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Jun 16, 2010


Yesterday we had a quick squiz at the profitability of the Australian mining industry compared to both other domestic industries as well as the world’s largest 40 mining companies. Today, it’s worth a taking a closer look at how mining industry profitability in Australia plays out on the basis of business size as well as a look at the proportion of all mining firms that are actually profitable.

The ABS “Australian Industry” report released last month not only provides data on Sales and Service Revenue and Operating Profit Before Tax (OPBT) for the mining industry as a whole in Australia – with the  ABS dividing the latter by the former to give us its definition of profit margin –  but also provides that data broken down into business size cohorts within the Australian mining industry.

The ABS uses three business size categories here:

  • Small – businesses which employ less than 20 people
  • Medium – business which employ between 20 and 199 people
  • Large – businesses which employ 200 people or more.

If we look at the profit margins of the mining industry broken down by those business sizes, as well as the share of sales and service revenue and share of OPBT  that each cohort experienced, this is what we get:


For some context, we’ll repost the chart from yesterday that compares how other industries are performing on the identical measure of “profit margin”:


As we can see, the small and medium sized mining firms are experiencing profits comparable to other Australian industries (albeit with medium sized firms at the top of the rest of the pack) – but large sized mining firms come in at a massive 46.1% aggregate profit margin.

Keep that in your thought orbit while we take a quick detour. The ABS also reports in that publication the proportion of all firms in a given industry classification that are profitable. If we look at the proportion of profitable firms across Australian industries, this is what we get:


This is where it gets particularly interesting. Only 51.2% of all mining firms were actually profitable in 2008/9 – the lowest of all industry classifications –  even though the industry wide aggregate profit margin for mining was the highest for any industry classification in Australia, coming in at a whopping 37.1%, and where the aggregate profit margin for large mining firms was an even larger 46.1%

So what we are seeing is an odd distribution of profits in the mining industry where a relatively small number of mostly large firms attracted massive profit margins (pushing the industry aggregate up substantially),  while a large number of firms attracted only moderate profits, and a very large number of firms – 46.9% – made a loss.

It would be accurate to say here that a majority of firms – and probably a very large majority of firms at that – would actually be better off under the proposed RSPT than the existing regime.

The design of the RSPT is such that it won’t make any currently profitable firm unprofitable (the larger a firms profit, the larger the slice of that profit the government ultimately takes) – but what it will do as part of its design is make some currently unprofitable firms profitable as a result of not charging firms for exploiting Australian minerals until they are profitable on the one hand, and the way the new Resource Exploration Rebate operates on the other.

Unless the collective management of the entire mining industry were dropped on their head when they were babies and its causing them to operate on the basis of something other than economic self interest in this debate, the hysteria coming from those purporting to represent the mining industry would appear to only be representative of a very, very small collection of mostly large and extraordinarily profitable firms – firms that have pushed the industry aggregate profit margin up to 37.1% and the profit margin of firms employing more than 200 people up to 46.1%, even though an astonishing 46.9% of all mining firms were actually unprofitable at the time!

When Mitch Hooke, Twiggy Forrest, Clive Palmer and the gaggle of usual suspects start whinging about the RSPT – remember exactly who they are representing, because it certainly isn’t the economic interests of the majority of mining firms in Australia.


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34 thoughts on “How profitable is mining – Part 2

  1. Government of the big 3 miners, by the big 3 miners, for the big 3 miners « An Onymous Lefty

    […] For the record, these were the profit margins by Australian industry last year: […]

  2. Shane

    Your analysis reveals the obvious fact that companies actually mining (as opposed to exploring) make money, and those without mines are not profitable (because they are looking for a resource to mine)

    Even a very small mining operation in any of the major commodities (nickel, gold, iron ore, coal, copper etc) will likely employ in excess of 100 people. Although the ABS classifies more than 200 people as “large”, the reality is that practically any decent sized mining operation will likely have more than 200 employees. They would certainly be well into the ABS medium category. All the ABS data does is split the companies into those who having mining operations (large, medium) and those that don’t (Small, medium). The guys with less than 200 employees will be looking (or exploring) for new deposits or seeking to develop a found deposit which is not yet in production.

    Calling the sector “mining” is misleading, as it implies all the companies in it are actually “mining”, eg. digging stuff up for sale. – “resources sector” would be more accurate, as it encompasses those in the small end looking for new deposits to mine in the future.

