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Mining for the Asian Century – Melbourne Mining Club address

Chief Executive Officer Andrew Michelmore addressed the Melbourne Mining Club on 28 August 2012.

Mr Andrew Michelmore
Executive Director Minmetals Resources Limited

Speech: Mining for the Asian Century

“Thanks for that introduction, although I’d like to note that I’m here as the CEO of MMG Limited today. Yesterday afternoon our shareholders voted to change our company’s name from Minmetals Resources Limited to MMG Limited. While it is only a name change, it is significant to us as it aligns our operating assets and registered company name.

I’d like to extend a welcome to Madame Liu Yu, representing the Consulate General of the People’s Republic of China, His Excellency Mr Somdy Duangdy, Minister for Planning & Investment from the Lao People’s Democratic Republic and Sir Arvi Parbo, Patron of the Melbourne Mining Club.

As a member of the Melbourne Mining Club speaker alumni – it’s an established practice to acknowledge the contribution of mining to this wonderful hall in which we sit.

Well that first rush to Australia’s mineral riches also represented the first great influx of Chinese miners – at its peak representing 3.3% of the Australian population.

However, that peak was short lived.

What we are witnessing currently is a very different relationship between mining and Asia that promises to be more enduring and far reaching than anything that has come before.

But first, a little context.

Another Asian Century

The economic rise of Japan, China, India – and the swiftly developing nations of South East Asia – is a secular shift in global economic and political balance of power.

What I want to talk about today has nothing to do with short term cyclical trends but long term demand.

But it is not without precedent.

This slide shows an overview of global growth over the last 2,000 years, although I’ll ask you not to dwell on the detail and accuracy of what is some ancient data and instead focus on the green, purple, orange and pale yellow sections of the chart. What this demonstrates is that Asia has been the dominant economic powerhouse for all but the last 200 years.

So perhaps calling this century the ‘Asian Century’ is a little redundant.

Personally, I welcome the focus. It’s timely for a nation like Australia to have a very hard look at our economic, policy and investment framework. It’s the right time to plan for the future and realise the opportunities that national endowment and geography have delivered us. 

And the current statistics are humbling.

  • Forty per cent of global economic activity is now in Asia and by the middle of the century that is tipped to top 50%.
  • In the past twenty years, China and India have almost tripled their share of the global economy, increasing their absolute size by nine times. 
  • Half the world’s population now lives in Asia – and around 60% of the world’s population live in the same time zone as Australia’s west coast. 
  • And looking forward, Asia is forecast to generate around 80% of growth in the next 10 years.

Australian exports of iron ore, coal, petroleum and metal concentrates to China topped $50 billion last year.
And whether you are watching a line of bulk tankers at a Queensland or WA port or a regional city rise in western China, the sheer scale of activity is extraordinary.

Once again, Australia has much to be thankful for in this new mineral rush. As our traditional trading partners in Europe and the US weather the storms of financial slowdown, we have retained a level of economic activity that is the envy of the developed world.

Assessing the balance

The same dynamics that are occupying the minds of Ken Henry and the Asian Century working group, should also be exercising this room.

As an industry, we have willingly ridden the boom in commodity prices over the last eight years or so – though some of us took a few knocks during the 2008-2009 financial crisis.

We have also collectively taken a sharp intake of breath in 2012 as prices and demand have softened.
This is not an industry that has ever been scared of taking a risk, but it has struggled to match its investment and production cycles to meet demand shifts.

This is also an industry that has survived, relied and thrived on foreign investment.

But the traditional models of production, manufacturing and investment flows and commodity cycles are being turned on their head.

In this Asian century, it is no longer the developing nations who provide raw materials for the developed world to transform into sophisticated manufactured products – it is precisely the opposite.

It’s the developed nations of Europe and the US – and even Australia – whose manufacturing heart is being hollowed out by high quality and elaborately transformed products from Asia.

Australia, Canada and South Africa are reliant on natural resource exports in a way that our economies have not experienced since European colonisation. Only this time the driving forces are decidedly different. 

