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How profitable is mining?

According to the ABS, very profitable.

At the end of last month (May 28), the ABS published their annual “Australian Industry” release which looked at a wide array of comparative industry performance measures for the Australian economy in the 2008/09 financial year. The results for mining are probably worth going over considering the hyperbole venting from some sections of that industry at the moment over the RSPT, particularly when it comes to issues of comparative industry profitability.

First off for some context, it’s worth looking at the number of people employed in each major industry sector in Australia at the end of last financial year, and the proportion of all jobs in the Australian economy that each of these sectors made up.

industryemploymentMining makes up 1.3% of all jobs in the economy. If we break the mining numbers down by state, this is what we get:

miningemployment

However, while mining employs only a relatively small number of people, it does have a much larger total economic effect as a consequence of the way mining investment flows through the economy – the so called “economic multiplier” of mining.

This multiplier is fairly large. The Qld government estimated in 2007 that the employment multiplier – the number of jobs created elsewhere in the economy for every job created in the mining sector – was around 4. That is similar to the employment multiplier for the construction industry, so it’s probably a little on the high side since the input-output tables of the national accounts and the old input-output multipliers that the ABS once produced suggested that the construction multiplier was a bit higher than that of mining.

But whether it’s 2,3 or 4 – mining dollars spread far and wide through the economy.

(Though, looking at the partisan political angle for a minute – it’s interesting that the Coalition is concerned about the negative effects of the RSPT in terms of the way the multiplier spreads the alleged impact of the RSPT through the wider economy, but ignore the same or larger multipliers that exist for the construction industry when it comes to the BER. But hey, this is politics and consistency has never been a particularly strong suit of the profession).

Before we get to profitability, it’s worth taking a slight sidetrack for a moment and look at a thing called EDRs. EDR stands for Economic Demonstrated Resources and is a measure of the demonstrated amount of various mineral resources available in the world. In Australia we also have a more refined measure known as Accessible Economic Demonstrated Resources. The AEDR is the size of total Australian EDR that is actually accessible and available for mining. AEDR excludes mineral resources which are inaccessible for digging out of the ground due to things like various environmental restrictions, the minerals sitting underneath land owned by the the Dept of Defence or resources that are inaccessible as a result of various government policies. AEDR measures the amount of stuff in the ground we can actually use under current law in Australia.

Using the AEDR measure, we can calculate the size of Australia’s known mineral wealth that can be dug up as a proportion of total known deposits on earth. Effectively, we can see what proportion of the world’s minerals Australia owns and can mine. This data comes from Geoscience Australia: (click to expand)

AEDR1

If we just look at those minerals where Australia owns more than 15% of all known deposits:

aedr2That last chart shows the minerals where Australia is not only a major global supplier, but where we have a significantly robust market position. We also need to remember that these resources are not only immobile, but finite – so keep that in your thought orbit for a bit.

Now lets talk about profit margins.

In the ABS “Australian Industry” publication linked at the start of the post, our national statisticians also calculated a number of ratios for industry sectors in the

2008/9 financial year, one of which was profit margin. If we compare the total profit margins of each industry sector in Australia, this is what we get:

profitmarginsMining comes in highest with a profit margin of 37.1% and, well, daylight is second. Worth mentioning is that the average profit margin for all industries in Australia is 11.2%.

How does this profit margin compare to other mining operations around the world?

Price Waterhouse Coopers produces an interesting little publication every year called “Mine” where they track the fortunes of the worlds 40 largest mining companies by market capitalisation. Their latest publication was released last month, which you can download for your perusal here.

If we look at page 13 of that document, we can see the average profit margins of the largest 40 mining companies in 2008 was 17% while the profit margins of the largest 40 mining companies in 2009 was 15%. Since companies fall into and out of the top 40 every year towards the end of the list, PWC also produce an average profit margin for the largest same 40 mining companies and tracked them over 2008 and 2009 on page 27. On that measure, the aggregate profit margin was 16% in 2008 and 15% in 2009.

However – and typical with these bloody things (thanks to Scott in comments – here’s where the UPDATE comes in) -  these guys are walking to the beat of a different definitional dictionary, making a direct comparison impossible (insert much swearing, fist shaking and cursing at accountants for attempting to reinvent what was a perfectly operational and mostly round wheel)

Because of the lack of directly comparable definitions here between Australian mining profitability and the top 40 miners, we have to make a consistent estimate of our own from the data each provides.