    If you want to know what the small end of the sector or the somehow “silent majority” of mining companies think about the RSPT, go and look at their website –


    “The Association of Mining and Exploration Companies (AMEC) is the peak national body representing hundreds of mid tier mining and junior exploration companies operating throughout Australia, the majority of which are either located or have projects in Western Australia.”

    AMEC is overwhelmingly opposed to the introduction of the RSPT.
    Members have welcomed the concept of a RER as a possible means of increasing exploration expenditure. However, a RER is not acceptable if it is coupled with the introduction of a RSPT.

    AMEC has long advocated a Flow Through Shares (FTS) scheme as a priority policy initiative and believes this is a more beneficial mechanism in attracting exploration investment and would increase exploration expenditure in Australia.

  3. Alex H

    I think there is a bit too much unwarranted fear floating around about the miners abandoning Australia. The resources are immobile. If they slow down the rate of exploiting the reserves, it just means that the reserves will still be there for future generations to benefit from, almost certainly at a higher benefit given that the other gloabal resources have been used in the meantime. It’s not really a terrible downside as I see it. Are we that scared of leaving some stuff for our grandkids?

    As to cancelled projects currently, I don’t think there will be any accurate data in a year when the govt is trying to put up this RSPT and the industry is coming out all guns blazing to stop it. In their shoes I would certainly be trying to paint a picture to the public that they are stopping investment. So we should expect announcements of investments cancelled which might have been cancelled anyway or were going to go on the backburner which will be attributed to the prospect of the RSPT

  4. Kit


    You are right about the miner’s trepidation on new exploration, and this is what’s going to politically backfire on the Coalition. The Coalition (and many commentators) have mistaken that trepidation and the miner’s negotiation bluster as a real, long-term structural calamity for the sector. The miners would, of course, prefer the tax gone and that’s their short-term strategy, but they fully understand that certainty is more important in the medium-term.

    When the miners realise that the tax is a reality they’ll attend to the detail to get the best outcome they can. When that deal is done, the Coalition and many commentators on this issue (i.e. Business Spectator) will look very bad indeed.

  5. biv

    Just read the following at the sister site of Crikey


    However 18+ months ago, BHP sacked their whole team that were working on the Olympic Dam expansion. Say’s a lot about their commitment to the project, given this was well before any announcements or leaks from the henry review let alone Rudd/Swan announcement of the RSPT.

  6. iainm

    Oliver – Equitability is a lot harder to determine! Providing Governments acknowledge the risks they’re taking on our behalf and plan accordingly (which I grant is something of a fantasy) then I see no problem with it. It’s a better arrangement than we’d get as ordinary shareholders since we get all our share of income returned as cash, rather than having dividends determined by the company. So by that measure, yeah, I think it is very equitable.

    Mark – you may be right with your implicit assertion that we are already seeing a drop in exploration, but I have a niggling feeling in the back of my mind that some of what we’re seeing from the miners in terms of “suspended” investment is simpler than all of that. Without draft legislation to tell them, and with confusion over whether/how the tax is retrospective, it is unclear to miners whether investment made now qualifies for the 40% subsidy/guarantee. Easiest way to fix that? Delay it until you get a definite answer …

  7. Oliver Townshend

    iainm – very pretty 40% rate coming and going, a bit like a 10% GST on everything (which we didn’t get). It’s economically efficient, but is it equitable? Do we want to subsidize miners? Do we need to?

  8. Mark Duffett

    do you really think that investors are going to turn away from mining exploration

    Not away from mineral exploration in general, just mineral exploration in Australia.

    …free up some high-risk capital for something a bit more constructive ¬– such as something that will help the world deal with the energy crisis.

    Like uranium exploration in Canada and Africa?

    the new arrangements will stimulate exploration

    Ultimately we’ll see about that. But I feel fairly safe in asserting that this hypothesis does not accord with present observable reality.

  9. zoomster

    Poss dear

    I know you’re a busy person, but I was wondering if you could find some time to do some of your pretty graphs to compare how past PMs and their parties have done in their first term.

    Is there enough data about for that?

