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7/30/2019 PWC Carbon Pricing Mining Sector Implications Aug11
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Carbon pricingImplications forthe Mining sector
pwc.com.au
August 2011
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2 | Carbon pricing | Implications for the Mining sector
Reductiontargets
The Australian Governments Clean Energy Future Plan (The Plan) commits Australia
to a reduction target of at least 5 per cent from 2000 levels by 2020 and 80 per cent
below by 2050.
Meeting this target will require abatement of at least 159 million tonnes CO 2-e by 2020Who is liable? Any entities with facilities with covered emissions above 25,000 tonnes CO2-e will have
a liability to surrender carbon units. The government estimates that approximately 500
heavy emitters will be obligated to surrender units under the scheme.
Around 100 of these are expected to be miners.
Carbon pricestarting pointsand evolution
to a exible price
The starting carbon price for each tonne of CO2, to be introduced on 1 July 2012, is $23.
This will rise (in real terms) to $24.15 in 2013 and to $25.40 in 2014.
Asof1July2015,aexiblecarbonpricewillbeintroduced.Thiswillinclude
atransitionalpricecapandoor.
Fuel excise Fuel Tax Credit Scheme reduction:
Transitional
assistancefor emissions-intensive trade-exposed (EITE)sectors
Organisations conducting emissions-intensive trade-exposed (EITE) activities will receive
anestimated$9.2billionintransitionalassistanceovertherstthreeyearsoftheJobsandCompetitiveness Program. The initial rates of transitional assistance have been set at two
levels, these are intended to reduce by 1.3% each year. The average industry rates are:
94.5% For highly emissions intensive activities (e.g. aluminium smelting, integrated iron
andsteelproductionandatglassproduction)
66% For moderately emission intensive activities (e.g. polyethylene production and tissue
paper production)
Theoperation,theimpactandtheeconomicandenvironmentalefciencyoftheJobs
and Competitiveness package will be reviewed. Productivity Commission inquiries are to be
conductedintheleaduptoexibleprice(12monthsto30June2015)withfurtherreviews
duringtherstsixmonthsand18monthsofexiblepricing.Followingthis,therewillbe
regularveyearreviews.Thesereviewswillconsideranextensiverangeoffactorsincludingif windfall gains have occurred and what future rates of EITE assistance should be provided.
Changes that will have a negative effect on the assistance rates will not come into effect for
three years from the announcement.
Importantly, activities directly associated with mining are not eligible for transitional assistance.
Fugitiveemissions
Fugitive emissions refers to the emission of greenhouse gases, most commonly methane,
which occurs during coal mining. In some instances technology exists to assist in limiting
thereleaseofthesegases.GassyminesalreadyinoperationwillbenetfromtheCoal
Sector Jobs Package, but such assistance will not be available for mines not already in
operation.
Therearesignicantissuesinrelationtothedataaccuracyoffugitiveemissionsforcoal
mines, with the range of uncertainty in the National Greenhouse and Energy Reporting(NGER) default factors being 50%. Liable entities are likely to focus effort on achieving
improved measures.
1 July 2012 30 June 2013:
6.21 cpl for diesel, fuel oil
5.52 cpl for petrol
3.68 cpl for LPG acquired inclusive of excise
1 July 2013 30 June 2014
6.521 cpl for diesel, fuel oil
5.796 cpl for petrol
3.864 cpl for LPG acquired inclusive of excise
1 July 2014 30 June 2015
6.858 cpl for diesel, fuel oil
6.096 cpl for petrol
4.064 cpl for LPG acquired inclusive of excise
1 July 2015 30 June 2016
(move to exible price period)
Fuel Tax Credit changes determined
six-monthly based on average carbon
price over previous six months
Key features and impacts of The Plan on the Mining sector:
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PwC | 3
Michael Happell
Partner
Energy, Utilities & Mining Leader
(03) 8603 6016
For more information,please contact:
Over the course of the last year, global economic andpolitical trends have changed the mining industry.In Australia miners are grappling with a loomingMinerals Resource Rent Tax (MRRT), skill shortagesand a high Australian dollar, which all serve toincrease operational costs. In this document weexplore the potential impacts the mining industry
faces in Australia following the release of the CleanEnergy Future Plan and Exposure Draft of the CleanEnergy Bill 2011.