So rather than use “operating profit before tax” to get an estimate of Australian mining industry profitability (what our ABS has used), we can use the ratio of EBITDA (earnings before interest,tax,  depreciation and amortisation) to revenue. Not the measure of profitability, but a estimate of profitability

For the Australian mining industry, this comes out at around 43%.

For the largest 40 global miners, after re-adjusting for PWC’s  “adjusted EBITDA” to get raw EBITDA, their ratio comes out at around 30% for the 2008/9 period (29.8% for one year, 30.3% for the other – split the difference for the two years and we get around 30%)

In 2008/09, the Australian mining industry had a EBITDA/Revenue ratio of 43%  while the worlds largest 40 mining companies had a comparable estimate of 30%

Note: Not quite as dramatic as earlier, but still very substantial and the argument holds.

When mining companies in Australia say that their investment in mining will cease domestically as a result of the RSPT, they are effectively stating that their firm will not exploit these immobile, finite resources which make up to nearly 40% of the total global supply of these minerals.

Should we care if companies like Fortescue, Xstrata or Clive Palmer’s operations pull the plug or cease investment?

With profit margins that high in Australia compared to the profit margins that other domestic industries in Australia receive, and with EBITDA/Revenue ratios much higher in Australia compared to what the largest global miners are receiving around the world (especially considering that a part of these global earnings ratios are slightly boosted by Australian operations),  even under a worse case RSPT scenario where mining profits in Australia take a significant haircut ( a dubious argument at best considering the design of the tax), for every noisy mining interest in Australia that walks away, there will, literally, be an army of mining investment and general investment  lining up to take their place.

Our profits and our resources are simply too good an opportunity to pass up – even if the profit margins involved in Australia are halved seriously reduced. When the noisy miners say that their capital is mobile, they are dead right – their capital is indeed mobile, but in exactly the same way that every other mining firm’s capital is mobile, including the capital of the worlds largest 40 miners.

With industry profits in Australia so high compared to both other domestic industries and the largest 40 global miners, with Australia owning a substantial piece of the worlds immobile and finite accessible  mineral resources, Big Dirt walking away from Australian investment will be their loss, not ours – because someone else will simply take their place.

Big Dirt – welcome to capitalism.

It’s also worth mentioning that the RSPT operates such that owning 60% of a highly profitable operation for 60% of the cost and receiving 60% of the profits (or taking only 60% of the losses – less across the board for less profitable mines) only makes the balance sheet burden-sharing of the governments cost rebates and the engineering of financial products to more equitably share that burden-sharing the actual key problem when it comes to sustaining rational economic investment in Australian mineral exploitation.

Don’t be surprised if something is negotiated on that issue which in  some way ameliorates companies carrying the full burden of the governments “promise to pay” on their own balance sheets.

UPDATE:

How profitable is mining Part 2 – mining industry profits by business size, proportion of unprofitable firms and how the anti-RSPT hysteria is not representative of the economic self interest of the majority of the firms in the industry.

36

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  • 1
    oldskool
    Posted June 15, 2010 at 1:12 pm | Permalink

    Out of curiosity, is the profit margin, from both sources calculated in the same manner?

  • 2
    Aristotle
    Posted June 15, 2010 at 1:12 pm | Permalink

    With industry profits in Australia so high, Big Dirt walking away from Australian investment will be their loss, not ours – because someone else will simply take their place.

    Indeed.

  • 3
    Socrates
    Posted June 15, 2010 at 1:47 pm | Permalink

    Great analysis again Poss, calling the lie on mining profitability. You have proven that:
    - mining is highly profitable in Australia compared to the rest of the world and
    - there is a high proportion of the world’s recoverable resources here,

    We can also illustrate how Australia’s mining taxes compare to the rest of the world. Here is the link to the OECD comparison of mining royalty and tax regimes (you have to consider the combined effect of the two together to get a fair comparison).
    http://www.oecd.org/dataoecd/35/44/44282904.pdf

    As you can see in Figure 1 Australia (WA used for comparison) is the second lowest taxer of mining in the world. So overall we have a large chunk of the world’s most valuable resources, they are highly profitable to mine, and the miners are lowly taxed.

    Despite their rhetoric, the mining companies won’t be going anywhere else soon.

  • 4
    Posted June 15, 2010 at 1:47 pm | Permalink

    V nive piece of work

    hopefully it will get wide coverage in all the MSM outlets

    but then again i’m just a dreamer

  • 5
    Posted June 15, 2010 at 1:49 pm | Permalink

    Oldskool – it should be, it’s a standard industry ratio.

