jamie freeman - balance resources - infrastructure development – where to start?

Infrastructure Development Where to start?

21 August 2014

www.balanceresources.com.au

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Overview

1. About Balance Resources

2. Challenges for infrastructure development – miners

3. Challenges for infrastructure development – infrastructure providers

4. Necessity for collaboration

5. Role of Government

6. How much regulation should we have?

7. Case Study – Wiggins Island Coal Export Terminal (WICET)

8. NT Infrastructure Status

9. The Infrastructure Working Group

Balance Resources

Balance Resources is a highly respected professional advisory firm providing specialist support and advice to the resources and infrastructure sectors, predominately related to the import and export of bulk commodities.

We have a unique blend of strategic, commercial, regulatory, technical and operational capabilities, as well as an unrivalled network of contacts and relationships throughout the infrastructure and resources industries.

Together, the above reflects a distinctive ability for Balance to analyse, lead and deliver optimal, and

integrated, solutions to our clients.

Assess Align Decide Implement Sustain

Where is Balance?

BRISBANE PERTH

DARWIN

TORONTO SEOUL

Who are our clients?

Three major client bases within the resources and infrastructure sectors, with a focus on bulk commodities, including coal, iron ore, metals and minerals:

Resource Companies

• Access to infrastructure (rail, port, water, power) • Mine development feasibility, construction and operation • Project & risk management • Value engineering & procurement

Infrastructure Companies (incl. Government agencies)

• Project structuring and feasibility • Demand analysis & customer alignment • Project & risk management

Domestic and International Investors

• Identification, analysis and due diligence on resource and infrastructure opportunities

Why is Balance different?

Balance is a boutique consultancy which offers services unique to the resources industry

No other consulting firm offers what we do:

• Specialised focus on complex multi-owner and multi-user supply chains within the resources sector

• Knowledge of the resources and infrastructure sectors derived from working in, and not on these businesses

• An unrivalled networks of contacts enabling us to connect with the right people to achieve the right outcomes

Balance is not an accounting, engineering or management consulting firm with side-services in infrastructure - infrastructure and resources are the basis of our business

Challenges for Infrastructure

Development - Miners

Drilling / Concept

Prefeasibility Study

Feasibility Study

APPROVALS

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Construction

Operations

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The ‘Good Old Days’: • Easier to move from explorer to producer • Timely approvals • Infrastructure commitment made upon completion of Feasibility Studies • A reasonable degree of certainty regarding infrastructure – strategy, pricing and capacity

Challenges for Infrastructure

Development - Miners

Concept Study

Prefeasibility Study

Feasibility Study

Fin

anci

al C

lose

Construction

APPROVALS Operations

Co

mm

it t

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Infr

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The New Reality:

• Complex and onerous

• Longer environmental approvals

• Explorers must commit to infrastructure before proving the mine is feasible

• Little certainty regarding infrastructure – strategy, pricing and capacity

Key Challenges for

Infrastructure Providers

• Access to funding • Proving supporting projects are viable (JORC resources / feasibility

studies) – difficult with multiple parties at different stages of development

• Government and other approvals • Contractual misalignment (project / rail / port) • Competing interests of multiple parties • Coordination of work streams

Strategic (critical and dynamic) Technical Commercial Government / Regulatory Funding

Key Challenges for

Infrastructure Development

Overall challenge for multi-user developments is the “Chicken & Egg” nature of infrastructure:

A mining project is not “bankable” without an economic infrastructure solution

BUT … How can funding be secured for an infrastructure solution

before proving the mining project is “bankable”?

No single or easy answer, but the solution will be when all work streams are past “the point of no return”

Necessity of Collaboration

Major infrastructure developments and expansions require a high level of cooperation and alignment amongst resource participants

Opportunities • Ability to start afresh rather than ‘patch’ legacy systems • Leverage collective experience in designing new infrastructure • Design well written contracts that promote the best interests of

each participant in the supply chain • Achieve greater transparency in supply chains

Reality • Unlikely to achieve utopian outcomes, but great opportunity to

improve upon the past and build a better future

Role of Government

“Good Old Days” – possibility of funding / underwriting / building the infrastructure as a ‘build it and they will come’ approach.

“The New Reality” – not nothing, but not everything, so what is the new role for Governments in Australia?

• Provide clarity on matters of strategy and policy • Establishment of a workable and stable process (for example, access

policy regimes) • Assist to clarify parties’ roles and responsibilities • Encourage better communication and collaboration between users,

service providers and the government • Have a light hand – the less interfaces the better

Level of Regulation

• The ideal is somewhere between none and ‘too much’ • If none, monopoly power could be exercised by infrastructure owners (the natural

counter argument is ‘why shouldn’t they exercise that power, as they paid for it’) • If ‘too much’, then like all other red tape and green tape, it’s a natural disincentive

to any investment • Either way too much, or too little, regulation can reduce competition and restrict

growth • What is key for stakeholders is that the level of regulation is:

• ‘Fit for purpose’ • Provides clarity on process, pricing and access • Equitable – balancing price and risk • Incentivises and fosters sector growth

Regulation Challenges

Consequences of poor regulation (perceived or otherwise):