Firstly, we have outlined industry reactions followingthe announcement. This is followed by an in depthQ&A with PwCs Energy, Utilities & Mining Leader,Michael Happell, which provides insight into howThe Plan could actually affect Australian miningoperations. You can also fnd the accountingimplications of the introduction of a price on carbon
and key next steps to ensure you and your organisationcan be proactive in your response. Indeed, respondingnow will help to ensure you are well placed with thetransition to a carbon price economy.
If you have any questions or would like assistanceworking through the carbon price response strategiesfor your organisation, please contact any of thePwC representatives in this document.
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4 | Carbon pricing | Implications for the Mining sector
Industry reactioncomments from across the sector
Despite enjoying record profts in 2010, Australian mining is an industry that has come under
increasing cost pressure in recent years. Following the announcement of the Federal Governments
10 July 2011 climate change plan, Securing a Clean Energy Future, market reactions throughout
the mining sector have echoed a common sentiment relating to the industry absorbing an additional
cost burden. Indeed many have argued that the result of the introduction of a price on carbon will
endanger the competitive advantage currently enjoyed by the major miners courtesy of Australias
proximity to emerging Asian markets most notably China.
Rio Tinto has been one of the mostvocal of the major miners, calling the
carbon price mechanism an unfair
tax on Australian exporters. BHP
Billiton has historically supported
action on climate change, however,CEO Marius Kloppers also noted
concern that Australias international
competitiveness could be harmed,
potentially affecting investment in
Australia moving forward.AngloAmericans Head of Metallurgical Coal,
Seamus French also voiced concern overthe future of Australian coal investment
projects, arguing that the tax bill on
fugitive emissions alone will accountfor more than 75 per cent of revenues
to be raised from the coal industry.
The Minerals Council of Australia (MCA)
has argued that the introduction of this
legislation is a dangerous experiment
with the Australian economy. In fact,
many across the industry are concerned
that the carbon price puts jobs at risk,
future investment in exploration in
jeopardy and erases a global competitive
advantage, which has underpinned
the Australian economy for years. If thiswas the case, Australians would not see
the real impact of mining investmentgoing offshore for 5-10 years. The
industry is also concerned about the
uncertaintyaroundtheeconomicow
through effects from suppliers. Some
have argued that 1 July 2012 start datefor The Plan is in fact too early and a
softer approach is needed to ensure a
smooth transition to a carbon economy.
In this document, Michael Happell,
PwCs Energy, Utilities & Mining sector
leader, outlines the key issues faced by
the mining industry if a carbon price issuccessfully introduced into the market.
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PwC | 5
Steel
The sector is characterized by capital intensive
infrastructure, high energy consumption and exposure
to international trade. Analysts have kept a close eyeon the sector in relation to the previous incarnations
of the Carbon Pollution Reduction Scheme (CPRS)
and related proposals.
Under the plan the steel sector is to receive two assistance
packages in addition to the EITE transitional assistance
availableforotherdenedactivities:
Steel Transformation Plan (STP) $300m over four
years for investment and innovation. Based on a self
assessment applicable to entities that meet qualifying
threshold of >500,000 tonnes of production of crude
steel in FY2009-10 (Bluescope, OneSteel) A 10% increase in the allocative baseline for EITE
assistancefrom2016/17forspeciedsteelmaking
activities. The result of this is that in 2016/17 entities
conducting these activities will receive >98% of their
permits at zero cost.
