Something is rotten in the
state of Denmark.
Hamlet, Act one, Scene four
Introduction
In the previous post (link here), which I strongly suggest
that you read before this reading this post, I laid out the background to the Anandilyakwa Land
Council’s (ALC) pursuit of the Winchelsea mine project, with high level support
from the NT Government, and an apparent lack of proactive engagement by the
Commonwealth. At the end of that post, I indicated I fundamentally disagreed
with the narrative being promulgated by the ALC. This post explains the reasons
for my concerns and argues that there are three high level problems with the
ALC narrative in relation to the future of Groote.
The first relates to endemic conflicts of interest
between the ALC and a number of associated corporations in receipt of royalty
payments from the ALC, conflicts that extend to the individuals involved and
which have the potential to adversely impact millions of dollars in royalty
allocations. The second relates to commercial feasibility of the
proposed mine (noting that I do not claim particular expertise in this matter, and
there is a risk I may be mistaken). The third relates to the ALC’s royalty
allocation strategy designed to facilitate the development of the mine.
The Commonwealth Minister for Indigenous Australians has
regulatory responsibility for oversighting the Aboriginal Land Rights Act in the
NT, and the various land councils established by that legislation. The land
councils are thus Commonwealth statutory corporations, and (in theory) subject
to the normal accountability and regulatory requirements applicable to all Commonwealth
entities. Former Minister Ken Wyatt was responsible for approving the
Winchelsea mining agreement on Groote in accordance with section 45 of the Act.
I should state up front that I readily acknowledge that the
NT land councils are complex cross-cultural institutions and confront
considerable challenges merely in undertaking their daily business. This is
particularly so for a small land council representing just 14 clans on a remote
archipelago. Yet the fact that the effectiveness of the NT Land Councils are so
important to the achievement of Aboriginal aspirations makes it even more
important that they should be held to standard accountability requirements,
both to their constituents and to the community at large. Once they lose the
trust of the wider community, and their own constituency, they will lose the
capability to protect Indigenous interests, let alone advance them. The ALC is
particularly vulnerable to financial risk insofar as it manages upwards of $50m
per annum in operational expenses and royalty distributions.
At its core, the institutional architecture oversighting Aboriginal
land held under ALRA title in the NT is simple. Land Councils have a function
of negotiating on behalf of traditional owners with persons seeking to obtain
an interest (such as an exploration or mining licence) over Aboriginal land. Aboriginal
land is owned by a Land Trust which must act on the direction of the relevant
Land Council. The Land Council in turn must consult the traditional owners (TOs)
for the relevant land to ascertain their wishes and must be satisfied they
understand the proposal and as a group consent before directing a Land Trust to
agree (or not) in relation to any decision related to dealing in the land. See
section 23 of the ALRA.
The Land Councils also have a function to assist in
commercial development. Section 23(1)(ea) provides that a function is:
to assist Aboriginals in the
area of the Land Council to carry out commercial activities (including resource
development, the provision of tourist facilities and agricultural activities),
in any manner that will not cause the Land Council to incur financial
liability or enable it to receive financial benefit…
Subsection 23(3) provides that in carrying out its
functions a Land Council should not give or withhold consent in relation to a
proposal unless it is satisfied that the TOs ‘understand the nature and purpose
of the proposed action and, as a group, consent to it’.
The difficulty in relation to the proposed Winchelsea mine
is that the TOs of Akwamburrkba (Winchelsea Island) own (via the Anindilyakwa
Advancement Aboriginal Corporation) 70 percent of the equity in Winchelsea
Mining Pty Ltd, the proponent. On its own, this creates a structural
potential conflict of interest. Yet the cross directorships, cross
employment arrangements, personal conflicts and cross consultancy arrangements
create an extraordinary network of conflicted loyalties that are difficult
to comprehend in any effective governance structure, let alone one involving a
Commonwealth statutory corporation.
According to Mr Hewitt in his evidence to the Estimates
Committee, the TOs did not make a financial contribution (the ANAO states it
was a mere $60), but instead agreed to provide their consent. In fact, a number of
Aboriginal Corporations based on Groote provided loans to Winchelsea (AAAC $11.6m; ARAC $4m) which supplemented the ACIM contribution of $10m plus a loan
of $1.6m). Moreover, AAAC has no CEO, and only 8 staff, and the majority of its
revenues are the result of discretionary grants from the ALC which according to
its 2022 Financial Statements (page 14) are provided for specific purposes
related to the Winchelsea Project. The Financial Statements report also states
that future funding from the ALC is contingent on progress reports and project
performance.
