Taking Stock 4 September

FOR those who fear that dopey bureaucrats and unbalanced activists are posing a threat to New Zealand’s ability to refocus on growth and economic progress, the last few days have been encouraging.

Perhaps the divide is not binary but in essence there are those who believe that growth lifts all living standards, and those who believe that existing wealth simply needs redistribution to lift all living standards.

I sit in the corner of those who want growth but should take account of sustainability, those who want wealth from realised capital gains to contribute to the nation’s pool (to spend wisely), but in my group we have no respect for those who live in the public trough and allow bias and personal opinions to surface in their paid work.

The last few days have hinted that Luxon’s government is improving the prospects of more wealth for the Crown to distribute.

I noted:

1. That allowing into NZ wealthy people will lead to the building of nice new houses, with a minimum cost price of $5 million.  A $5m building cost will include more than $500,000 in GST payments and will employ tradespeople.

2. That the Environmental Protection Agency (EPA) now in public acknowledges that its role is to help the process of getting new projects approved. Its CEO, reacting to political criticism, has said so. This sounds like a swing towards science rather than activism.

3. A Central Otago economic consulting firm has published an encouraging analysis of one of the biggest projects that, up and running, would materially alter wealth in Central Otago (and New Zealand).

The EPA’s reaction to typically forthright criticism from the Minister of Resources was adult.

The Minister, Shane Jones, criticised the EPA for its nitpicking, and its apparent belief that its job was to ignore the benefits and prioritise the negatives, when assessing consent applications.

The EPA CEO responded that the EPA now recognised it had the responsibility of making Fast-track applications easier to assess, rather than building obstacles to a successful application.

He is right. I applaud.

Prior to the change in government an application to proceed with a project could be declined by the EPA, which wrongly was given a responsibility it was not equipped to discharge.

It had people able to investigate environmental issues. It had no real commercial talent to weigh economic benefits, as it clearly failed to do with the declined Chatham Rise dredging project.

The Fast-track process passes the accountability of weighing costs and benefits to people chosen for their commercial nous.

Growing our tax base is a dominant factor in having the money to rebuild all those assets that have been ignored, disgracefully, for decades, and to nurse people who are broken.

The following chart highlights the size of the problem, displaying major companies and their nett profit after tax, a guide to how much or how little company tax is being paid. The figures are the latest available. I acknowledge that NPAT is not the only measurement of business progress, but it does hint at the tax payable.

These figures also remind us of the importance of our dairy farmers.

Fonterra $1.168 billion after tax

Auckland Airport $420 million

Fisher & Paykel $377m

Contact Energy $331m

Mainfreight $274m

Spark $260m

Ebos $215m

A2 Milk $202m

Port of Tauranga $173m

Genesis $169m

Vector $167m

Air New Zealand $126m

TVNZ $25m

Get ready to refer back to this list after reading the information below.

Note that many big organisations recorded ugly losses and thus pay no tax.

Meridian Energy loss of $452m

Ryman loss of $436m

Fletcher Building loss $419m

Infratil loss $261m

Very clearly, corporate taxes need lifting. New ventures are needed.

Bureaucratic hurdles are welcomed only if the project comes with profits but needs intervention because of related hidden social costs.

Last week the High Court supported a Maori hapū who opposed a consent application from the Port of Tauranga which wants to develop its port at Sulphur Point and at Mt Maunganui.

Either a careless proof-reader or a cynical company lawyer led to missing a reference in the POT description of the Sulphur Point development. The hapū has a marae a few hundred metres from Sulphur Point. It claims it is affected by air quality, noise, traffic etc, and protests against the development.

The High Court confirmed the Port of Tauranga could not proceed to the Fast-track process until it addresses these issues.

The Port argues that these delays affect a project worth hundreds of millions of dollars. (POT is our major export port.)

Clearly POT should have responded to the hapū opposition, at least acknowledged it, and displayed how it could mitigate any meaningful problems.

It is greatly encouraging that the EPA does not have the right to decline the project but does have the right to draw attention to what was a relevant error in the application.