Year% of Permits provided as
assistance (Steel)
2012/13 94.5
2013/14 93.3
2014/15 92.1
2015/16 90.9
2016/17 98.6
2017/18 97.4
2018/19 87.4
2019/20 86.2
These packages will shield the sector from the high
potential imposts of the carbon price. Deutsch BankAG estimates the impact at -3.3% NPAT for OneSteel in
FY13 and -9.3% NPAT for Bluescope in the same period.
Coal
Government analysis concludes that an average non-gassy mine will incur
additional costs of around $1.40 per tonne of production. For gassy minesthat release of fugitive emissions, this cost will rise to between $7.4 and
$25 per tonne of saleable coal.
As gassy mines have limited abatement options, the government is proposing
the Coal sector jobs package. This will provide $1.264bn over six years for
gassy mines, based on historic emissions intensity per tonne of saleable coal.
Threshold of 0.1tCO2-e/tonne of production
18 mines in NSW, 7 in Queensland are expected to be eligible
Rate of assistance up to 80%
Existing mines only, expansion projects are excluded
Scheme to be administered by Department of Resources, Energy & Tourism
A further package of $70m is provided for the Coal Mining Abatement
technology Support. This is to be on a co-contribution basis.
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6 | Carbon pricing | Implications for the Mining sector
Q&Awith Michael Happell, PwCs Energy, Utilities & Mining Leader
Q: The MCA has said The Planwill impose massive costsfor no material environmentaldividend. How exactly areminers being hit so hard
with the introduction ofa carbon price?
Wehaveidentiedanumberof
additional costs that miners are mostconcerned about:
1. fugitive emissions from coal mines
2. rising energy costs
3. a lack of transitional assistance
for mining activities, despite
being predominantly an export
focussed sector
4. the reduction of the fuel tax
credit scheme
5. the accumulation impact, taking
into account the proposed MineralsResource Rent Tax (MRRT) andthe strong Australian dollar.
Q: What are the features of thePlan for the mining sector
versus the original CPRS?
Under the original CPRS proposal,
activitiesthatweredenedas
emissions-intensive and trade-exposed
(EITE) were in line for transitional
assistance in the form of free carbon
units. This continues to be the caseunder the recent legislation, however
most mining activities do not meet the
criteria of an EITE activity which leaves
miners open to considerable additional
liabilities, despite most of their
production being exported.
The CPRS lacked detail on dealing with
fugitive emissions from gassy coal mines
the new Plan provides more detail and
an assistance package of $1.264bn over
six years for the 25 gassy coal mines that
meet the eligibility threshold.
Q: How will the reduction inthe Fuel Tax Credit Schemeimpact the industry?
Theplanfeaturessignicantchanges
to the existing fuel tax credit and
excise regimes, which are a core part
ofthecarbonpriceproposals.Specic
to mining, fuel tax credits previously
available for non-gaseous fuels (such
as petrol and diesel), which are usedoff-road for burning/generating heat
or in internal combustion engines for
off-road activities, will be reduced by an
amount equal to the carbon price. More
simply, mining has not been excludedfrom the discounting of fuel tax credit
(FTC)rates.Theagriculture,shingand
forestry sectors, in comparison, have been
excluded from the discounted rates and
therefore retain the full value of the FTC.
In preparation for these changes,
impacted businesses may need to
implementsignicantsystemschanges
to capture the revised excise and fueltax claiming rates, in order to report
and recover the correct amount to/from
theAustralianTaxationOfce.When
Australiamovestoaexiblecarbonprice
in 2015, the fuel tax rates will change
every six months, placing an added
burden on systems. The changes in the
fuel tax/excise claiming rates should
also be factored into the projected costs
of fuel in feasibility studies.
Q: How will the carbon priceinteract with the MRRT?
The deductibility of units under the
proposed Minerals Resource Rent Tax
and existing Petroleum Resource RentTax will depend on whether the Units
are used to abate emissions resulting
from activities that occur within the
taxing point/ring fence under the
applicable resource tax. For vertically
integrated operations, there will needto be apportionment where both the
upstream and downstream operations
produce emissions.
