EVER since Rio Tinto and BHP Billiton announced plans to merge their Western Australian iron ore mining operations, Premier Colin Barnett has been issuing statements which make him sound more like Hugo Chavez, the radical socialist president of Venezuela
EVER since Rio Tinto and BHP Billiton announced plans to merge their Western Australian iron ore mining operations, Premier Colin Barnett has been issuing statements which make him sound more like Hugo Chavez, the radical socialist president of Venezuela than the Liberal leader of this resource-rich state.
Mr Barnett has ominously warned that the miners need to remember who owns the iron ore in the first place and has worried out loud that the miners may end up lopping jobs in their efforts to remain competitive in their industry. Perhaps he is peeved that the deal was done federally and he was not at the table.
Briefcase thinks that he should focus on the fact that the proposed new entity will continue to provide a solid stream of royalties to his coffers and that the profits generated by the marketing arms of Rio and BHP will be going to shareholders and not a foreign government.
It is true that we are lucky enough to live in a Commonwealth where the nation's mineral wealth is ultimately controlled by the state, but it is the entrepreneurial efforts and technical skills associated with risk capital that ultimately leads to the realisation of value from these resources. Companies that take exploration, production, financial and market risks to develop a successful mine pay a royalty on the sales value of their product, just as they should.
However, Mr Barnett's bluster sounds more like the ranting of an oligarch who might threaten to take away the rights of private enterprise to exploit mineral wealth on behalf of the state than the calm and reassuring words of the head of a democratic state.
Worryingly, his doppelganger, Mr Chavez, has taken his zeal that step further. He has been busily nationalising the country's oil and cement industries, among others.
This course of action is doomed and will inevitably lead to a slow decay and collapse of these once-profitable and efficient industries, as government ineptitude and its social programs conflict with the commercial goals and realities of business.
Briefcase thinks it is unhelpful when politicians roll-out the old rhetoric about a state's control of resources. It is just as well that Mr Barnett is not in power in the US, where mineral rights are vested with the landowner and not the state.
Ultimately, the best way for the state to unlock value associated with its natural resources and mineral endowment is for it to work in partnership with private capital in the form of companies.
This is not to deny that the state may well have a role to play in some nation-building enterprises, such as the construction of Dampier to Bunbury Natural Gas Pipeline, but in general, surely the best role for government is taxing and regulating business.
There is a global market for risk capital. Banging the table and demanding a larger slice of the pie for government is a guaranteed way to ensure that less capital is spent in your country, while watching as that capital departs to more business friendly jurisdictions. Countries that run either corrupt or unfair royalty systems suffer from a lack of capital for project development, while countries that operate transparent and fair royalty systems, designed to reward both risk and effort, can look to mutually beneficial relationships with their corporate citizens.
Governments love to focus on jobs. Mr Chavez wants his nation's oil wealth to create jobs while building schools and hospitals. The best way to achieve these goals is for the oil company to be run efficiently so that it generates sufficient cash-flow surplus to pay dividends to its owners and taxes to the state.
Running a business for the benefit of its workers is a recipe for disaster. For many years, General Motors was run more for the benefit of its unionised workforce and its overpaid executives than for its shareholders, and now it is bankrupt.
The Soviet Union tried to run its state-owned enterprises to create jobs, and they mostly failed. This type of organisation lacks entrepreneurial zeal and customer focus, which delivers a Trabant while the private business model delivers a BMW.
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There appears to be some lingering and antiquated idea, even in the halls of our free enterprise system, that business is somehow responsible for creating and maintaining employment. Employment is created by businesses that keep ahead of the game and remain competitive.
Employment is a derivative of successful industry, not its aim. If Rio and BHP believe there are synergies and efficiencies, reportedly worth up to $10 billion to their combined iron ore operation, these savings will flow on to a more competitive operation, which is able to produce an improved return for its owners, lower cost products for its customers and a more secure employment environment for the people who work there.
The alternative of some sort of government-sponsored workplace is not even worthwhile thinking about. Businesses that lose focus on their ultimate profit motive end up employing no-one.
Mr Barnett's focus on jobs is understandable; he is, after all a politician.
However, he would know that it is those industries that move with the times to restructure their operations - while innovating and investing in the best available technology - who survive and prosper. Companies that continue to operate with labour-intensive or inefficient business models ultimately fall behind and employ fewer people than their more aggressive cousins.
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BHP's payment of about $7.2 billion to equalise its holding in the Pilbara iron ore mining project with Rio Tinto values the joint venture at around $143 billion, which is far in excess of the valuation implicit in the investment proposal put forward by the Chinese aluminium giant Chinalco.
Would the shareholders of Rio rather see the company raise money at an absolute knock down, bottom-of-the-market price to a favoured investor while the minority shareholders were unable to participate in the lucrative recapitalisation deal, or would they like to see the creation of a world-class mining joint venture and also have the opportunity of participating equally in a recapitalisation process? I think the answer is obvious.
By the way, has anyone asked why a Chinese aluminium company should be interested in buying into an iron ore operation? How strange. This is akin to Qantas seeking to take a major investment in a parcel of Chinese hotels. Possibly related, but it's not really Qantas's business. Not a lot of logic or synergy to the normal Western eye.
Perhaps China Inc felt that its ultimate strategy for Australia's iron ore assets would be less blatantly obvious by the use of this company for the proposed transaction, rather than, say, an existing steel smelting, refining and fabrication company, which might have been a little too close to the bone. Alternatively, Chinalco may have just happened to be the government run vehicle that had the cash available at the time.
Briefcase sees the BHP/Rio Pilbara iron ore joint venture as a win for all stakeholders, be they shareholders, employees, governments or customers. The alternative was unpleasant and unfair.
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n Peter Strachan is the author of subscription-based analyst brief StockAnalysis. Further information can be found at Stockanalysis.com.au.