We are dependent on the rapidly expanding middle classes of Indonesia, China, India and Korea to maintain our standard of living. Our exports of resources and services have become our currency in this new manufacturing power balance.

As our traditional sources of foreign direct investment flows contract, we are also having to shift our thinking on capital and risk. As a nation with a rich resource endowment but a relatively small population and a traditionally low savings rate we have never generated a saving pool that can sustain the investment our capital intensive industry requires.

As an illustration, the pundits are predicting that the emerging and developing world could well be a net foreign investor – while developed countries become net foreign borrowers – as early as 2025.

As an industry, we must look to non-traditional investment sources and that brings with it an imperative to understand a fundamentally different investment culture. 

Asia knows mining

And that means bursting a few myths.

I find it a little curious that as an Anglo Saxon mining veteran with a career dominated by Australian, US and European experiences, I have become a commentator on Asia.

I could flatter myself and suggest it was the quality of my insights.

What is closer to the truth is that I am in a unique position as a businessman standing firmly between the rise of Chinese capital and the operation of a predominantly western mining sector.

And, to the chagrin of my communications team, I’m also someone who says things pretty much as I see them.
So let me turn to a few observations regarding the region that is a whole lot more than just a major customer.

Firstly, Asia understands mining.

When the Sepon mine in Laos, now part of MMG, was in development, early digging uncovered ancient wooden structures, initially thought to be fish traps. After some diligent investigation and further heritage conservation, it emerged that this was some quite sophisticated underground mining infrastructure. Most likely it was used for the extraction of copper and gold some 2,000 years ago.

There are similar examples of a long mining tradition to be found across Asia.

Today, Asia has its own swiftly growing, technology led – mining and processing sector. They have complementary expertise to the traditional mining jurisdictions and are adapting technologies to exploit ore bodies that would not be feasible to most of us.

Asia is investing heavily in exploration and rationalising its mining houses, and our major shareholder Minmetals is an example of that. Apart from its investment in MMG Minmetals controls significant natural endowments in a number of minerals and has extensive skills in its management ranks.

Second, it is deeply in our industry’s interest to develop our ‘Asian capability’ to better work with the diverse nations of our North.

What is Asian capability?

Well, it does include language skills – but it is so much more than that.

My Indonesian, Lao and Japanese extends to a couple of words – my Mandarin is terrible. For me, the Asian language ship is one that has unfortunately sailed.

But that doesn’t mean I am not consistently growing my capability to build relationships and business opportunity in Asia.

Working with a majority Chinese shareholder, there are few days that go by where I am not surprised by the commonality of issues between our two business cultures.

Often, we have very different solutions – but that is where the real learning begins.

I implore this room to do more than sit across a negotiating table, or be advised by a western expert to understand the diverse and intriguing Asian mind.

Third, we should acknowledge that we are a sector that owes its existence to foreign direct investment and the free flow of capital.

And while that capital has previously come via western institutional support or the state mining houses of South America – no region has greater capacity to fund our future growth than Asia.

In 2009, when OZ Minerals was forced into a position of having to sell most of its assets in order to deal with a financial crisis forced upon it by the GFC, it was only China Minmetals Corporation who were sufficiently far-seeing to propose a solution. A solution that enabled OZ Minerals to survive and Minmetals to acquire an attractive portfolio of mining assets.

Following that investment, Minmetals has nurtured the management and assets it acquired, listed the company publicly and supported two significant acquisition programs – one unsuccessful in Equinox Minerals and one successful in Anvil Mining.

It has done this while requiring the highest level of governance and management accountability. It has also done so on a purely commercial basis. And, contrary to some of the fears expressed at the time, China still purchases around the same share of the company’s production as it did at acquisition.

I tell the MMG story not to talk our shop but to demonstrate that Asian investment is diverse and complex. There are many other approaches that deserve to be tested in the right place – and that is in the marketplace.

The MMG model is still unique, but I’m fairly sure it will not remain so for long.

My final point is an issue that challenges all of us – regardless of jurisdiction, commodity or operating model. How do we ensure our industry’s contribution to sustainable development is both positive and recognised?