That the mainstream and social media typically side with protestors is no longer in doubt. Protest equates with clickbait and thus does not have to be balanced in its presentations. Many people enhance their ego by collecting clickbait support.

The application now has to be “complete”, not popular with irrelevant reporters, seeking by-lined attention.

Of course this narrative leads into the most relevant application that will be filed this year.

That is the consent application from Santana Minerals to mine a distant valley in the Dunstan ranges, on land owned privately by the Bendigo Station, the site more than three kilometres from any house, and out of sight from anyone bar occasional motorists driving through the hills, or from inquisitive passengers on aircraft.

The importance of this project can be seen by referring back to corporate New Zealand’s 2025 NPAT results, with their implied contributions to tax, displayed in the chart above.

Contact Energy, NPAT $331m, was fourth on that list, Mainfreight at $274m, was fifth.

Santana Minerals has published independently calculated figures, based on a gold price 10% lower than the current spot price, estimating NPAT of around $290 million, nett profit after paying corporate tax close to $200 million, including royalties. This makes Santana high on our list of future tax-payers.

This week an independent Central Otago economist released an analysis of Santana’s prefeasibility study (PFS). His release was described as an Economic Impact Statement (EIS).

The independent analysis found:

a) The project would contribute $5.8 billion of direct GDP to the Otago economy over its initial 13-year life, calculating this at NZ$5410 per ounce of gold. The spot price this week is a few dollars under NZ$6100 an ounce.

b) Government revenue over the mine life, from taxes, royalties, PAYE tax and ACC payments, would be approximately $1.8 billion, substantially more over the period than Contact Energy future corporate tax payments, at its current level of profitability.

c) The project would support 357 fulltime equivalent workers, earning on average per annum $140,300, more than double the inland Otago average wage. (There have already been 1000 job applications, unsolicited, many from within iwi and from local and nearby residents.)

d) The total number of direct and indirect jobs created would be around 854.

e) The average GDP per worker at the project would exceed $1 million, at least seven times the average of inland Otago workers, and 12 times the national average.

Note that Wellington’s average GDP per head, of around $80,000 is calculated as though the total cost of the public service is exactly matched by their contribution to GDP. (Surely there must be a better measurement of the contribution of public servants to GDP.)

If the application were forwarded as being “complete”, the Fast-track panel would then assess any cost of the project (such as a 13-year scar on a barren, distant valley) against the financial benefits.

New Zealand badly needs $2 billion of new tax receipts. It also needs well-paid jobs.

The new system takes out of play those who revel in “belching in church” to gain short-term attention to their likes and dislikes. It leaves in play those with knowledge of the environment and ecology, and those with the commercial and social skills to weigh costs against benefits.

When consent is sought, the EPA has 15 days to consider and then forward the application to the Fast-track people, or to define what issues have not been addressed, returning the request to the applicant.

Those who read the Bendigo Economic Impact Statement will be hoping that the weighing of costs and benefits will not take anything like the allowable six months by the Fast-track panel.

The Santana project is comfortably the one that will have the most immediate benign effect on our economy.

_ _ _ _ _ _ _ _ _ _

IT IS telling that the two environmental groups with the knowledge to comment meaningfully on the Bendigo project have to date been silent.

Those two organisations are Forest and Bird, and the Environmental Defence Society, both of which have relevant leadership and structures, focus on science, and cannot be captured by headline hunters.

By contrast, the views of the Sustainable Tarras group are similar in relevance to a streaker at a schoolboy rugby match, in my opinion.

Sustainable Tarras was quite legitimately entitled to some consideration when an airport was mooted to be built in the town of around 250 people, a few kilometres north of Bendigo. That airport would need to be tolerated by all Tarras people.

Some people in Tarras appointed as its spokeswoman a Wellington Regional Council employee whose is paid in Wellington to consider environmental issues in Wellington. That spokeswoman, Suzanne Keith, is described as being an employee who writes on the environment, has 20 followers from Victoria University, according to Google, but has a homely bach in Tarras.

She seems a keen outdoor person, and is obviously highly motivated, a major user of the Official Information Act, presumably to help her assess environmental issues. 

