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BX3033 PROJECT EVALUATION
11:59 pm, 04 August 2024 (Singapore time)
The purpose of this project is threefold: to teach you about a particular and important case of resource use assessment, to give you experience in writing a report of the consultancy type, and to give you some experience of working in a small group.
BACKGROUND
Mining in Kakadu
Kakadu National Park was established in three stages. Stage One was proclaimed in 1979, Stage Two was added in 1984 and Stage Three in 1987. Supplementary proclamations were made in 1989 and 1991 (Kakadu Conservation Zone). The entire Park is jointly administered by the Commonwealth Government and the traditional Aboriginal owners under the Commonwealth’s National Parks and Wildlife Conservation Act 1975.
Mining had taken place in Kakadu since Europeans first entered the area. The early mines were small and had little impact on the environment. In the early 1970s, however, major uranium deposits were discovered at Ranger, Jabiluka and Koongarra. After an enquiry into the issue of Aboriginal land rights, the Commonwealth passed the Aboriginal Land Rights (Northern Territory) Act 1976, which gave Aborigines the right to negotiate benefits from mining. When the Ranger Uranium Mine (RUM) was established in 1978, the negotiations between RUM and the traditional owners resulted in the latter gaining royalties, which are managed by the organisation of traditional owners called the Gagudju Association.
The “three uranium mines policy” of the Labour Government prevented to development of Jabiluka and Koongarra. Governments and politics have changed since the 1980s and on 4 August 2005, Commonwealth Government declared that it was taking control of all uranium deposites in the NT to “give certainty to the industry and ensure the expansion of exports to meet growing demands for nuclear energy worldwide” (The Australian, 5 August 2005) . The recent discussions between the Commonwealth Government and the Indian Government over the possibility of Australia exporting uranium to India has again caused a discussion in government over the possibility of allowing mining in national parks. Many politicians in the government now consider that the “locking up” of minerals in national parks to be a major restriction on Australia’s ability to take advantage of the minerals boom.
The Consultant’s Task
The consultant is required to present the Department with a report, a version of which will become a Cabinet Submission, which will assist the Government and the Department in its deliberations on the issue of allowing mining in the Kakadu region (composed of the Kakadu National Park and the mining leases which are in or adjoin it). The Cabinet will consider the proposal to approve a new proposal for the Coronation Hill project, as well as the Jabiluka proposal. Your report will review and update the Resource Assessment Commission’s (RAC) Inquiry into the Kakadu Conservation Zone and will comment on data relating to experience of the RUM and the Jabiluka proposal.
(Near Fiction)
The land on which the potential mine sites are located is owned by the Aboriginal tradional owners under the Aboriginal Land Rights (Northern Territory) Act, 1976. Under the act, they have considerable say in whether mining may proceed, and the Aborigines often object because either sacred sites are threatened or because of perceived undesireable social consequences. In the case of such objection, the government may invoke the Act’s “national interest” clause of the Act (as it threatened to do during the Ranger negiotations) which allows it to override the wishes of the traditional owners. Depending on the review of the issue of mining in Kakadu, the government may either invoke that clause or achieve the commencement of mining in other ways. In particular, as part of this assessment process, the government wishes to consider whether it should amend the mining provisions of the NT land rights act to conform with the mining provisions of the amended Native Title Act, 1993.
Coronation Hill
On 18 June 1991, the Federal Cabinet agreed to prohibit the mining of Coronation Hill (Guratba) in the Northern Territory (NT) on the explicit grounds that the rights and beliefs of its Aboriginal custodians should be respected. Six days later, the 47.5 km2 Kakadu Conservation Zone, encompassing the Coronation Hill (CH), was incorporated into Kakadu National Park.
The mining industry expressed very strong objections, claiming that the decision would send the wrong signals to investors, and thus would discourage investment in mining. Some industry spokesmen were extreme. For example, Mr Hugh Morgan, at the time managing director of Western Mining, said that the decision not to mine CH was
telling the world, particularly our Asian neighbours, that we are not serious about holding this country, justifying our occupancy of it, developing it and resolutely defending it if we are threatened (The Weekend Australian, 17-18 Aug 1991)
In addition to industry objections to the outcome, there were a number of objections to the lengthy process undertaken, in the form of a Resource Assessment Commission (RAC) inquiry, to arrive at recommendations. These complaints assisted in the move to abolish RAC.
New mine data
As part of the consultancy report, the consultant will be required to update the RAC’s analysis of the Coronation Hill mine proposal, and the following are the current expectations in relation to that project.
The company which wishes to develop the Coronation Hill deposit is a consortium called the Coronation Hill Mining Corporation (CHMC).
The assessment date for the project is January 2024. All values quoted are in estimated January 2024 prices.
It is estimated that the costs of assessing the proposal and essential proparatory work done in Jan 2022 and Jan 2023 are $5 million and $6 million, respectively.
