Travel Report

Tom Kenyon Member for Newland

Canada 29/2/08 - 9/3/08

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2 6 JUN 2008 HOUSE OF A5SEM84,Y

STUDY TOUR REPORT LODGED

/ USPEAKERU

HC)USE OF ASSEMBLY

Obiectives :

The objective of the trip was to represent the Minister for Mineral Resources Development at the Prospectors and Developers Conference (PDAC) in Toronto, Canada as well as to further my knowledge of the current state of the mining industry and meet with various industry bodies.

Discussion :

PDAC is the single largest mining conference in the world. This year it was held at a new venue to accommodate the increased number of delegates (over 20,000). It consists of booths and displays by prospectors, exploration companies, mining companies, service providers, suppliers as well as commodity price forecasts and investment and government policy presentations .

It is fair to say that there was a very high level of confidence in the industry at the time of the conference . At the same time, the credit crunch was having a certain impact on the industry . Mainly companies are starting to focus on assets they have rather than acquiring more or doing more deals and are starting to conserve cash - becoming a little more conservative in their outlook . This is especially true for exploration companies without producing mines .

It is possible that there will be a round of industry consolidation within the next year or two, particularly among junior explorers as cash reserves are depleted and it becomes more difficult to raise money.

On the other had, companies with producing assets have strong cash flow and are in a good position to wait out the credit crisis . On the whole there is still a reasonable amount of liquidity available for resources projects although it is not as easy as it was to obtain finance for projects .

It is in this environment of tightening credit that it is important for Australia (as well as the various states) to provide a regulatory environment that is as competitive as possible . The states need to introduce programs similar to the South Australian Plan for Accelerating Exploration (PACE) initiative . Some are such as Queensland and the Northern Territory . The single greatest contribution that the Federal government can make is to introduce a "flow through share" scheme (FTS) .

Essentially this involves exploration companies passing exploration expenses to shareholders as tax deductions . Because exploration companies have no income, when they spend money on expenses that would be tax deductible for a company with income, they build up tax credits . If they find something and develop a mine they can use these tax credits to reduce their tax .

However, most exploration companies don't find anything and so their credits disappear into the ether . An FTS scheme allows these credits to be passed onto shareholders (almost like a franking credit) . This makes investment in exploration companies more attractive to investors and makes it easier to raise money .

These initiatives would stretch company cash further and make it easier to raise money. The Canadian experience has been that the FTS scheme reduces the severity of economic downturns and accelerates the upswing after a downturn as well as increasing exploration spending overall .

While on the subject of raising cash, I do not believe that it is sustainable for exploration companies to continue to float on the share market whilst raising such small amounts of money. Typically, an Australian resources company float raises between three and five million dollars . This is not enough to sustain a serious exploration drilling campaign and could leave exploration companies stranded and vulnerable to takeovers during a credit squeeze such as we are experiencing now or in the event of another industry downturn .

Canadian companies on the other hand (and greatly assisted by the Canadian FTS) routinely raise between ten and twenty million dollars at a float.

The South Australian Government attends PDAC with a substantial delegation. Minister Holloway has attended on a number of occasions as well as the Executive Director of Minerals and Petroleum and the Director of Minerals and other PIRSA staff. They collaborate with the other states and the NT in a "Team Australia" approach .

Also important is the work of the South Australian Minerals and Petroleum Experts Group (SAMPEG). This group was represented at PDAC by Mr Derek Carter who needs to be heartily thanked for his efforts on behalf of the state both at PDAC and myriad other investment conferences . His efforts over the years have contributed substantially to the success of the PACE program.

So far this approach seems to have worked well however, the display is tired and needs a revamp. PDAC is now so big, with so many delegates and displays that it is important to have some sort of gimmick to attract visitors to the stand. One idea may be to model the stand as an "outback pub" with a genuine bar in the middle . This may be able to attract sponsorship from Foster's or another brewer . Regardless of the approach, the issue requires some thought, particularly from the Federal department .