    There might be a bit of granular disagreement on the margins for each, but we’d be talking only a couple of percent by the way these things usually pan out.

    The only way they’d be significantly different is if one of them is walking to the beat of a completely different dictionary.

  • 6
    mrflibble
    Posted June 15, 2010 at 2:05 pm | Permalink

    So, to compare apples with apples, where & how do the royalties that are paid to dig up the dirt factor into the profitability. My working assumption (for validation) is that these are included as amongst the costs of doing business in Australia, and hence already included in the ‘profitability’ calculations.

  • 7
    oldskool
    Posted June 15, 2010 at 2:08 pm | Permalink

    Thanks, excellent work as usual- of course no-one but Crikey readers will ever know the lies that are being forced on them…

  • 8
    Scott
    Posted June 15, 2010 at 2:18 pm | Permalink

    You’re comparing Operating profit margin (the ABS study) with Net Profit Margin (the PWC study).
    If you read the definitions at the back of the two reports, you will find that you should be comparing the Operating Profit margin from the ABS report with the EBITA margin listed in the PWC report. You 2will find they are closer.
    Lazy stuff Possum.

  • 9
    pancho
    Posted June 15, 2010 at 2:34 pm | Permalink

    Hey Poss,

    I’d assume there’s internal polling going on wrt the tax. Are you privy to any of it? The politics are difficult to read at the moment, and both parties seem a bit unsure of their initial tactics. Any ideas why?

  • 10
    Peter Smith
    Posted June 15, 2010 at 2:36 pm | Permalink

    Does no-one in the government understand these numbers?

    I don’t understand why they don’t counter the fearmongering in this and other battles with facts. Are facts just too passe for Real Men?

  • 11
    Posted June 15, 2010 at 2:53 pm | Permalink

    Scott – that’s not quite right either! Bloody PWC.

    It’ll be back when I fix it.

  • 12
    Geoff
    Posted June 15, 2010 at 4:19 pm | Permalink

    Possum

    Operating profit equals gross profit less all operating expenses. This is the surplus generated by operations. It is also known as Earnings Before Interest and Taxes (EBIT).

    Net profit equals gross profit less operating expenses less Interest and Taxes.

  • 13
    Cuppa
    Posted June 15, 2010 at 5:44 pm | Permalink

    Watch the ABC give information such as this a wide berth while relaying News Ltd’s every beat-up against the RSPT.

  • 14
    Posted June 15, 2010 at 6:01 pm | Permalink

    OK – that’s done and dusted. I could seriously smack some people in the financial industry in head at the moment.

    Geoff -the problem was, firstly, “off definition” definitions on the one hand, and then to compound it, inconsistent data definitions at the compositional level, making it tedious to get something comparable between the two data sets.

    So PWC’s “Adjusted EBITDA” had to be de-adjusted and compared to revenue to give us what is really a second or third best best working solution. And I have a suspicion as well from other data I’ve just waded through that their revenue measures are a bit depressed to boot.

    Ugh.

  • 15
    Harry "Snapper" Organs
    Posted June 15, 2010 at 7:02 pm | Permalink

    Seriously interesting, Possum. I hope some serious financial reporters have taken note, but apart from Peter Martin, I’m pessimistic.

  • 16
    RonAld Ainsbury
    Posted June 15, 2010 at 7:30 pm | Permalink

    As I understand the government’s tax is based on ROI so margin is only half the story – what is the rate of return on either assets or shareholders funds?

  • 17
    David Richards
    Posted June 15, 2010 at 8:01 pm | Permalink

    So – not only do miners have the best profits, if you were to use a profit to employment ratio – they are massively ahead of any other sector. Not only are they not giving a fair share back to the government (and therefore the people of Australia) via royalties and taxes, they also fail to give a fair share through employment. Forget multipliers. TThe economic multiplier argument didn’t mean anything to those who wanted to reduce the size of the government sector.

    What should have been a very big plus for the government has been mishandled and turned into a negative. It should have been aggressively explained from the outset. The best course is as Rudd now advises – stick their courage to the sticking place. A backdown on this – and the Libs will hypocritically pound him for the backflip and not standing for anything.

    The RSPT is a GOOD POLICY, and the ALP should hold firm on it. The ETS was flawed, and should have been redraughted without an eye to trying to curry favour with the Libs. The Net Filter was a totally BAD POLICY, and should be dumped forthwith.

  • 18
    imacca
    Posted June 15, 2010 at 9:08 pm | Permalink

    “So – not only do miners have the best profits, if you were to use a profit to employment ratio – they are massively ahead of any other sector.”