  10. Gusface


    again a great post

    why cant the MSM publish this data


  11. iainm

    You can’t separate the subsidy from the tax – together they constitute the Government taking a 40% stake in the venture. So the subsidy – of itself – isn’t designed to correct any market failure, but it makes the whole tax regime “balance” so that it doesn’t distort investment decisions. It is economically efficient, because it means that the investment decisions made will be the same as what they were if there were no tax at all (unlike royalties).

    It doesn’t matter if “bad explorers” know they can get almost half their money back. They still will have lost 60% of it, so why would they undertake exploration if they didn’t think they’d find something? Sure, explorers might need to be “a little less sure” of hitting pay-dirt than they currently are, but that’s precisely why the new arrangements will stimulate exploration – because the Government bears some of their risk, and correspondingly takes some of their profits.

  12. Oliver Townshend

    I don’t see the problem with mining running at a loss. Its being the structure of the industry for over a hundred years. People (Speculators) invest their money knowing that the explorers will run at a loss, and they load it up with capital (on call) and no liabilities to speak of. This gets run down until either they (1) go broke or (2) find something and attempt to make themselves into a mine.

    So while the new Tax might subsidize them, this is fixing something that isn’t broken. There is no market failure. Mining raises the capital it needs. You can’t justify the RSPT on the grounds of subsidy, because its unnecessary. And indeed, a subsidy might overstimulate bad explorers who know they can get almost half their money back.

  13. Possum Comitatus

    Mark, the rebate operates for companies in a tax loss position such that for around every 139 bucks they spend on exploration, they only have to pay for $100 of it and receive a $39 rebate.

    That is a substantial cash subsidisation of the exploration game that only last year they could only dream about.

  14. Kit

    Don’t worry Mark, someone somewhere will get the rebate – it really won’t go to waste.

    [“Through the RSPT, the Government will effectively make a contribution of 40 per cent to the costs of the project outlaid by the entity. An entity will be able to access the contribution by deducting the costs outlaid on a project from: the project’s RSPT income; from income of another project owned by the entity or owned by another entity of the same wholly owned company group.

    Any remaining costs will be carried forward to be deducted as a loss against future income or be refundable at the 40 per cent rate on a reasonable basis, such as when an entity exits the resource sector. The basis for refundability will be determined through consultation with stakeholders.” (Government Fact Sheet)
    Oh yea, except of course all those companies that don’t make a profit, ever anywhere.

    The point is, the rebate will be available and investors will have access to it and will factor that concept into the decision to invest. This is the key point; the risk is reduced concomitantly with the gain. The reduction in very high profits might be annoying for some investors looking at Possum’s graph and licking their collective lips, but do you really think that investors are going to turn away from mining exploration because the party’s quietened down somewhat.

    I won’t even mention that it just might free up some high-risk capital for something a bit more constructive ¬– such as something that will help the world deal with the energy crisis.

  15. Mark Duffett

    it’s more complicated than that because of the costs of exploration are significantly reduced at the firm level

    Not really, as the exploration firms have said in dismissing the value of the proposed rebate. I think you still fail to understand the all or nothing nature of the exploration game. Almost by definition, any economic discoveries made will be realised as ‘super’ profits. Correspondingly, exploration costs as a proportion of the value of discoveries made are very low (development costs are much higher, if the project proceeds to that stage), hence the value of the rebate is negligible. But if (as is more often the case) you don’t find anything economic, you don’t make any revenue, hence you don’t pay any tax, hence the value of the rebate is zero (but you’ve still done your investment dough).

  16. Kit

    So, Mark, stratospheric returns may be less but risk is also reduced.

    The “key” to this debate then is not whether the tax will halt exploration, it will not. The key is, in fact, do we as a society prefer a structure that encourages high-risk/high-return investment to the benefit of … well, high-risk investors, or should we tailor policy towards medium-risk/medium-return investment which benefits medium-risk investors (e.g. superannuation funds) and, through tax, society more broadly – well let me think for a second.

  17. Possum Comitatus

    Actually mark, it’s more complicated than that because of the costs of exploration are significantly reduced at the firm level as a result of the exploration rebate that is part of the RSPT.

  18. Mark Duffett

    Possum presents a key to the RSPT debate in that last graph, but then draws completely the wrong conclusion. As with all subsequent comments, he ignores the exploration dimension of the mining industry. I’d wager that most of those ~50% of mining firms that failed to make a profit were in fact primarily exploration outfits. Most get little or no revenue from actual mining. They are also without exception small to medium size by the definition above (mostly small), which probably goes a long way to explain (by average-dragging) the extent to which profit margin shrinks with company size as seen in the table above.

