Energy Debate in Australia Needs to Get Serious

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What a big country Australia is!

Your Melbourne-based editor is back from a great visit to Geraldton in Western Australia. When you spend too much time behind a desk, you can forget how big Australia is. Getting ready to board the flight from Perth to Geraldton, we noticed right away all the red dust on the boots and shoes of the folks who were coming down from what everyone is tipping to be the next big iron ore province.

More on what we found in Geraldton next week. One point worth considering today is political risk. You don’t normally associate Australia with political risk. Usually, it means the chance that the government of a small country will change the rules on you (Guinea) or some neo-Marxist windbag like Hugo Chavez will nationalise your investment (Venezuela).

But bureaucratic red tape can also be a kind of political risk. Capital is impatient. It has choices. It goes where it’s treated best. If it takes too long to get mines into production in Australia, you sense foreign partners and investors will look for other world-class mineral deposits and projects to develop.

For example, there is the particular case of uranium. Now that the Western Australian government has introduced legislation to ban uranium mining in WA, foreign investors are indicating they’ve had enough. Canada’s Mega uranium said it will walk away from its $2 billion investment in its WA uranium project because it “cannot continue to invest in projects/jurisdictions in which it has little or no chance of a return.”

Pretty simple. Of course, if the people of WA decide they don’t want a uranium mining industry, that’s fine too. That’s what self-government is all about. But we also think, in our humble, loud-mouthed, American opinion; this reflects a lack of seriousness in the energy debate in Australia.

Power has to come from somewhere. If you want to limit emissions from coal-fired power without leading directly to lower rates of growth (or downright contraction) then you need other alternatives for base-load electricity. Renewable targets are all pie-in-the-sky. They’re completely unrealistic.

As far as we can tell, the only realistic alternatives to coal and natural gas for base-load electricity are geothermal and solar thermal (and perhaps, large stacks of solid oxide fuel cells). We met one citizen of Geraldton who said that the issue of climate change was more urgent than both world wars combined. If public policy debate in Australia is informed by this kind of earnest hyperbole, you can kiss a lot of foreign investment goodbye.

Of course, it helps that Australia has resource wealth. That ensures there will always be interest in new projects. You can’t mine the stuff if you don’t have it. And from our conversations with a few of the miners, they say the problem is not so much the cumbersome nature of the permitting process (which has always been that way), but the number of new projects seeking approval. There’s a big backlog.

There’s also a major labour shortage forecast. But hey, Geraldton is a nice place. If you have a son or a daughter or niece of nephew looking to make a new start and try something exciting in life, there are worse courses of action than packing up and heading west. There’s a whole lot of beach, a whole lot of sun, and a whole lot of work to be done.

What about the markets? Well, nothing major seems to have happened while we were away. Our thesis, then, is basically the same. Expect more write downs and losses in the financial asset markets. The whole model of the last fifty years, Credit, Consumption, and Collateralisation, is dying if not dead.

Meanwhile, the other more tradition model of economic prosperity (you know, the one that made Britain and American industrial and geopolitical powers) is based on savings, investment, capital formation, and production. You make more money making stuff than you do buying stuff.

The good news for Aussie investor is that Aussie firms are key to the whole “industrial production” model. And the even better news is that the recent correction in resource stocks leaves many good projects selling at attractive valuations. What more can you ask for?

Oh, many of the projects are flying under the radar of institutional analysts because they’re either too small…or the institutions are using discounted cash flow models to evaluate mining companies…instead of learning how to value a resource. “Focus on good people, good projects, and good partners,” is what we told the crowd at the end of the day Wednesday.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Your statement that “the Western Australian government has introduced legislation to ban uranium mining in WA” is incorrect. This will be dependant on both the outcome of an immanent state election and the passage of such legislation through both the lower and upper houses of parliament.

    It would be amazing for a major corporation to walk away from a $2 billion investment on a spurious assumption on an electoral and political outcome that will no doubt be clarified within a few months.

    Neville Moriarty
    August 29, 2008
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  2. Thanks for the call to debate. The National Energy Essay Competition, which recently closed for submissions, is intended to be that needed debate. I had intentions of entering, but I work as an engineer on a coal mining project (for a power generator, no less) and study renewable energy part-time at Masters level… either way, I look forward to a prosperous career in energy, no matter which way it heads!

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  3. Hi Dan,

    Regrettably, standing in the way of the few political practioners who actually have a view on energy policy and making best use of Australia’s tremendous resources in an energy-hungry world are:

    a professional political class that seems to have about a 30-second attention span for any issue other than the 24 hour news spin cycle, their re-election prospects, and who is going to knife them in the meantime for pre-selection from their own respective teams

    and

    a public sector that seems largely at a loss to connect where the wealth in this country that pays for the largesse comes from and hostage to particular anti-development agendas

    Agendas emphasised by the Geraldton resident you met who looks to ‘the now’ and sees CO2 emissions as a bigger threat than the doubtless near panic which probably embraced Geraldton in 1942 when invasion seemed a realistic if not likely prospect !?

    And if we look to add one area to the debate I don’t recall seeing touched upon elsewhere.

    Recall that, in part, the dark events of 1941 and 1942 were triggered by the aggressor states seeking to put their boot on resources they felt were needed and only obtainable by force, being denied to them in other channels ( not justifyng them – just pointing out there is precedent for aggressive aquisition of resources ).

    So come the day that Bob Brown and Christine Milne carry your Geraldton friend’s concerns to their desired conclusion and we kill most of our energy and extractive minerals industries to ‘save the world’ – I just hope the three of them will be standing at the end of the wharf in Gerladton to explain their logic to any of our northern Asian neighbours and customers who might not share The Greens’ view that we are actually doing them a favour by turning off the strategic resources tap to them.

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  4. There is a huge political risk associated with sitting on a quarter to a third of the world’s uranium (and thorium) and not letting anyone get to it.

    Domestically there is no practical way to achieve green house targets without it.

    It is unfortunate that most arguments (for and against nuclear energy) take the form of extreme religious belief. There can be no compromise and to do anything other than fence site would be political suicide in Australia.

    A serious debate on the actual risks of using (and avoiding) nuclear energy would be good ….. but how would you keep the lunatics and their various vitriolic wheelbarrows out of the debating chamber?

    Eventually there will be an underlying shift in public opinion and the stuff WILL COME OUT of the ground. But I’m not holding my breath and neither are investors it seems. The current impasse leaves us with Old King Coal’s CO2 or no heating at all.

    Coffee Addict
    September 3, 2008
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