    Thats a good point, needs to be made more often i think. If there is any industry in Australia that can pay a greater share of tax its certainly the miners.

    thanks for this one Poss.

  • 19
    John Reidy
    Posted June 15, 2010 at 9:42 pm | Permalink

    An estimated difference of 13% (43 – 30%) in a multi billion dollar industry is huge.
    If the leases were available foreign mining companies will be knocking the doors down.

  • 20
    political animal
    Posted June 15, 2010 at 9:48 pm | Permalink

    And that 37.1% profit margin is of course an average, there are miners making more than that!

  • 21
    David Richards
    Posted June 15, 2010 at 10:05 pm | Permalink

    exactly John Reidy – call the miner’s bluff. If they cancel projects – they forfeit their leases.

    They’re a mob of wideboys, chancers, and spivs.

    They don’t give a toss about Australia

  • 22
    Posted June 15, 2010 at 10:37 pm | Permalink

    My contribution to the mining debate: Mining Windfalls A Taxing Problem

    Our mega miners aren’t threatening to go somewhere else. They already are everywhere else.

  • 23
    Mr Squiggle
    Posted June 15, 2010 at 10:43 pm | Permalink

    Poss, as always, love your work, but this time I have some critisims;

    1) The component of the current tax regime that addresses the idea of non-renewable resources is the royalty system. The RSPT will leave the royalty system in place and furtherre-affirms it by taxing the sector at a high enough rate to create a refund back to the mining companies to cover their royalty expenses…now what is the point of that? I can’t work it out,

    2) Your use of EBDITA is important, because it leaves the door open for one major critisim of the RSPT…if the government wants more tax revenue out of mining companies, how about it helps the companies sell more of their stuff? 30% of a bigger EBDITA will leave a bigger tax take for Australia without reducing NPAT. What’s wrong with a win/win approach?

  • 24
    jenauthor
    Posted June 15, 2010 at 11:57 pm | Permalink

    Do the politician’s minders trawl crikey … do they ever take the info they find here and use it?

    I know the guy from the AWU does — but it shoud be mandatory reading, just like the other news outlets.

  • 25
    B.Tolputt
    Posted June 16, 2010 at 8:27 am | Permalink

    The point of leaving the royalty system in and refunding it is to enable the tax law to be changed in the face of opposition from the resource states (WA & Qld). If the royalties were to be scrapped outright, the mining companies would only need to mount a campaign in two states rather than federally.

    It is known as choosing the ground on which to figt your battles. The royalties will eventually be scrapped (they’ve already said this), the Labor Party is simply leaving that as a fight for another day. No sense in taking on the states as well as the well-funded mining lobby.

  • 26
    Posted June 16, 2010 at 9:39 am | Permalink

    UPDATE:

    Part 2 – mining industry profits by business size, proportion of unprofitable firms and how the anti-RSPT hysteria is not representative of the economic self interest of the majority of the firms in the industry.

    http://blogs.crikey.com.au/pollytics/2010/06/16/how-profitable-is-mining-–-part-2/

  • 27
    Jim
    Posted June 16, 2010 at 10:16 am | Permalink

    So why hasn’t an analysis like this appeared in any of the media?

  • 28
    marekdiug
    Posted June 16, 2010 at 12:34 pm | Permalink

    If you where to take the Australian companies out of the top 40 world miners what effect does this have on their EBITDA/Revenue ratio?

  • 29
    michael crook
    Posted June 16, 2010 at 2:41 pm | Permalink

    All of which quite ignores the fact that coal mining with its 12 hour rotating shifts is extremely dangerous for those people that do work in it. How about a banner “coal mining……..killing workers, destroying families, poisoning communities, corrupting politicians and, polluting the atmosphere, stop it.” I think that should do it.

  • 30
    Michael R James
    Posted June 16, 2010 at 6:44 pm | Permalink

    To second some of the remarks above, to query why the main media including the ABC and the Labor party seem unable to have these relatively straight-forward statistics at hand and to convey them in their arguments. OK, partly rhetorical when it comes to the MSM. Graphs. Remember the publishers/editors rule: for every graph or equation in a piece at least 10% of the audience is lost. (20% in Qld and WA).
    On that point could I suggest Possum rotate his graphs 90 degrees so we don’t kink our necks reading the abcissa (I’m from Queensland:-)

  • 31
    Michael R James
    Posted June 16, 2010 at 7:10 pm | Permalink

    @michael crook at 2:41 pm
    “…coal mining with its 12 hour rotating shifts is extremely dangerous for those people that do work in it.”

