Industry bodies across the mining sector have delivered a statement to the Senate Economics Legislation Committee, noting proposed reforms to the capital gains tax (CGT) impact mineral exploration, drilling and beyond.
The Association of Mining and Exploration Companies (AMEC) told the Committee that the CGT reforms hit mineral exploration “where it hurts most”, with chief executive officer (CEO) Warren Pearce saying that the activity, alongside mining, makes a “critical contribution” to Australia’s economy.
Pearce called mineral exploration the nation’s original start-up, one that drives new mines, jobs and overall economic growth.
He also said that the success of this relies on two main components.
“Men and women investing their own money and time to develop a mineral exploration company and project, backed by Mum and Dad retail investors taking a punt on their success,” he said.
Pearce explained that, like the technology and biotechnology sectors, mineral exploration is a high-risk, early-stage business with no production, “usually” no income and on a “very small” chance of success.
Whilst noting that only around one in a thousand exploration projects become an operating mine, Pearce noted that ASX-listed exploration companies are “responsible” for roughly 75 per cent of Australia’s economic discoveries, highlighting the imperative to support both large-scale and junior companies.
“In setting up and investing in these companies, the incentive is purely in the hopeful prospect of capital growth,” he said.
Likewise, the Australian Drilling Industry Association (ADIA) also addressed the Senate Committee, saying that the reforms could have “serious unintended consequences” for both the drilling industry and the wider Australian economy.
“ADIA contends that removing existing CGT concessions would significantly reduce investment in junior mineral exploration companies,” it said.
“Exploration relies heavily on private capital, often years before any commercial return is possible.
“Reduced investor incentives could make it much harder for explorers to raise funds, leading to fewer drilling programs and a substantial downturn in exploration activity.”
The ADIA added that given exploration drilling accounts for roughly 45 per cent of the nation’s drilling fleet, it warned that the reforms could “trigger” a recession across large sections of the drilling industry.
In the wider economic lens, a joint statement from the Business Council of Australia (BCA), Australian Chamber of Commerce and Industry (ACCI), Australian Industry Group (AIG), and the Council of Small Business Organisations Australia (COSBOA) “strongly opposed” the CGT changes.
The statement said that it would discourage investment at a time when Australia “needs it most”, noting growing global competition, and that the nation “cannot afford” policies that make it a “less attractive” investment destination.
“We should be competing to attract the capital our projects and businesses need to grow the economy and fund the services Australians rely on,” they said.
“We urge the Parliament not to proceed with the legislation and consult with the business community in good faith to fully assess its consequences.”
An article by the ABC in late May said that while the basic principle of the proposed reforms is “simple” – more tax for those who earn capital gains on the sale of investment properties, shares or their own businesses – there are implications for a variety of investors who are beyond the property investors, which the masthead said have been the Federal Government’s focus.
This is where Pearce’s concerns lay, who echoed the ADIA’s sentiments, saying that exploration remains “inherently speculative [in] nature”, where 80 per cent of junior explorers record a net loss in any given year.
This makes retail investors who are willing to engage in high-risk but potentially high-reward opportunities critical.
“Mineral exploration relies heavily on a very small and shrinking pool of retail investors,” he said.
“Risk capital is hard to come by, and if Mum and Dad retail investors desert mineral exploration, there will be no investment to replace it.
“Mineral explorers will be starved of capital, and Australia’s mineral exploration effort will decrease rapidly.”
As for the ADIA, it added that the tax changes “undermine” incentives for entrepreneurship, with drill contracting business being high-risk, capital-intensive ventures that require “substantial upfront investment” with “no guarantee of success”.
“ADIA maintains that the current taxation settings help balance the risks business owners undertake,” it said.
“Removing these incentives may discourage new business formation and prompt existing operators to leave the industry, reducing competition, innovation, and productivity.”
