Federal) funding Third-Party / Investor funding Consortium-based user funding
  17. 17. page 17 Case Study – WICET Challenges: • Multiple existing and new miners – some requiring expansion tonnage • Numerous large, junior & mid-tier explorers seeking capacity • Constrained existing rail network requiring significant upgrades • Two above-rail operators (Aurizon Operations and Pacific National) • A complex regulatory frame • The absence of government funding • Port of Gladstone (Government owned) at full capacity Outcome: The successful greenfield development of the Wiggins Island Coal Export Terminal (WICET) – a multiuser, open access facility owned and funded by a consortium of producers, together with upgrades to the existing rail network to support the increased volumes
  18. 18. page 18 Case Study – WICET The WICET development model facilitates efficient infrastructure development through: • Industry owned and largely privately funded • Open, equitable and transparent Access Policy (specific to WICET) agreed with State, port corporation and industry • Broad industry support • No cost to Government • Terminal charges limited to cost recovery only
  19. 19. page 19 NT Infrastructure Status Plenty happening in the NT and at a Federal level, however: • General policy position from NT Government that infrastructure is to be funded by private sector • Large number of exploration companies which will require access to rail, port, power and water infrastructure but who are:  Located in various regions in the NT not consolidated to one area  On varying development horizons  Cash constrained in PFS/FS phases Meaning opportunities for collaboration are challenging and require a new approach to development.
  20. 20. page 20 NT Rail Infrastructure • AustralAsia Railway (Tarcoola to Darwin), leased & operated by Genesee & Wyoming Australia (GWA), as the ‘below-rail’ infrastructure provider • Regulated monopoly asset - open access and regulated pricing • Access and pricing are a negotiated outcome between potential users and the rail infrastructure provider, under a negotiate/arbitrate model • The regulations governing pricing and access have not been tested and the economic regulator (ESCOSA) has not had a need to intervene • The access to, and pricing of, the rail infrastructure through the NT could well ‘make or break’ exploration projects, so very careful considerations need to be given to how these matters are progressed
  21. 21. page 21 NT Port Infrastructure • Darwin Port Corporation (DPC) – owned by the NT Government • DPC has the power to impose dues and levy fees • No independent regulatory oversight of pricing or access • Third party access is provided on a competitively neutral basis, however transparency is critical – access criteria is not publicly available, nor are the reasons for access decisions disclosed • Key challenges for explorers are asset ownership structures, operational efficiencies and integration with rail (supply chain)
  22. 22. page 22 Where to from here? • Efficient development of infrastructure is critical to viable development of resource projects in NT • Reductions in price and conditions of access will only succeed if miners collaborate and work together where possible • Suggest establishment of a resource based infrastructure advisory body – Infrastructure Working Group (IWG) • The IWG will be formed by NT resource companies incentivised to develop collective approaches to infrastructure solutions
  23. 23. page 23 IWG Concept • A single point of contact to provide input into NT infrastructure projects • A coordinated private sector position on key infrastructure issues • A forum for members to collectively discuss, plan and negotiate strategic, commercial and technical/operational arrangements for critical infrastructure projects • Coordination on common issues in planning infrastructure developments in various NT regions • Advice on potential for investment into infrastructure projects • A forum to collectively brief government on infrastructure projects
  24. 24. page 24 IWG Objectives The IWG will review and provide advice on: • Economic and regulatory impediments to the efficient delivery of relevant infrastructure projects • Proposals to facilitate the alignment of NT Government policies and laws relating to development of, and investment in, infrastructure • Lowering transaction costs in the provision of infrastructure • Prioritising infrastructure projects, based on demand for infrastructure • The establishment of an independent supply chain coordination body • Infrastructure financing and funding, including strategies to attract financing and improve investor certainty in the commitment to the infrastructure project pipeline
  25. 25. page 25 In Summary Infrastructure Development – Where to Start? The answer lies in: • Accepting new models of infrastructure development in the resources sector; • Attempting to drive down transport and infrastructure costs to make projects economical; and • Working together as an industry to invest and develop for the benefit of all resource projects in the NT.
  26. 26. page 26 Contacts balanceresources.com.au Queensland PO Box 10521 Brisbane Adelaide Street Brisbane, QLD 4000 Level 10, 500 Queen Street Brisbane, QLD 4000 Western Australia Level 3, 267 St Georges Tce Perth, WA 6000 Northern Territory GPO Box 4783 Darwin, NT 0801 Canada Suite #486, 100-2 Toronto St Toronto, ON M5C 2B5 Jamie Freeman – Director BTech MBA GDIFSM GCMM GAICD Mobile : 0431 912 776 Email : jfreeman@balanceresources.com.au Rebecca Landon – Managing Director B.Ec B.AsSt (Specialist) Mobile : 0423 037 154 Email : rlandon@balanceresources.com.au Richard Jackson– Associate Director MAICD Mobile : 0400 286 626 Email : rjackson@balanceresources.com.au