The costs of developing roads in the mine area will be: Jan 2024, $20 million; Jan 2025, $15 million; and the road maintenance costs will be $2 million per year for the life of the mine.
The costs of the construction of the processing plant and major earthworks will be: Jan 2024, $100 million; Jan 2025, $50 million; Jan 2026, $20 million. The salvage value of the plant is expected to be $200 million.
10 trucks would be bought in January 2024 at a price of $5 million in total, and the registration fee for these trucks is $2 million in total. The resale value of these trucks at the end of the project life will be $1 million.
Working capital costs will be $5 million, commencing in the year zero.
Mining will commence in Jan 2027 and will be conducted in two phases. From Jan 2027 until Jan 2034, mine will be open cut, and from then until the end of mining it will be underground. Recurrent production costs will be 15% of the value of output during the open cut phase, and 20% of the value of output during the underground phase.
Core case
In the core case, based on data provided by CHMC, it is estimated that the value of output in Jan 2027 will be $70 million and it will grow by 5% per annum until 2034. It will then grow by 3% per annum from that level until the closure of the mine.
Alternate case 1
Since all of the ore to be mined will be exported, expectations about the value of output depend critically on the the assumption that are made about the foreign price of minerals and on the exchange rate. Doubts have been expressed about assumptions used in the core case. In alternate case 1 you are to assume that international mineral prices will be 8% lower than in the core case.
Alternate case 2
The value of the AUD has been fluctuating substantially in the past few years. Currently one AUD can exchange for 0.67 USD. Experts expect it to depreciate somewhat over the future, beginning early 2024. To reflect this possibility, examine the case where the AUD depreciates by 8% by comparison with that assumed in the core case. Assume that ore prices are fixed in USD.
In order to do the project, in Jan 2024, CHMC expects to borrow $300 million which requires to pay an interest of $20 million per year, and issue bonds to raise $100 million which requires to pay a coupon of $5 million per year.
The nominal rate of return on investments in similar mines in Australia is 8%. The government expects that the average rate of inflation over the project life will be 3%.
The contingent valuation (CV) study conducted for the RAC inquiry was subject to considerable criticism and was somewhat ignored by the RAC in its final deliberations. On the basis of the RAC CV, the noted expert in this area, Richard Carson, derived the lower bound of $286 million for Australians’ willingness to pay to avoid even minor damage to Kakadu National Park. He obtained this figure by assuming that the survey respondents were replying as families rather than as individuals, and that they were offering a lump sum payment rather than a payment per year for 10 years. You are to use Carson’s estimate, after adjusting it for inflation, in your analysis.
TERMS OF REFERENCE
MINING IN KAKADU
(a) Assume that the mine will last 15 years, and outputs and recurrent production costs would occur at the beginning of the years.
The consultant will do the following:
1. Outline the history of Kakadu National Park.
2. For the Coronation Hill project, as described in these documents, provide the net present value calculations using Excel spreadsheets, excluding externalities for :
(a) The Core Case
(b) Alterate Case 1
(c) Alterate Case 2
3. (a) Adjust your calculations to account for externalities as estimated in the RAC contingent valuation study. Adjust those figures to Jan 2024 values using the CPI.
(b) Describe the results of the contingent valuation study conducted for the RAC Inquiry and the objections to it. (b) Is Carson’s treatment too conservative? (c) What does this study and others reported on the www tell you about the usefulness of CV studies?
(c) Do a literature review (around 5 studies) on the use of the contingent valuation method in CBA.
4. (a) Adjust your calculations to account for externalities as estimated in the RAC travel cost study. Adjust those figures to Jan 2024 values using the CPI.
(b) Describe the nature and significance of the travel cost study conducted by Knapman and Stanley for the RAC inquiry. (b) Adjust Carson’s figures to current values using the CPI.
(c) Do a literature review (around 5 studies) on the use of the travel cost method in CBA.
5. Provide a recommendation as to whether the development of the Coronation Hill mine should be permitted (from the society’s perspective.)
(b) While the consultant may use historic material from the original RAC studies and reports, maximum use must be made of up-to-date web materials.
(c) The consultant is to use best industry practice in the analysis and presentation of the report. This includes following the Style Manual for Authors, Editors and Printers, fifth edition (1994) for layout, references, etc.
(d) The consultant is required to provide an invoice showing all costs incurred in undertaking the consultancy.
(e) Submission date: 11:59 pm, 04 August 2024
END OF DOCUMENTS SUPPLIED BY THE DEPARTMENT
YOUR REPORT
Conduct your study and write your report in the following way:
(a) Presentation of the consultancy report
Remember that a consultancy report is not an academic essay. It must be a clear, concise and accurate assessment of the issues, without excessive general and background discussion. You must address the terms of reference directly, do everything stated in them, and little more. You must bear in mind that the press will quote passages out of context, so that qualifying clauses must be included whenever important and quotable statements are made. Assume that your readers are impatient, but they are either knowledgeable in economics or will be appropriately briefed by the Department.