But her following is not stacked with people able to form solid assessments of costs and benefits. Her recent public meeting in Cromwell, at a church hall, attracted 120 people, whose loudest message was their disappointment that their opinion will not be canvassed. According to earlier media reports, a double-figure number of Tarras people have expressed interest in working on the site. Presumably they were not at Keith’s meeting.

By contrast with “Sustainable Tarras”, Forest and Bird, and the EDS, are weighty organisations, not dependent for information or opinion on a tiny number of activists.

Their views would be interesting. The eventual equation to consider will be based on science and maths, not on any resistance to the beauty or otherwise of a working mine. I presume the Wellington Regional Council is not paying for an activist to pursue her cause. (Perhaps this personal task is performed outside work hours.)

I repeat: this project is important to NZ. The government understands that. Opposition would be ineffective unless it was based on science, and was balanced.

_ _ _ _ _ _ _ _ _

RECENT analysis suggested that in the past year or so the banks with the best track record of forecasting financial market changes (interest rates, currency etc) have been the ASB and Kiwibank, surprisingly the ANZ being at the other end.

ANZ, our largest bank with the broadest database, now forecasts that the Reserve Bank will cut interest rates by 25 basis points twice before Christmas. I believe the ANZ.

This implies a cash rate of 2.5%, bank deposit rates falling to a similar level for short-term rates, with call rates for retail sums unlikely to remain in the 2% range.

It is the long-term rates that are meaningful for investors.

Mortgage rates will probably fall a little but given so many mortgages are floating, the big question for borrowers would be the point at which banks are forced to lift rates. If that is next year, then borrowers might be pondering fixing their mortgages for a longer term.

What lingers in our company’s thoughts is the ease (or difficulty) with which countries can raise 10-year money from bond markets.

Currently, countries often have low cash rates, but the rates demanded by bond markets, to fund government borrowing programmes, is the issue that preoccupies me.

The US 10-year rate is around 4.15%, the UK rate is nearer 5%, the NZ rate also in that area.

Thirty-year rates are nearer 5% and look likely to rise. Bond markets penalise countries that keep borrowing more and have no plan to raise taxes to solve the imbalance.

If bank and swap rates stay around 3%, then a 10-year rate of 4.5% is talking loudly about future inflation rates and currency values.

Currently, one can buy in NZ very long-term council bonds at yields well above 5%, such as the 2050 Auckland City Council bond, cleverly sold in 2021 when interest rates were inexplicably at almost zero, enabling the ACC to borrow for 30 years at lower than 3%.

That was the period when NZ should have raised a hundred billion with issues of long bonds. At one stage the NZ 10-year rate was 0.5%.

We now raise money at nearer 4.5%. A 4% saving on $100 billion would have been rather useful.

Austria did see that opportunity. It raised billions with a 100-year bond at an extremely low rate, less than 1%. The Austrian 100-year bond today sells for around 35 cents in the euro, meaning pension funds which bought the bond have been slaughtered by the fall in value, while Austria spends very little on servicing its debt.

I suggest investors carefully watch long-term rates. If the latest bout of money-printing or the next tranche (from a Trump-influenced Federal Reserve) sees global savers willing to buy bonds at 2%, that would be a strong signal to me to quit long bonds while rates are artificially low.

The 10-year global bond rates send a loud signal, much more relevant than the overnight cash rate, which will always be volatile.

How clever of the policy-makers in Vienna to have spotted the opportunity. How stupid of managers of other people’s money to have bought any of those 100-year bonds!

_ _ _ _ _ _ _ _ _ _ _ _

Travel

11 September – Ellerslie – Edward Lee

12 September – Albany – Edward Lee

24 September – Lower Hutt – Fraser Hunter

24 September – Napier – Edward Lee

30 September – Taupo – Johnny Lee

1 October – Hamilton – Johnny Lee

3 October – Tauranga – Johnny Lee

7 October – Palmerston North – David Colman

8 October – Christchurch – Johnny Lee

Chris Lee

Chris Lee and Partners Limited