Q: How are increases in energyprices likely to impact miningbusinesses? With this inmind, what should minersbe thinking about to preparefor this cost?
The increased cost of electricity anddiesel is renewing the sectors focus
onenergyefciency.Identifyingwhere
an operation consumes energy and
what steps can be taken to reduce
consumption are an immediate step
that businesses can take.
Prioritising reduction efforts is a real
challenge, especially for long lived,complex operations. With limited
capital available the key is to develop
aconsistentnancialmodelwhich
willenableefciencysavingstobe
identied,quantied,evaluatedand
prioritised. Our experience workingwith global mining organisations has
shown that using Marginal Abatement
Cost Curves (MACCs) is valuable and
can provide the rigour needed for the
CFO to make informed decisions and
deliver tangible cost savings.
Q: Will this affect Australiascompetitive advantageinternationally?
The carbon price will add cost to existing
and potential future operations. This costwill be factored in to decision making
when considering the economics of, for
example, expanding an Australian mine
again or expanding a mine elsewhere in
the world. While the mines themselves
are unable to be moved, capital is mobile
and mining companies will invest their
money on the projects that generate the
best return. The carbon price, including
its impact on input prices, will make
Australian projects more expensivethan they otherwise would be and
will decrease the return generated.
Of course, if these projects remain the
best options available to a company, they
are likely to continue to go ahead, so long
as they still meet internal return hurdles.
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PwC | 7
Q: Will investment in futureGreeneld projectssuffer as a result?
As mentioned, the carbon price willadd to the cost of constructing and
operating a mine in Australia, therefore
reducing operating margins and
increasing capital costs. As a result,
thoseGreeneldprojectswhichare
more marginal may struggle to generatesufcientreturntosupportthecapital
investment. Combined with the MRRT,
the changing tax environment for
a miner in Australia may also lead
companies to look elsewhere in their
exploration efforts. We know themining industry is global and miners
are already investing more of their
exploration funds in emerging countries.
This may encourage Australian miners to
continue focus offshore.
Q: Will the owners of mines bedirectly liable?
The liable entity will generally be the
person with operational control over
the mine facility (that is, authority to
introduce and implement any or all of
the operating, health and safety, and
environmental policies for that mine).
Therefore liability may not reside with
theentitythathasnancialcontrol
over the mine but rather with:
Joint venture operators for minesheld by unincorporated joint ventures
Mining contractors
Natural gas retailers, who are initially
responsible for the emissions from the
use of natural gas by their customers
Q: What impact does thecarbon price have onunincorporated joint
venture interest/s?
The operator of a facility held by an
unincorporated joint venture (UJV)
has the ability to transfer liability for
surrender of carbon units to the UJVparticipants in proportion to their
respective interests. Since a carbon
price liability arises on facilities thatproduce 25,000 tonnes or more of
CO2-e for covered emissions, the legal
entity holding the UJV interest may
be responsible for surrendering carbon
units to cover their emissions. Besides
creating an obligation to comply with
the carbon pricing mechanism this
creates a number of other issues.
Those issues include how the UJV
participant ensures that the operators
calculation of liability is accurate,
howtheUJVparticipantcaninuence
the operator with respect to business
decisions to reduce emissions (such
as changing the fuel mix or using lower
emissions technology) and whether the
UJV participant can pass on the further
cost (or renegotiate its contracts).
It is important to highlight that whereliability is transferred, the fact the UJV
participant may have a small interest
(say 5%) does not negate the need to
comply as it is the facilitys emissions
that determine whether it is covered
by the carbon price. Therefore, it
will be appropriate to agree with the
operator in advance whether (or not)
the liability is going to be transferred.
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8 | Carbon pricing | Implications for the Mining sector
Q: With the introduction of acarbon price into the market,
what are the potential owthrough effects in terms ofkey mining suppliers? Willthis result in an additionalcost for miners to absorb?