Special attention should be given to your Executive Summary. In general, it should be no more than about two pages long and should cover the major points raised in your report. Many writers use a * at the beginning of each paragraph. The executive summary will be the first part of the report to be read, it will create the impression which most people will develop about the report, and it will be the only part read by most people, including journalists. Thus it must be complete, quotable and punchy, so that the reader does not ask at the end of reading it: is that all we get for our money?
Your report should have the following elements and they should be presented in the following order:
1. Title page.
2. Acknowledgments.
3. Table of contents.
4. Table of tables, figures, maps, &c.
5. Abbreviations.
6. Terms of reference.
7. Executive summary.
8. Text.
9. Appendices.
10. References.
(b) Your invoice
Your invoice should be submitted as a loose sheet enclosed in the report. To calculate your costs do the following:
1. Decide on the type of tasks and time required. After writing your report, divide the tasks and time which you undertook into those which would require someone (a) with a strong command of economics, (b) with a working command of economics but with good data and document skills, and (c) with secretarial skills.
2. Calculate the time required for each type of employee. Your company would have to have employed a Research Officer (RO) for tasks (a), a Research Assistant (RA) for tasks (b), and a secretary for tasks (c).
3. Calculate costs. Cost ROs at $1200 per day, RAs at $400 per day, and the secretary at $200 per day. Add 30% to cover payroll tax, workers compensation insurance and the employer's superannuation contribution. One of your ROs will need to visit Canberra for two days to present the report and have discussions with the Department. The travelling allowance (TA) for Canberra is $140 per day. Your company adds 30% to direct costs (all those stated above) to cover fixed costs (rent, light and power, &c.) and profit.
(c) Marking scale
This project will be marked out of 60 marks. The allocation of marks will be on the following basis:
Terms of reference part (a)
1. 5 marks
2. (a) 4 marks
2. (b) 5 marks
2. (c) 5 marks
3. (a) 5 marks
3. (b) 5 marks
3. (c) 5 marks
4. (a) 4 marks
4. (b) 5 marks
4. (c) 5 marks
5. 5 marks
Invoice with documentation of your costings (d) 2 marks
(d) Marking adjustment
Your mark will be a composite mark, with 50% being based on the mark that the group project achieves, and the remaining 50% being based on the mark, which the group achieves, weighted by the relative contribution of each group member (using the Contribution Statement).
Complete a Contribution Statement that indicates the contribution of each group member on a scale of 100% in terms of group activity participation and contribution to output. Ensure that this contribution statement is sent to your lecturer via email at [email protected] on the submission date, and all the group members must be copied in this email. Failing to send the Contribution Statement email or not copy all group members in the email means the contribution is assumed to be equal across group members.
BASIC REFERENCES
You will be expected to provide an updated discussion of all aspects of this topic. This means that you should examine the web on every matter to discover the latest views and facts.
ABARE 1990, Mining and the Environment: Resource Use in the Kakadu Conservation Zone, Commonwealth of Australia, Canberra.
Attorney-General's Department 1998, Native Title, AGPS, Canberra.
Australian Government Publishing Service (AGPS) 1994, Style Manual for Authors, Editors and Printers, fifth edition, AGPS, Canberra.
Australia, House of Representatives, Votes and Proceedings, Canberra.
Australia, Senate, Journals of the Senate, Canberra.
Ecologically Sustainable Development Working Groups 1991, Final Report - Executive Summaries, AGPS, Canberra.
Imber, D., Stevenson, G. & Wilks, L. 1991, A Contingent Valuation Survey of the Kakadu Conservation Zone, RAC Research Paper No. 3, Vol. 1, AGPS, Canberra.
Industry Commission 1991, Mining and Minerals Processing in Australia, Volume 4: Other Supporting Material, AGPS, Canberra.
Knapman, B. & Stanley, O. 1992, The Economics of Mining Coronation Hill, Discussion Paper, No 11, ANU North Australia Research Unit, Darwin.
Knapman B., Stanley, O. & Lea, J. 1991, Tourism and Gold in Kakadu, Australian National University, North Australia Research Unit, Darwin.
Mc Rae H., Nettheim G. & Beacroft L. 1997, Indigenous Legal Issues, second edition, LBC Information Services, Sydney.
Resource Assessment Commission (RAC) 1991, Kakadu Conservation Zone Inquiry, Final Report, 2 vols., AGPS, Canberra.
Stanley O. & Knapman B. 1990, Potential Impact of the Mining of Coronation Hill on the Northern Territory Economy, RAC, Canberra.
www search under Coronation Hill, Ranger Uranium Mine, Jabiluka, Kungarra, Kakadu, Jawoyn, Gagadju, Mirrar and others.
www.environment.nsw.gov.au for a large number of studies on valuing the environment.