    So, where do these small exploration firms get their income from, if not directly from mining? Investors. Investors who know very well (if they have any clue at all, i.e. have seen data like Possum’s graph) how few mining companies actually make a profit. That’s why they are seen as high-risk investments. And that, in turn, is why such investments won’t happen unless there is the prospect of high rewards. As such, Possum’s arguments about small-medium firms being better off under the RSPT than the current regime are nonsense.

    People can spout rhetoric about how mineral resources are owned by all Australians all they like, but the resources might as well not exist if they’re not identified.

  19. Possum Comitatus

    Alex, you’ve raised an interesting point.

    If it comes to the point of these resources being close to exhausted at some time in the future, should Australia plan to keep some form of strategic reserves?

  20. Alex H

    Thanks Mark, I was speaking from ignorance and I have now bothered to look up the relevent regs for WA…
    As you state, the system is pretty similar to what I described above, except that the actual regs are a bit more sensible 😉

    This WA government site states that mineral and petroleum industry was worth $61b in 2009 and $73.1b in 2008 and collected $2.5b in royalties in 2009. Given the profit margin which the industry is operating at, and the strength of the industry evidenced by its rate of growth it seems that the industry could bear some additional contribution to public coffers.

    This is reasonable for the mining industry where it is not for other industries because fundamentally the mining industry is using a resource belonging to the country and therefore the country is perfectly entitled to extract as much value out of the resource as possible. Mining taxation policy should be to gain as much revenue as possible at a rate which delivers a market force to keep production at a desirable level.

    Any takers on the question of how much of a finite resource should we dig up each year?

  21. Mark Duffett

    A better approach would be to directly tax the amount of resource used…

    Er, Alex H, you do realise that this proposal in your second paragraph is essentially a description of the status quo, don’t you? What you outline is pretty much how royalties currently work.

  22. Alex H

    Getting good value for Australia from Australian minerals is a good idea and RSPT is a better way of doing it than the status quo. The statement in the article “… not charging firms for exploiting Australian minerals until they are profitable…” concerns me a bit in that it sort of allows for companies to inefficiently use Australia’s resources. It penalises companies for making money rather than using the resource. If it is profit after a bunch of things like dividends etc it is also ripe for avoidance by structuring company finances differently.

    A better approach would be to directly tax the amount of resource used. If a company can make more money with the same amount of resource, good on them, they deserve more reward for operating efficiently, there will still be company tax anyway. Ideally the direct resource tax would be pegged to the market value of the commodity so that when the market for a resource booms, Australia gets an increase in the value derived from the resource. The company using the resource would still get benefit from the boom as their margin would also increase.

    On another point, Shepherd Marilyn raises a relevent example in Nauru. Nauru had a finite amount of a valuable resource, exploited it in a short space of time and is now a mess with no more resource to contribute to the economy. As Possum points out, all of these minerals are finite. Therefore we should consider the simple question: What percentage of a resource should we mine each year? Peak resource concept (aka Peak Oil) says that use of a finite resource must peak and start to decline at some point. If we keep increasing the rate at which we use resource, we make the crunch when we start to run out a lot harder.

    Should we mine resources at a rate where they run out in 50yrs, 100yrs, 500yrs etc? Consumption at a considered rate now would be a good idea if we want our descendents to enjoy the benefits of mineral wealth as we currently do. Not to mention that the resources will be worth more down the track as demand increases and supplies dwindle.

    Where is the debate on what rate we should be shipping off our resources?

  23. shepherdmarilyn

    After years of lies and demonisation about an apology to the stolen generations Rudd did it anyway, that is not the act of a coward.
    After years of lies and obfuscation he ratified Kyoto, which is still binding no matter how much we pretend we care that he dumped the bad ETS.
    He has increased pensions from 25% to 27.7% of the AMWE and no-one reported it.

    It seems to me that they have a good story to tell but the media will no write it.

    It’s as if Rudd shot all their mums.

    And if one more of the jerks uses that quote “greatest moral dilemma of a generation” to beat him up without thinking outside their own tiny little bubble brains I will gut them.