While the stand is the centre of PDAC operations, I found that it was hugely important to walk around the booths and displays to introduce ourselves and attempt to convince the companies to come to South Australia. The Executive Director and I spent a great deal of time doing this and were quite successful . Five companies agreed to visit South Australia for meetings and briefings with the Minister and PIRSA. It is reasonable to expect that any company that does decide to explore in South Australia will spend between one and two million dollars . Potentially the time spent walking the booths at PDAC could return up to $10 million of direct exploration expenditure in South Australia .

A key part of the South Australian program at PDAC is the South Australian dinner that is held on the Saturday night before the conference begins. I was able to attend and speak at this dinner . A number of companies are targeted and executives from them are invited. The event uses South Australian wine as part of the selling point. The Australian High Commission must be thanked for their help over a number of

years in getting this wine to Toronto . It is important that this dinner continues to be used effectively . The key to this is the guest list. A lot of thought and organisation needs to be given to this event, well in advance of the date . I would suggest that the list is also broadened to include key Canadian stockbrokers, investors, bankers and financiers . The ideal way to achieve this would be to have a state representative based in Canada for a number of months of the year, if not permanently . Their task would be to gather intelligence and compile a list of high quality invitees .

As part of its activities at PDAC, Adelaide based stockbroking firm Taylor Collison holds an investment showcase in Toronto . I was able to assist with this event which was an excellent presentation of investment opportunities in many South Australian companies including Southern Gold, Minotaur, Terramin and Uranium Equities .

This leads to my next observation . Given the credit outlook for the next few years it is probably time for the PACE program and PIRSA to look at being more focussed on assisting companies in their efforts to raise cash. This could involve a more detailed program to target stockbrokers, analysts, investors and financiers here in Australia, especially in Sydney, Melbourne and Perth. The Rugby Sevens tournament could be particularly useful in this regard, especially when targeting investors from Brisbane and Sydney. I suggest presentations, lunches and events in these cities targeting these people .

It should be noted that sometimes lunches and dinners, effective as they have been in the past, are no longer necessarily the most effective way to attract the interest of stockbrokers and investors . It may be that we need to expand the range of activities that we offer . For instance perhaps we could offer wine tasting nights (with our winemakers), team and outdoor activities such as paintball or abseiling, harbour boat tours or rally driving courses might prove to be a better hook in attracting our target audience who I am told are becoming more and more jaded with dinners, lunches and cocktail parties, than the traditional methods .

Adelaide based stockbrokers and analysts have told me that it would be useful for the government to be more involved in this area especially in concert with the industry .

During my time at the conference, I was informed that the Japanese conglomerate Mitsubishi was interested in investing in a number of smaller Western Australian magnetite deposits. An opportunity exists for South Australia to target Mitsubishi in order to attract them to invest in a number of emerging South Australian iron ore projects . The ideal venue to do this is at the Uranium Conference in Perth held in July 2008 . Mitsubishi and the Japanese metals company JOGMEC will be sending a substantial delegation to that conference . They should also be invited to a South Australian Dinner .

Other areas where the state government might be able to play a role include access to The Woomera Prohibited Area and a streamlining of some areas of regulation - particularly with regard to Aboriginal Heritage issues and Native Vegetation regulations .

Also while at the conference, the Executive Director of Minerals and Energy, Paul Heithersay, the Director of Minerals Ted Tyne and I met with the equivalent public

service officer from the Canadian Province of Saskatchewan and we finalised details of an exchange program between the two geological surveys .

This will involve geologists from the surveys from each survey travelling to the other state/province and spending time working with the other survey . There are many geological similarities between the two provinces, not the least of which is the abundance of Uranium . This will broaden the experience of both the geological surveys and assist with the development of the mining industry in both jurisdictions .