No country, indeed no company, has a mortgage on the right approach to sustainable development. It is an ethos that we have recognised as miners that we must leave an area and a people better for our presence.

From everything I have seen this is a vision that we all share.

How we get there, and how far down the road each company or country is, remains open to debate.
What I have seen, particularly in Laos and China where I have most recent experience, is a concerted commitment to create enduring wealth, and a positive legacy from mining.

In this context, I’m delighted to be chairing the Mineral Council of Australia’s first offshore Sustainable Development Conference in Bangkok in November this year. This conference represents ten years since the agreement of the sustainable development framework that underpins the International Council on Mining and Metals and the MCA’s Enduring Value approach. The region looks to the Australian mining industry to set the standards on sustainability and mining expertise.

To this end, MMG is proud to be supporting Monash University in its efforts to establish a new Mining Engineering School in Australia – and offering Monash post-graduate mining qualifications and research through its Shanghai and Mumbai campuses.

Before I close, I want to briefly refer to MMG as an example of what I believe a miner for the Asian Century might look like. 

In Asia and around the world

Firstly to our Board.

We have a fantastic balance of mining executives, some from our major shareholder and some independent directors with international experience. On top of that, we have a cultural mix that bridges our operating and funding structure.

What strikes me most strongly about our Board and major shareholder is not how different, but how similar it is to global practice.

It is a relationship based on trust and confidence and the support to speak up.

Our leadership team has the delegated authority from its Board to manage day-to-day operations in line with best practice.

As a major metals and minerals company, China Minmetals makes an extraordinary major shareholder
They provide a unique insight into global commodity demand. In an industry where lead times can extend for years, and even decades, China Minmetals brings valued support. This includes a solid financial foundation, balance sheet flexibility, access to Chinese financial institutions and a long-term investment view. We call this patient capital – it expects an appropriate return but is in it for the long game.

As a significant miner and commodity trader, they also bring the benefit of technical skills, a drive for innovation and cross-cultural awareness.

Most importantly, we share a vision for MMG – to create the next generations’ leading diversified minerals and metals company.

While in terms of size and scale we aim to grow the business four to five times in value, the key term within this vision is ‘next generation’. Taking our unique model, we want to build a new mid-tier miner.

The out-cropping, high grade ore bodies in low risk jurisdictions have largely been discovered. They are the easy deposits, capable of generating low cost, high grade mines that some might even say are management proof.
Now, the challenge lies in extracting value from lower grades, developing infrastructure solutions in tougher locations and building open relationships with expectant communities.

We see this challenge as our opportunity. 

Mining can make a real difference to the economic base of a nation – and Australia’s experience over recent years is as good an example of the positive contribution the mining industry can make to an economy as you will ever see.

Our challenge as a next generation miner is to ensure that wherever we mine – the full story is understood.
That each host country understands the broad positive outcomes that a well-managed mining sector can bring.

A belief in progress

And we have to tell that story differently.

As an industry we have been guilty of quoting statistics rather than listening carefully.

We have seen economic outcomes as the only things that matter – but that’s not the whole story.

We have struggled sometimes to understand the under-currents of political and social demands that make us a lightning rod for community unrest.

I want to close on something that, if you’ll permit me the indulgence, sums up our vision for mining in the Asian century.

It’s a positioning we believe reflects our view for an Asian Century.

We’ve just finished an exercise at MMG, asking our employees to help us define the reason for doing what we do and the result was inspiring.

After 12 months and a lot of discussion at all our operations and offices, we’ve decided – that is our workforce not the CEO – that our company will stand for progress in many ways:

  • The everyday progress of each individual contributing to our vision;  
  • The personal progress of every employee;
  • The progress for our communities that provides real and lasting benefits; and
  • The progress for our society – as the world develops and evolves using the metals we produce.

Our progress, they told us, is not just in our day-to day achievements, relationships and goals, but progress in the widest sense. My challenge, and that of my management team, is to harness our employees’ belief and the unique opportunities this Asian Century presents – to mine for the progress and advancement of all.

Thank you.”