While Winchelsea Mining is a subsidiary of Anindilyakwa
Advancement Aboriginal Corporation (AAAC), a registered charity. The AAAC’s
six Directors include three ALC Directors. The ALC Chair, the ALC CEO and his
spouse are three of five Directors of Winchelsea (the other two are representatives
Winchelsea’s other owner, AUS China International Mining Pty Ltd). There is
no representation on the Winchelsea Board of any AAAC Directors.
Given these complex conflicts of responsibility, it is
difficult to see how the ALC could have objectively and neutrally undertaken
the consultations necessary for it to meet its statutory functions in
negotiating a mining agreement between TOs and Winchelsea Mining Pty Ltd. It is
also difficult to understand how a Minister, if properly advised, could approve
a proposed mining agreement without initiating further investigations to ensure
there were no accountability or policy issues requiring specific attention in
the Agreement. One option available to the Minister would have been the
appointment of a mining commissioner to watch over the negotiations. Given the
current structures in place, it seems unlikely that the then Minister in fact
undertook any of these precautionary measures.
Problem One: ALC effectively controls key
Aboriginal corporations in receipt of royalties.
While the ALC has a statutory function to assist Aboriginal
Corporations such as AAAC and GHAC, it seems unlikely that this power extends
to cases where the ALC is exercising effective control of the corporation. See
for example sections 23AA (3) and (5) of the Aboriginal Land Rights Act.
Section 910B of the Corporations Act 2001 provides inter
alia in relation to the meaning of control that ‘control’ includes:
having the capacity to
determine the outcome of decisions about the body corporate's financial and
operating policies, taking into account: (i) the practical influence that can
be exerted (rather than the rights that can be enforced); and (ii) any practice
or pattern of behaviour affecting the body corporate's financial or operating
policies…
It is clear that the ALC’s influence over AAAC’s budget
and expenditure and its role in controlling the operations of its subsidiary
Winchelsea prima facie meets this definition.
Similar arguments can be made in relation to the other
corporate entities operating on Groote with significant involvement in aspects of
the Winchelsea mine proposal:
Groote Holdings Aboriginal Corporation receives
significant royalties from the ALC to support the development of the Winchelsea
mine, particularly its logistics infrastructure. GHAC’s funding is 99 percent
from the ALC. Its six community based Directors include the ALC Chair and four
other ALC Directors, and the three Independent Directors include the ALC CEO, and
whose Chief Operating Officer is the ALC CEO’s spouse. The Chief Financial Officer (CFO) of GHAC is
undertaken by ENMARK, the firm operated by the Chair of the ALC Audit
committee.
The Anindilyakwa Royalties Aboriginal Corporation
whose primary role is to receive and disburse section 63(3) payments has nine Directors,
including five ALC Directors (including the ALC Chair) and of the remaining
four independent Directors, at least two are or have been in receipt of
consultancy funding from the ALC.
The Anindilyakwa Leaders Future Fund Aboriginal
Corporation (ALFFAC)is a further example of the ALC exercising control and
influence over a corporation, albeit with its purpose fo benefitting ALC
members in plain sight. The ALFFAC Board and membership is comprised entirely
of Directors of the ALC, whose funding of $1.5m in 2021/2022/2023 was entirely
from the ALC (listed as a section 35 grant) and whose purpose is entirely
focussed on providing voluntary and extremely generous lifelong ‘recognition
and protection’ packages to former ALC Board members and staff (albeit with a
discretionary element). While a case can be made for arrangements such as
these, they are virtually unknown amongst Commonwealth statutory corporations
and the potential downside is that they may constrain the exercise of
independent judgment by ALC Board members who may fear they are placing a
future income stream at risk if they question the ‘accepted wisdom’ on
investment decisions involving millions of dollars.