Whilst in Canada, I was able to meet with Sheila Stenzel of BC Minerals which is an industry body based in Vancouver, British Columbia . Ms Stenzel is the Director of the Mineral Resources Education Program of British Columbia. The program is funded largely by contributions from industry but receives an enormous amount of support and co-operation from the BC Department of Education . The program was initiated by a single teacher and has grown into a substantial program aimed at increasing the number of children entering the mining profession as they graduate from their studies . There is a special emphasis on science and Maths.

I attached the most recent brochure available at the time of my visit to BC Minerals . I would suggest that two or three interested teachers be sent to British Columbia for a substantial amount of time (perhaps 3-6 months) to work with BC Minerals and the BC Department of Education to develop a curriculum that can be applied here in South Australia .

The British Columbian program is seeing a significant increase in the number or students studying maths and science and going onto further study in fields such as geology and mining engineering . I thank Ms Stenzel for meeting me at such short notice as well as her generosity with her time .

The city of Vancouver is undertaking a substantial number of infrastructure projects . One of note is known as the Canada Line . At a length of nearly 19 km, the Canada Line will be an automated rail-based rapid transit service connecting Vancouver with central Richmond and the Vancouver Airport -- linking growing residential, business, health care, educational and other centres in the region -- and adding transit capacity equivalent to 10 major road lanes . The Canada Line will connect with existing rapid transit lines at Waterfront Station and major east-west transit services, creating an enhanced transit network to serve the region.

I was able to view progress of part of this project in downtown Vancouver (the construction of the tunnel under the city) . It is a remarkable project and it is interesting to note that the City of Vancouver is moving in a similar direction to the State government in terms of the use of light rail for mass transit.

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Figure 2: Project Summary Detail .

Recommendations

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The project involves the construction of tunnel from Waterfront Station and an upgrade to the station . Upon completion, travellers will be able to check-in, check baggage at the station thus saving time upon arrival at the airport and reducing congestion at the check-in counters at the airport .

This may be an option in future as the public transport system in Adelaide develops .

1 . The South Australian Government should continue to be represented at PDAC, particularly at the ministerial level .

2 .

PIRSA minerals focus a large effort on ensuring that its invitation list for its PDAC South Australia dinner continues to remain high .

3 . The South Australian government should work with other states and the federal government to update and refurbish the Team Australia booth .

4 . The State Government appoint a representative in Canada (probably Toronto) . The main focus of this representative should be to increase the awareness of investment opportunities in South Australia for Canadian investors as well as to help South Australian companies make contacts in the finance sector in Canada. A second task might be to promote South Australian wines and to lobby the Canadian provincial governments to change their laws regarding the wholesaling arrangements for alcohol .

5 . The Federal Government introduce a Flow Through Share (FTS) scheme as soon as possible .

6 . Mining companies listing on the stock exchange should attempt to raise larger amounts at their floats . These amounts should be more than $10 million rather than the typical $4-5 million .

7 .

The State government should investigate ways in which it might assist the mining industry access capital, both through institutional investors and retail investors .

8 . The State government should encourage both JOGMEC and Mitsubishi to invest in South Australia .

9 . The South Australian government should review the Aboriginal Heritage Act should be reviewed and the government should review the operations of the Native Vegetation Act to ensure that these process are as streamlined as possible .

10 . Two or three interested teachers should be sent to British Columbia for a substantial amount of time (perhaps 3-6 months) to work with BC Minerals and the BC Department of Education to develop a curriculum that can be applied here in South Australia .

Finally, I would like to thank Parliamentary staff for their assistance with travel arrangements ; Minister Holloway's office ; Mr Paul Heithersay, Executive Director of PIRSA Minerals and Energy Division ; Mr Ted Tyne, Director of Minerals ; Mr Derek Carter, Member of SAMPEG; Mr Andrew Shearer, Analyst, Taylor Collison and Ms Tania Williamson of PIRSA.

Tom Kenyon MP JP Member for Newland