• Can be worse than no regulation • Economically inefficient • Increased sovereign risk • Decreased incentive to invest in Australia • Reduced competitiveness of export supply chains • Inbuilt inefficiencies – policy framework drives unintended

outcomes

…… need the right balance for sensible commercial outcomes

Development Alternatives

There are a number of different funding models that can be utilised when developing infrastructure projects:

In an age of reduced Government funding for major infrastructure projects, there has been a significant rise in the incidence of user- funded infrastructure developments

Government (State and/or Federal) funding

Third-Party / Investor funding

Consortium-based user funding

Case Study – WICET

Challenges: • Multiple existing and new miners – some requiring expansion tonnage • Numerous large, junior & mid-tier explorers seeking capacity • Constrained existing rail network requiring significant upgrades • Two above-rail operators (Aurizon Operations and Pacific National) • A complex regulatory frame • The absence of government funding • Port of Gladstone (Government owned) at full capacity

Outcome: The successful greenfield development of the Wiggins Island Coal Export Terminal (WICET) – a multiuser, open access facility owned and funded by a consortium of producers, together with upgrades to the existing rail network to support the increased volumes

Case Study – WICET

The WICET development model facilitates efficient infrastructure

development through:

• Industry owned and largely privately funded

• Open, equitable and transparent Access Policy (specific to WICET)

agreed with State, port corporation and industry

• Broad industry support

• No cost to Government

• Terminal charges limited to cost recovery only

NT Infrastructure Status

Plenty happening in the NT and at a Federal level, however:

• General policy position from NT Government that infrastructure is to be

funded by private sector

• Large number of exploration companies which will require access to rail,

port, power and water infrastructure but who are:

Located in various regions in the NT not consolidated to one area

On varying development horizons

Cash constrained in PFS/FS phases

Meaning opportunities for collaboration are challenging and require a new

approach to development.

NT Rail Infrastructure

• AustralAsia Railway (Tarcoola to Darwin), leased & operated by Genesee

& Wyoming Australia (GWA), as the ‘below-rail’ infrastructure provider

• Regulated monopoly asset - open access and regulated pricing

• Access and pricing are a negotiated outcome between potential users

and the rail infrastructure provider, under a negotiate/arbitrate model

• The regulations governing pricing and access have not been tested and

the economic regulator (ESCOSA) has not had a need to intervene

• The access to, and pricing of, the rail infrastructure through the NT could

well ‘make or break’ exploration projects, so very careful considerations

need to be given to how these matters are progressed

NT Port Infrastructure

• Darwin Port Corporation (DPC) – owned by the NT Government

• DPC has the power to impose dues and levy fees

• No independent regulatory oversight of pricing or access

• Third party access is provided on a competitively neutral basis,

however transparency is critical – access criteria is not publicly

available, nor are the reasons for access decisions disclosed

• Key challenges for explorers are asset ownership structures,

operational efficiencies and integration with rail (supply chain)

Where to from here?

• Efficient development of infrastructure is critical to viable development

of resource projects in NT

• Reductions in price and conditions of access will only succeed if miners

collaborate and work together where possible

• Suggest establishment of a resource based infrastructure advisory body –

Infrastructure Working Group (IWG)

• The IWG will be formed by NT resource companies incentivised to

develop collective approaches to infrastructure solutions

IWG Concept

• A single point of contact to provide input into NT infrastructure projects

• A coordinated private sector position on key infrastructure issues

• A forum for members to collectively discuss, plan and negotiate

strategic, commercial and technical/operational arrangements for

critical infrastructure projects

• Coordination on common issues in planning infrastructure

developments in various NT regions

• Advice on potential for investment into infrastructure projects

• A forum to collectively brief government on infrastructure projects

IWG Objectives

The IWG will review and provide advice on:

• Economic and regulatory impediments to the efficient delivery of relevant infrastructure projects

• Proposals to facilitate the alignment of NT Government policies and laws relating to development of, and investment in, infrastructure

• Lowering transaction costs in the provision of infrastructure

• Prioritising infrastructure projects, based on demand for infrastructure

• The establishment of an independent supply chain coordination body

• Infrastructure financing and funding, including strategies to attract financing and improve investor certainty in the commitment to the infrastructure project pipeline

In Summary

Infrastructure Development – Where to Start? The answer lies in:

• Accepting new models of infrastructure development in the resources

sector;

• Attempting to drive down transport and infrastructure costs to make

projects economical; and

• Working together as an industry to invest and develop for the benefit of

all resource projects in the NT.

Contacts

balanceresources.com.au

Queensland PO Box 10521 Brisbane Adelaide Street Brisbane, QLD 4000 Level 10, 500 Queen Street Brisbane, QLD 4000

Western Australia Level 3, 267 St Georges Tce Perth, WA 6000

Northern Territory GPO Box 4783 Darwin, NT 0801

Canada Suite #486, 100-2 Toronto St Toronto, ON M5C 2B5

Jamie Freeman – Director BTech MBA GDIFSM GCMM GAICD Mobile : 0431 912 776 Email : [email protected]

Rebecca Landon – Managing Director B.Ec B.AsSt (Specialist) Mobile : 0423 037 154 Email : [email protected]

Richard Jackson– Associate Director MAICD Mobile : 0400 286 626 Email : [email protected]

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