To sum up, it is one thing to
argue, as the ALC does, that its involvement with the various corporations
supporting the proposed Winchelsea mine is consistent with its statutory
function to assist distinct and autonomous corporations in its region to engage
in commercial activities. It is quite another thing to engage with corporations
where the ALC is prima facie exercising effective control in its own
right in relation to the decisions being taken. Such an outcome is not consistent
with the fundamental intent of the checks and balances that are built into the
architecture of the Aboriginal Land Rights Act in the NT. In particular, the
provisions of section 35 which are clearly designed to ensure land council
accountability for its payments to corporations of section 64(3) royalties. This
accountability constraint is undermined and subverted if the corporations are
not independent of the Land Council. This would not be just a technical breach,
but leaves open the potential for poor decision-making to occur without any of
the normal checks and balances being engaged. The key intent of these checks
and balances is to protect traditional owner interests. As a result, the
likelihood increases that land council interests (or in a worst case scenario, the
interests of a clique within the land council) are pursued to the disadvantage
of TOs generally.
Problem Two: the financials for the Winchelsea
mine project do not stack up.
The key documentary sources I relied on in assessing the
economic impact of the project are documents included in the Draft
Environmental Impact Statement (EIS) for the project submitted by Winchelsea
Mining (link
here and link
here). The EIS is currently open for public comment. Key chapters are Chapter
Four (4.3.2 Ore Estimation), Appendix E JORC Reserve Estimate Report
undertaken by Xenith, a specialist resources consultancy and Appendix X
Social Impact Assessment undertaken by CDM Smith (4.1.14.10 Project Labour
Requirements and 4.1.14.11 Project
Economic Contribution).
According to the sampling undertaken by Xenith, the total
proved and probable ore reserves (as at October 2020) were 11.8 million tonnes
with an average manganese concentration of 26%. Xenith estimated the costs of
extraction and processing (Table 8.1) and this led to the estimation of net ore
prices for the various categories of ore (Table 8.2 at Appendix E). Estimated FOB prices varied between A$5.68 and A$1.74
dmtu (dry metric tonne unit). I requested Chat GPT to analyse the relevant information
in the report: ore reserves, current manganese prices and extraction scheduling
data (table 4.3-5) to obtain a total revenue figure for the projected 11-year
life of the mine. That request elicited a current valuation of estimated
total revenue for the project of A$33.6m. Xenith undertook a Net Present Value
analysis of the orebody and the costs of production/processing (Section 8.5
Financial Analysis page 30). They state without any further information:
‘Financial analysis of the mine schedule showed a positive NPV of the project’.
They do not expand however on the assumptions adopted including the relevant discount
rates.
In a case study of the Winchelsea project on the Xenith web
site (link
here), Xenith commented:
The outcome of the study
confirmed the project was technically viable. It demonstrated targeted export
manganese ore product quantities and grades could be achieved based on the
waste removal, ore mining, ore processing and associated support infrastructure
and services, including product export facilities.
We concluded the project
demonstrated positive economic returns with respect to cashflow, NPV and IRR,
however the final determination of the project’s economic feasibility remained
subject to financing and certain regulatory approvals in control of, and to be
determined by, Winchelsea Mining.
I take this conclusion at face value but note that it does
not appear to take into account the costs associated with the purchase of the
mining tenures involved from Yukida Pty Ltd, the previous owners of the
exploration licences. In particular, according to the 2020 AAAC Financial
Statements, Winchelsea is committed to paying Yukida $6.25m immediately upon
the first shipment of manganese. Nevertheless, noting that the total value of
the ore resource will be subject to variations in the price of manganese, even
were we to assume that manganese prices doubled over each the projected eleven
year life of the project, the net value of the resource would be around $70m
and the potential profit would be substantially less than that figure. I
should add a caveat here that I am not an expert in project feasibility studies
and was extremely sceptical when I first made my own rough calculations of the limited
likely value of the ore reserves. However, I took some confidence from having
my rough estimates confirmed by ChatGPT’s assessment of Winchelsea’s EIS data.
We can get a sense of the financial challenges arising from
the low valuation of the available ore body by calculating the costs of
employing the average of 83 mining staff identified in the EIS over the 11 year
term of the mine. See Chapter 4 of the EIS, section 4.4.14.1. which describes
the proposed workforce for the mine (link
here). A quick internet search reveals the average mining salary in
Australia is over $105k per annum (link here and link here). Adopting a
conservative approach, and assuming the average salary at Winchelsea is say $95k
per annum, then the cost of 83 staff over 11 years totals $87m. If the
Winchelsea resource is valued at $70m, then the projected employment costs produce
a $17m deficit without any further assessment of the costs of the capital
investment required for the mine, the necessary operating expenditure, the
contracted payments to Yukida Pty Ltd of $6.25m arising from Winchelsea’s
acquisition of the mining tenure, and of course the repayment of the ‘loans’ of
$15.6m already provided by AAAC ($11.6) and ARAC ($4m). Clearly, on the available
information provided by Winchelsea, far from being commercially viable, the
Winchelsea project faces huge challenges to avoid incurring substantial losses.