Additional costs expected to be
incurred by mining suppliers and
passed down the supply chain include:
increased energy costs
increased transportation costs,
in particular for rail transportation
increased contractor costs, in
particular where the carbon unit
liability resides with the mining
contractor
increased capital expenditure costs
(steel, cement, fuels)
The ability to pass on these costs by
mining companies will be constrained
by both the terms of existing long term
contracts and the characteristics of the
market in which the mine production
is sold.
Q: How will this affectM&A activity?
Wherever there is strong strategic
imperative M&A activity will continueunabated. We have already seen this
after the governments carbon pricingannouncement with the Peabody/
Arcelor bid for Macarthur in the
coal sector and in the Upstream gas
sector with Origin and ConocoPhillips
announcing FID for the APLNG project.
Carbon pricing presents all miningcompanies with an opportunity to
make changes to their asset portfolio
and operations to manage their
carbon exposure and to pursue
M&A opportunities to enhance
their competitive position.
A key impact on M&A will be seen inthe pricing of companies or assets that
are liable (or likely to be liable) in a
carbon priced world. For many smaller
producers or explorers this is not likely
to be an issue. For those mines that are
caught, sellers will need to understand
the impact carbon has on their own
valuation through:
cost and tax imposts;
the ability, or inability, to pass thosecosts on to end users;
workingcapitalandcashow
implications; and
changes in their cost of capital.
Buyers of those assets will need to
understand the same for the targets
they seek to pursue. For buyers thisunderstanding will prove to be more
elusive as they will need to rely on
due diligence to accumulate their
knowledge. Uncertainty in the minds
of buyers over the quantum of the
carbon impacts will most likely mean
that in the near term they will seekeven lower acquisition values as a
cushion or safety net against the risk
of lower returns post acquisition.
This initial uncertainty over appropriate
valuations in a carbon priced worldmay well see some sale or bid processes
delayed or not able to reach completion,at least over the next 18-24 months.
Acquisition or project debt is unlikely
to be too heavily impacted as banks
have been focusing on the expected
introduction of carbon pricing for
a number of years. Once the new
landscape is understood, banks arelikely to work with miners to establish
sustainable capital structures.
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PwC | 99 | Carbon pricing | Implications for the Power and Utilities sector
How do you account for the
carbon price?Accounting for thecarbon price will
vary depending onthe nature of theunderlying business,the emissionsintensity of the
operations, and thelevel of governmentassistance received.
There is currently no prescribed accounting guidance for companies to apply in recognisingtheimpactoftheschemeintheirnancialstatements.
Consequently, there is expected to be a diverse range of accounting approaches applied inthemarketplace(ashasbeentheEuropeanexperience)whichcanresultinsignicantlydifferent outcomes in the income statement and balance sheet. This may impact a number ofkey metrics, for example, bank covenants, employee incentive schemes and regulatory licencecompliance measures (e.g. AFSLs).
Companies will also have to disclose their accounting policies in respect of the schemesouserscanunderstandtheimpactwithinthenancialstatements.
What do I needto consider tomaximise value tomy organisation?
Where choice exists, companies should invest time understanding which accountingpolicy most appropriately aligns with the underlying economics of the transactionand also meets their strategic business objectives. Companies should consider:
Impact of the scheme on asset impairment calculations
Accounting for free permits received
Accounting for cash received as part of the government assistance package
Accounting for payments / contractual arrangements for early closure of generation facilities
Impact of government assistance on asset impairment assessments
Where permits should be recognised on the balance sheet
How permits should be accounted for on an on-going basis
Accounting for forward contracts to purchase or sell permits
Accounting for carbon clauses within sales/purchases/derivative contracts
Accounting for liability to surrender permits over generation period.