    After that statement, which he still believes, the world collapsed – anyone watch 4 Corners this week? That is what Rudd and the government had to deal with.

    No credit at all is given, we whinge about a frigging ETS which has become nothing but a navel gazing indulgence while people are scrounging for food and clean water all over the world, while millions are being made homeless and jobless we whine about a building program that is actually well monitored and controlled and is providing great benefits.

    Why don’t any of the media publish any of the good results that are easily found at this site?


    All we get is this whining about a bloody canteen.

    The mining industry is a sick joke and what we have to ask ourselves is this – do we want everything mined and mined until we live in nothing but a polluted quarry resembling Nauru?

  24. David Richards

    jen – I hope Rudd does stick to his guns, apart from maybe a bit of minor tinkering with the cutin point, and a few things as Poss suggests for projects in their infancy. Other than that, the bastards in the MCA have been ripping off the Australian citizenry and have to pay more.

    On this, I support Rudd 10,000%.

  25. jenauthor

    [Ultimately, the mining companies and executives are bargaining with the leverage that they have in the public arena. They have every right to do this and it is good that they do. I feel they ultimately will be successful due to the inherent weakness of Kevin Rudd as a leader. I would fear a situation where a truly anti business government arises in Australia and the business community were for some reason unable to get into gear with robust public discussion. The Australian people would suffer tremendously]

    I disagree with you rationalist. I don’t think Rudd will back down (everyone seems to think Rudd is weak but I venture tht this idea has been a media construct that has fooled many, even those who have a modicum of intelligence.

    This tax is exactly the opposite to what you say — it is basically pro-business as they, as a whole, get the most out of it. i.e tax reduction, support for their super, infrastructure assistance.

    In personal income tax, those who earn ridiculous amounts of money are expected to pay more tax.This is no different. I pay about 40% tax, but I don’t get the kind of offsets that these mining companies do. I find that offensive when they are reaping the riches from something I have partial ownership of, and then they distribute a proportion of their profits overseas.

  26. Winston

    I notice that the ABS Industry Report doesn’t include the finance and insurance sector.

  27. mondo rock

    I feel they ultimately will be successful due to the inherent weakness of Kevin Rudd as a leader.

    I have the same view.

  28. rationalist

    Ultimately, the mining companies and executives are bargaining with the leverage that they have in the public arena. They have every right to do this and it is good that they do. I feel they ultimately will be successful due to the inherent weakness of Kevin Rudd as a leader. I would fear a situation where a truly anti business government arises in Australia and the business community were for some reason unable to get into gear with robust public discussion. The Australian people would suffer tremendously.

    Also, I feel it is foolish to justify a taxation regime simply because companies will not go offshore. That is not an appropriate way to think about tax policy. It is not the role for government to develop onerous taxes for the sake of being onerous with a justification that companies will not go offshore according to computer models or statistics.

    I feel that a resource rent tax is good however the kick in % should be more reasonable. The rate should be appropriate to ensure that taxation revenues are competitive with other nations and finally the government should not adopt any of the risk of mining projects through the tax system.

  29. Kit

    Thanks again, Poss. Your nocturnal escapades have again created a cacophony of commonsense. I just wish that the mainstream media would remove its earplugs.

  30. Possum Comitatus

    No doubt rationalist! 😛

    Some of it has been flagged from the very beginning, especially on low value stuff like quarries and fertiliser inputs. It’s just the windmill tilters at The Oz that seem to have the memory of a goldfish on these things.

    I still reckon there needs to be some sort of transitional mechanism for projects that were developed under a set of assumptions based on the old regime and which haven’t yet obtained returns large enough to justify the original investment – even if those projects are currently highly (or dare we say) super profitable.

    The burden sharing of the governments “promise to pay” where the companies effectively carry all of the burden on their balance sheet is still a bit of an issue to my mind as well.

  31. Tweets that mention How profitable is mining – Part 2 – Pollytics -- Topsy.com

    […] This post was mentioned on Twitter by Possum Comitatus, Christopher Owen, Trevor Kerr, Matt Cowgill, Michael Rose and others. Michael Rose said: RT @Pollytics: How Profitable is Mining – Part 2 http://bit.ly/9jNrdq Mining industry profits by business size and unrepresentative hysteria […]

  32. rationalist

    Rudd will still water the tax down, funny isn’t it :).

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