Reinforcing this rather dire assessment, the EIS also estimates
the contribution of the project to the local, NT and international economy. In Appendix
X, Table 4-22 the consultancy firm CDM Smith (presumably engaged by Winchelsea)
estimate the anticipated capital expenditure associated with the mine in the 12
months from 2024 as $224.6m. In Table 4-23, they estimate the
operational expenditure of the mine over a period of 14 years from FY 2025 as
totalling $448m (presumably in 2024 dollars). That is in total, the EIS
estimates capital and operational expenditure of $672m over the life of the
mine. Yet the total current value of the manganese resource currently
identified is somewhere between $30m and $70m.
There is a part of me that still cannot come to terms with
these calculations. Yet they are drawn from Winchelsea’s own documents and
commissioned research. The figures would be laughable except that the mine is
apparently proceeding, albeit slowly and incrementally, and with apparent support
amongst political elites in Darwin and Canberra. While the prospect of a viable
mine continues to have currency and be talked up (see the Estimates transcript quoted
in the previous post), the risk will be that the ALC and Winchelsea will
contrive to direct more and more royalty flows to Winchelsea (via the corporations
listed above) to seek to demonstrate that the possibility of a commercially
viable mine is more than a mirage. The inevitable losers in such a process will
be the Anindilyakwa families and children who could have been supported by
sensible and more risk averse royalty distribution policies.
Problem number three: the Future Groote Strategy
is hot air.
As I noted in my earlier post,
the ALC Strategic Plan 2023- 2033 is an ambitious document (link here). It is 173 pages and identifies 18
individual areas of focus for the decade ahead conveniently listed on page 3. I
am not seeking to provide a comprehensive critique of the document here, and
readily acknowledge that many of the proposed priorities and initiatives would have
enormous merit if they could be funded.
In relation to the Winchelsea mine and the concomitant
implications for royalty distributions, the ALC strategy is to use the Winchelsea
mine as a ‘future Groote enabling project’ with:
… a core vision to raise
enough revenue to permanently support the economic and social future of the TOs
of the Groote Archipelago… The mining venture will provide annual fixed
payments to impacted clans, provide guaranteed payments into the Anindilyakwa Mining
Trust and surplus profits will be reinvested into major projects for the
benefit of TOs…
I see two separate issues with this strategy.
First, as outlined above, it seems
far from certain that Winchelsea will make commercial profits, and to the
extent that it makes losses that are made up or offset from royalty flows
through the ALC and its associated corporations, the ALC post mining strategy
outlined in the Strategic Plan will be a complete failure.
Second, even if my financial
analysis were to be misconceived and the mine was financially viable, it is not
clear to me that the opportunity cost of the necessary financial commitments
towards the mine from royalty distributions do not outweigh the benefits. This
is essentially a value judgment, or to put it another way, a policy issue.
However, it seems to me that in a situation (as outlined in the ANU socioeconomic data report published on the
ALC website link
here) where there is a significant outstanding housing need, where
education outcomes are woeful, and where health and substance abuse are ongoing
challenges, the policy choice is clear. The current path of prioritising a
major commercial investment with limited employment opportunities for local
people, and the potential for substantial financial losses, is in
socio-economic terms extremely high risk.
An alternative strategy based on low key and
straightforward investments in housing, preventative health and education would
likely create more certain and widespread benefits. While the ALC would argue
that they are in fact investing in these priorities, the reality is that the
quantum of funding projected to flow into the mine will inevitably stifle the
amounts available for these more basic strategies.
The bottom line here is that the aspirational rhetoric in
the ALC Strategic Plan is both ultra-ambitious, and it fails to
adequately consider the choices and trade-offs between the numerous priorities
that the ALC is promulgating. Moreover, while the Plan (which appears to have
been drafted to a management consultant’s template) mentions risk, its
substantive terms ignore the very real risks embedded in the overarching
approach being adopted.
The present policy direction will likely not lead to a
profitable mine, will negate the opportunity for spin-off economic
opportunities, and will be unlikely to lead to the achievement of the balance
of $650m in the Anindilyakwa Mining Trust that underpins the ALC’s post-mining
vision for Groote Eylandt.