    I think you are talking about China and the developing world. From Wiki: “Modern mining in the U.S. is only slightly more dangerous than driving, with .02% of miners dying in accidents, compared with .016% of the country’s population dying in car accidents.[14]” Can’t find the stats for Australia but with more open-cut and strong unions I would expect the accident rates to be even lower. The most recent media fuss was Beaconsfield: one death.

  • 32
    Harvey Tarvydas
    Posted June 17, 2010 at 7:13 am | Permalink

    Dr Harvey M Tarvydas

    Good one Possum but you have been very gentle and considerate.
    @ Kevin Rennie “they are everywhere” You remind us all of the extreme simplicity which carries such potent reality that has escaped us all (all those clever people who actually think we are having an appropriate discussion) and put the clever discussion into kindergarten.
    Possum’s 4.9% for WA (first graph) making WA standout from the rest is matched by the WA standout high % of deadheads that pollute that state and couldn’t think their way to a profit if you showed them how while their hero’s (any big timer) are telling them ‘profits will hurt you’. Pyschology, pyschology, pyschology is everything.

  • 33
    Harvey Tarvydas
    Posted June 17, 2010 at 7:27 am | Permalink

    Dr Harvey M Tarvydas

    @Jim because a very large part of the media is like the Gulf of Mexico oil slick – a dangerous polluting toxin negatively affecting human happiness and health (and wealth) in many ways.

  • 34
    David Richards
    Posted July 2, 2010 at 2:31 pm | Permalink

    A lot more profitable than David Koch on Sunrise led people to believe.
    He said the RSPT had been cut from $12B to $3B… when it has only been reduced to $10.5B.

    BTW – Skynews poll – how biased can you be?

    What do you think about Julia Gillard’s mining tax compromise?

    * It is a fair compromise
    * It is just tinkering around the edges
    * It is a rubber stamp on Rudd govt negotiations

    No “I think it is too favourable to the miners” option? It should be 70%.

  • 35
    David Richards
    Posted July 2, 2010 at 4:02 pm | Permalink

    hmmm – seems Kochie may have been the one to get it right, and the other report was wrong.

    Coal and Iron Ore only to be taxed?

    That means copper, silver, lead, zinc, rutile, gold, diamonds, and all the rest are still being plundered by the miners at bargain basement prices.

    Yet people will happily vilify anyone in receipt of government assistance.

    Sense of proportion here people!

    ALP – you must try harder.

  • 36
    NonFiction
    Posted February 2, 2013 at 2:10 pm | Permalink

    Which company is more profitable: BHP, Telstra, Woolies, Coca-Cola Amatil, News or Qantas? Since 1993 BHP is the least profitable, with exception of Qantas. In the midst of the mining boom, BHP is currently only as profitable as Woolworths.

    There is so much opinion on mining profits, not much valid economic analysis. Comparing margins is not the right way to look at profit as it doesn’t consider how much was invested to generate the margin. You need to look at return on invested capital.

    http://costcurve.com.au/mining-profitability-mining-is-no-goldmine-part-2/

6 Trackbacks

  1. ...] This post was mentioned on Twitter by Jason Wilson, Possum Comitatus, Ben Hughes, Ben, Sherd and others. Sherd said: RT @Pollytics: Now on Pollytics: How profitable is mining? http://bit.ly/bHJUct Twice that of the worlds largest 40 mining companies [...

  2. By Super Profits Tax finds support on June 15, 2010 at 5:30 pm

    ...] that ASSERT that Big Dirt will leave Australia if the RSPT becomes law….basically, they won't! How profitable is mining? This is seriously so good it is worth quoting the whole article… I especially love the end [...

  3. ...] Politics, elections and piffle plinking Skip to content « How profitable is mining? [...

  4. ...] Mining directly employs 1.3% of the total Australian workforce, with an estimated multiplier of around 4, so it can claim about 5.2% overall (pie sellers, hairdressers who work in the mines etc). [...

  5. By MIning Democracy | Prosper Australia on July 2, 2010 at 12:05 pm

    ...] It seemed that small business was kept out of the loop, as defined by the decision to stage a debate between Paul Howes, representing the working man, and Clive Palmer, of the mining interests at the National Press Club. This really should have been between small business and mining. Look at how profitable mining is. [...

  6. ...] Mining directly employs 1.3% of the total Australian workforce, with an estimated multiplier of around 4, so it can claim about 5.2% overall (pie sellers, hairdressers who work in the mines etc). [...

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