Want to know more? Visitwww.pwc.com.au/carbonprice
PwC | 9
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10 | Carbon pricing | Implications for the Mining sector
Actions
Assess whether youare directly liable
Determine the facilities over which you have operational control
Determine the quantity of covered emissions for each facility
Assess whether each facility is liable
Setupacarbonpriceprojectofcetomanagecarbonworkstreams
Manage the costimplicationsfor your business
Identifyemissionsabatementopportunitiesandassessthenancialviabilityof each using marginal abatement cost curves
Investigate your ability to access Government funding for abatement and
energy opportunities Review existing supply contracts and assess the potential carbon price pass
through impacts
Develop a carbon procurement/trading strategy
internationally linked units
via the local auction process
Carbon Farming Initiative projects
Consider liability transfer options to enable you to manage your owncarbon price risk
from gas retailers
within joint ventures
within corporate groups from contractors
Consider thepotentialrevenue impact
Assess your ability to pass on additional costs to customers
review existing and future customer contracts for pass through clauses
assess your market characteristics (local vs international prices/competitors)
consider product pricing changes
consider potential product substitution impacts
Manage your balancesheets impacts
Develop accounting policies for the treatment of carbon units
Assessyouroverallfuturecashowimpactsanddevelopcashowmanagementstrategies to maintain working capital
Update relevant asset NPVs and assess potential asset impairments
Consider the impacts on your current and future investment decisions
Next steps
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PwC | 11
Further reading
You can read more about the carbon price and how it may affect your business
atwww.pwc.com.au/carbonprice
Tax implications forbusinesses impacted bythe carbon price and itscomplementary measures
Contacts:
Michael Davidson
Partner
Tel: +61 2 8266 8803
Liza Maimone
Sustainability & Climate Change
LeaderTel: +61 3 8603 4150
What does the ClimateChange Plan mean forthe Australian M&Aenvironment?
Contacts:
Jock OCallaghan
Partner
Tel: +61 3 8603 6137
Peter Munns
Partner
Tel: +61 3 8603 4464
CarbonPrice
Mechanism
Tax implications for businesses impacted by thecarbon price and its complementary measures
1 August 2011
pwc.com.au
What does theClimate ChangePlan mean for theAustralian M&Aenvironment?
Dealspoint of view
August2011
Impact onM&Aactivity 2
Accessingfunding 5
Complexityfordue diligence
6
Conclusion 7
Australias Carbon Price What Does it Meanfor your Business?
Contacts:
Liza MaimoneSustainability & Climate Change Leader
Tel: +61 3 8603 4150
John Tomac
Partner
Tel: +61 2 8266 1330
Carbon pricing Implications for thePower & Utilities Sector
Contacts:
Mike ShewanPower & Utilities Industry Leader
Tel: +61 3 8603 6446
Liza Maimone
Sustainability & Climate Change Leader
Tel: +61 3 8603 4150
The AustralianGovernmentsClimate Change PlanWhat should business consider?
whatwouldyouliketogrow.com.au
19th July2011
Carbon pricingImplications forthe Power andUtilities sector
pwc.com.au
August2011
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pwc.com.au
South Australia
Andrew [email protected]+61 (8) 8218 7401
Victoria
Michael HappellPartnerEnergy, Utilities and Mining [email protected]+61 (3) 8603 6016
Liza MaimonePartnerSustainability and Climate Change [email protected]+61 (3) 8603 4150
Western Australia
Darren SmithPartner
[email protected]+61 (8) 9238 3240
New South Wales
Marc [email protected]+61 (2) 8266 1333
John TomacPartner
[email protected]+61 (2) 8266 1330
Queensland
Brian GillespiePartnerEnergy, Utilities & Mining Consulting [email protected]+61 (7) 3257 5656
Wim [email protected]+61 (7) 3257 5236
Contacts
2011 PricewaterhouseCoopers. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers a partnership formed in Australia,which is a member rm of PricewaterhouseCoopers International Limited each member rm ofwhich is a separate legal entity