Conclusion
For the reasons outlined above, I consider the current
policy approach of the ALC, which is built around a complex and wide-ranging
strategy of utilising section 64(3) royalty flows to effectively underpin the
development of the Winchelsea mine, to be deeply flawed.
The May 2023 ANAO audit was focussed entirely on the ALC
and its governance, and it identified a range of serious issues. The ANAO remit
did not extend to the associated corporations in receipt of ALC funding. Yet a
wider analysis encompassing the corporations funded by the ALC suggests that
the ALC is using its financial heft and extensive cross-directorships to
exercise effective control over these corporations. In the process, very real
conflicts of interest have emerged which fundamentally undermine the policy
architecture laid out in the ALRA for protecting the interests of TOs.
Those structural conflicts of interest are endemic in the
decision-making related to the distribution of section 64(3) royalties on
Groote, and to the decision-making regarding the granting of consent to Winchelsea
Mining Pty Ltd to develop a mine on Groote. The ALC has not published its
assessment of the commercial viability of the project, and nor is the mining
agreement between the ALC and Winchelsea Pty Ltd in the public domain. Critiques
such as that offered here are thus based on inherently incomplete information.
Nevertheless, there is more than enough smoke in the public domain to justify
calling the fire brigade.
It is unclear how Minister Wyatt saw his way clear to
approve the agreement given that the ALC Chair and CEO also sit on the
Winchelsea Board. Assuming that there was no fraud involved, we can be confident
that the ALC’s narrow interests were protected in the mining agreement, but it
far from clear that the wider long term interests of the TOs on Groote were
protected. In particular, there is very real risk is that royalty funds that
could assist in reducing endemic disadvantage across Groote will instead be
allocated to an investment in a mine that appears not to be commercially
viable. In the worst case, royalty funds will be allocated to subsidising
and/or concealing financial losses, and may vanish. In such a circumstance, it
is unclear who the beneficiaries will be, but it is clear that they won’t include
the general Groote Eylandt community. Moreover, in the worst case scenarios,
when the community on Groote realise what they have lost, the recriminations
will be severe and the implications for social cohesion will be significant.
There has clearly been a comprehensive failure to comply
with generally accepted governance standards within the ALC. The Directors
collectively must share responsibility. The senior levels of the bureaucracy,
particularly NIAA, also share responsibility insofar as they have a
responsibility to clearly and firmly advise Ministers when existing
institutional frameworks are clearly not operating as intended or designed.
The NT Government and CLP Opposition must have a sense of
what is going on, but both appear to be entirely focussed on their internal
dysfunction and the forthcoming election. So too must members of the Senate
Estimates Committee who appear to have been blithely blind to what is going on.
However, the most serious failure must be sheeted home to the successive
Commonwealth Ministers who have looked away when they should have asked
questions and taken action. This is not just an issue about ensuring strict accountability
or making technical adjustments to processes, it is about Governments stepping
up and taking the hard decisions to assist the wider Groote community to take
control of its future. It is about prioritising
the pursuit of good policy over playing politics.
I recently wrote to the
current Minister for Indigenous Australians recommending she take
proactive action to ascertain what is occurring on Groote in relation to
royalty management. In particular, I recommended inter alia that she
initiate an independent forensic audit of the whole royalty allocation
system on Groote. If the concerns outlined in this post are confirmed, and
if she does nothing substantive, she too will own responsibility for whatever
transpires over the next five years on Groote.
Finally, it strikes me that it is time that the
Commonwealth commissioned a comprehensive and independent review of the
operation of the Aboriginal Land Rights Act in the NT focussed on the
effectiveness of the current policy architecture. In two years’ time the
legislation will have been in place for fifty years. Much has changed in that
time, in communities, in the NT, in Canberra, and beyond. Without regular
review, the institutional arteries that permeate the legislation become sclerotic,
institutional risks increase, deeper responsibilities are overlooked, and the various
stakeholders involved may lose sight of the opportunities inherent but unrealised
in the institutional structures legislated almost fifty years ago. The issues
on Groote are likely replicated to a greater or lesser extent elsewhere.
A visionary minister and government would adopt a proactive
stance, and not bury their head in the ground. Reform, whether deep change, or
just a regular tune up, is best undertaken by those sympathetic to the aims of
the policy structures in play, not by those fundamentally opposed.
16 March 2024
