Mike Henry currently finds himself wedged between two extreme examples of Australia's capacity to manufacture economic self-harm.
In February Henry assumed responsibility for the kit and caboodle of BHP Billiton's Australian mining operations. Before that he was running just the Global Australian's coal business. So he was already well versed in the first of these theatres of the occasionally absurd, the negotiation between BHP's coking coal operator and its unions over a new enterprise agreement.
Then, more recently, Henry was introduced to the Grylls Proposition.
Early last month Brendon Grylls won the leadership of the Western Australian National Party on the wings of a promise to recover the state's crumbling budget by introducing a new $5 a tonne impost on iron ore produced by BHP and its bigger Pilbara competitor, Rio Tinto.
Rio's fledgling boss, JS Jacques, subsequently suggested that the proposal – linked as it is to the state's very particular political fragilities and to the eroding public standing of the big miners – has seen the Pilbara jump to the top of the company's rankings of live sovereign risks.
To put that into some sort of context, that means Rio is now working to a song book that says its 50-year-old Pilbara business carries greater sovereign risk than mining copper in Mongolia, minerals sands in Mozambique or uranium in South Africa.
Paradigm shift
Henry is not so ready to ascribe a peak-risk ranking on the Grylls Proposition. But he is more than ready to describe how the Grylls Proposition might result in a paradigm shift in the way the risk of investment in the Pilbara is assessed within and without BHP.
Like so much else at BHP, risk management is a science where data is used to announce the probability of any particular problem actually occurring and then that is matched against its potential cost.
"Just because there might be a low probability, therefore don't worry, that is not smart risk management," Henry observed on Thursday as he opened another public front in the campaign against the Grylls Proposition.
"All I can say is it is very big risk, even if you give it a low probability. It is a $1.5 billion a year problem and that translates to an NPV of between $15 to $20 billion. That is huge. That is huge for us and huge for the state, which is why clear-headed people have come forward and said that the tax is a poor proposition.
"On the one hand it is very reassuring that the Premier, the Prime Minister and other state and federal representatives have come against the tax. But as much as some people may view this as low probability, if it were to occur it would be such a massive thing for our business, and for the Western Australian iron ore industry, that we have to take it seriously. So we have to get out there and arm people with the facts."
Grylls' riffs
Drilled to its core, there are two familiar riffs driving Grylls' siren song.
First there is the persistent untruth that the miners do not pay a fair share of their profits in return for access to our national physical estate. And that is layered with the proposition, having invested collectively $US62 billion ($81 billion) on iron ore growth over the past decade, the likes of Rio and BHP have little choice but to operate and maintain their expensively wrought systems.
The claim to recovered fairness resounds in many corners of Western Australian where communities that have lived through three long years of pain caused by the miner's drive down the cost curve.
But for all that the retail politics is sound, Grylls pitch is intellectually hollow. It just does not stack up.
Grylls argues that the miners do not pay enough rent for access to their tenements. The current impost is 25¢ a tonne. He reckons $5 a tonne would be better. And he would be right if 25¢ a pop was all that Rio and BHP paid.
"That is red herring, a furphy, it is very misleading," Henry said. "We paid $17.50 per tonne [to the state] in 2015. And our contribution to the state has grown 10-fold, by 1000 per cent, in the last ten years."
Last year BHP's iron ore exports generated $US10.53 billion in revenue. It cost about $US5 billion to dig and sell the stuff. After accounting for depreciation and amortisation, BHP extracted earnings before interest and tax of $US3.74 billion from iron ore. The business paid $975.6 million in income tax and, well before that, it filled WA's coffers with $US743 million, a figure that includes about $US60 million in rent paid on state issue production leases.
The story echoes at Rio Tinto. Since 2010 its iron ore operations have generated $US42.6 billion in earnings after paying $24.44 billion in income tax and $US9.17 billion in state royalties and rents. And, over that same time $US33 billion was reinvested in Pilbara growth.
Sunk capital
The other side of the coin here is the leverage of sunk capital.
Grylls and those that back him are actually betting on a conviction that neither BHP nor Rio would really be able to respond aggressively to what everyone acknowledges would be a profound change in the investment return metrics.
"That proposition might hold if we were working in a closed economy with no choices and no competition, maybe," said Henry. "But this business competes globally and we have aggressive competitors in Brazil that are already growing their business. Adding 20 per cent [to] our costs makes us less competitive over time and that quite frankly means less investment over the future in WA."
To be clear on what Henry is saying there, at current mining volumes, the Grylls tax would raise an additional $3 billion from twin targets of this asset strip.
It is a fact of mining life that sustaining output requires constant carefully planned reinvestment in new production. As one mine is depleted another must be ready. It is estimated BHP and Rio need to build a new 50mtpa (million tonnes per annum) mine every five years just to sustain current output. The Grylls tax would make those the investment decisions needed to make that happen very much more difficult.
But it is not just the new that would be changed. The economics of maturing mines would be shifted as well. "Mines are not amorphous things. They are groups of pit that have different pits and different strips within them," Henry explained. "We analyse which of those areas are economic at any particular time," he said. The point there is that miners are forever closing in parts of a mining whole and opening new strips and pits. Grylls would make closing things easier and extending them harder.
The risk spread far beyond the actual mines. Henry notes BHP has invested about $US1.5 billion in Port Hedland and community infrastructure over the past five years. "That is put at risk," he said. "And the dividend. We paid $1.5 billion in dividends last year but given there is not a limitless pool of cash, paying double in royalties, it has to come from somewhere."
Other simmering content
And, just finally, what of that other simmering content up there in Queensland's coal fields? The last time we checked the BHP managed operator of the world's biggest coking coal business, the BHP Billiton Mitsubishi Alliance, had just offered workers three years of zero wage rises along with costly increases to rents in their company owned housing, reductions to super payments, changes that leave management in total control of rosters and with ever more capacity to introduce contractors and casual workers.
BMA and its unions met on Tuesday. If the subsequent union update is any guide, things did not go so well. In the unions' 27th update on the ten months of negotiations, members were told that pretty much everything offered had been rejected and that they were still resisting the company's opening proposition, which is to separate a seven mine agreement into three unequal parts.
Coal workers were told that during Tuesday's meeting one BMA negotiator had "made an outlandish statement at the meeting to the effect that employees are not employed to make decisions, they are employed to follow directions."
"When challenged BMA subsequently apologised if the statement offended anyone present," the unions reported.
That this comment was made and was "dumb" has been confirmed by BHP. What it reflects though is important. There is a growing level of frustration at the lack of progress of these discussions. And at some point the stasis will need to be broken. Whether or not that means BHP will take its proposal directly to the workers, as it did twice during the strike-blighted union contest in 2011-12, only time will tell.
