Adelaide has Olympic-size aspirations for 2012 – but will South Australia’s most famous mega-project even reach the starting line? Renu Prasad reports
In a coincidence of events which must have sent a shudder through the Adelaide business community earlier this year, the seemingly invincible BHP announced a fall in profits for the first time in three years, Rio Tinto announced a $US8.9 billion writedown of its aluminium business and critics eagerly predicted
that BHP’s US$12 billion investment in Petrohawk was destined for a similar fate.
Why does all this matter in South Australia? Last October, BHP announced US$1.2 billion in pre-commitment capital for the first phase of the Olympic Dam expansion project to develop an open pit mine – a project which has the potential to create one of the world’s largest open pit mines which would increase copper production from around 180,000 tonnes per annum to 750,000 tonnes per annum and beyond. The site is also said to feature one of Australia’s largest gold reserves and the world’s largest reserve of uranium. The 20 billion dollar question – would BHP hold its nerve in an increasingly uncertain environment and make the final commitment to Olympic Dam? The legal profession has more than a passing interest in this story. It was the potential of this project which prompted Blake Dawson
– now Ashurst - to open its South Australia office in 2008 and had local firms eagerly eyeing the spin-off work. Little wonder, then, that partners were quietly choking on the biscuits at morning tea time when they opened the papers to read that, in accordance with the principle of “one bitten, twice shy” the future of Olympic Dam was up in the air.
A final investment decision on the project is yet to be made, with BHP CEO Marius Kloppers only prepared to reveal that the executive decision making process was “progressing well.” However, the project appears to be gaining momentum with reports that international fund manager BlackRock has doubled its exposure and the award of an A$100 million contract to Melbourne crane company Boom Logistics to work on the site. Local lawyers are confident that the project is still on course. “BHP is definitely moving ahead with Olympic Dam,” declared Piper Alderman partner Tony Britten-Jones. “It will go ahead – it’s just a question of [to what extent] and when.” He is dismissive of media scepticism . “I think there’s an appetite in the financial media for negativity at the moment – take interest rates for example, they are always on the front page,” he says.
This is the flagship project for South Australia. “It’s very important in terms of local and external confidence,” says Britten-Jones. “It is very real in terms of attracting suppliers and service entities to
SA and over time of course there’s the direct benefits - royalties and the like. However, at the moment it’s more about confidence and getting feeder businesses to come here.” And as is the case with just about any South Australian mega-project, there are fears about the extent to which local business will benefit. “Of particular concern is the prospect of fly-in/fly-out staff resulting in South Australia not fully capitalising on the mining opportunities,” says Finlaysons chairman David Martin.
“It is recognised within the business community and government that while South Australia has a strong skills base, the size of many of our businesses is not of a sufficient scale to successfully bid for large
mining projects.” It’s a crisis, but one not without opportunity for legal advisors. “Local businesses which alone do not have the potential to provide support services to the mining industry could scale up through not only the traditional routes of M&A, but also by considering joint ventures and strategic alliances,” says Martin. “We see this as an area of opportunity for SA businesses and we are particularly well placed to help such businesses.”
It’s a parochial line of strategy, but one with which South Australian lawyers are well familiar. As reported in ALB’s Adelaide Report in 2011, local firms have become increasingly strident about high profile legal
work being won by “fly in” lawyers from the East Coast when the same skills, they argue, are on tap in Adelaide. That’s been the pattern for years and while the likes of Finlaysons won’t be kicking Blake Dawson off the top rung of the BHP panel anytime soon, there’s hope that the fruits of the South Australia resources boom will be distributed more evenly as local enterprise plays a greater
role.
Market
Adelaide has not been immune from the increasingly fluid partner movements between firms of late. Expect some high profile movements in coming months: Ashurst is looking to recruit some extra capacity for its four year old Adelaide presence. Managing partner John Carrington confirmed with ALB that his firm was on the hunt, although he said that no decision had been made as to exactly how many new lawyers would be brought on board. Given that Ashurst followed BHP down to South Australia, it should not come as a surprise that the firm is calling for some extra firepower with the Olympic Dam expansion on the cards.
However, Carrington is of the view that Adelaide is ripe for expansion regardless of the fate of Olympic Dam. “I think South Australia is a state which offers potential for growth,” he observes. “ It is not as advanced in terms of resource development as either WA or Queensland, but there are clearly some substantial projects underway there. I’m very pleased with the fact we have a presence in Adelaide and I can see an opportunity to expand that presence.” Indeed, the absence of the top tier in Adelaide – with the notable exception of Minter Ellison – has been a striking feature of this market for many years. Perhaps Blake Dawson will be the first, but not the last, to see the light. The other important move is that long serving Minters Adelaide managing partner Nigel McBride has flagged his intention to leave the role at the end of the year. His successor is yet to be announced. There was some speculation that the Minters Adelaide/Northern Territory partnership would split from the firm (a la Phillips Fox –
Fox Tucker), which the firm has denied. Meanwhile, construction and infrastructure lawyer Manik Meah
has joined Minters Adelaide, making the move from Gadens Lawyers affiliate firm Fisher Jeffries. McBride was upbeat about the projects space, stating that there were “many major projects either
in the pipeline or underway.”
Other national firms have been reorganising themselves. Piper Alderman partners Mark Keam, Tracey Kerrigan, Neville John and John Hiatt departed to form their own workplace relations boutique, KJK Legal. The move reflects a desire by Piper Alderman to pursue a national employment practice, which was thought to be incompatible with the state-based workers’ compensation practicev of the KJK partners. Kelly & Co has appointed its youngest ever chairman of partners. Partner Jamie Restas, 38, was last year elected unopposed as chair of the firm, replacing Michael Durrant, who has stepped down to focus on his growing resources practice after almost three years in the position.
Economy
The National Accounts reveal that the South Australian economy is one of the weakest in Australia, which accords with anecdotal evidence from firms about weak business confidence. “The feedback
we are receiving from our diverse client base and from peers in other professional services firms is that business confidence remains flat,” comments David Martin.
He attributes this to the state of the global economy. “Despite encouraging signs of recovery in the U.S. economy, the continuing strong performance of the growth economies and the avoidance so far of a sovereign debt crisis in Europe, nonetheless business confidence in Australia is unlikely to pick up significantly in 2012 until the European situation becomes much clearer,” he says.
By contrast, Piper Alderman’s Britten-Jones believes the economy has already turned the corner: “There’s a degree of gloom still in residential housing and some parts of retail but at the same time
a lot of people are keen to get on with business,” he says. “I think compared to where things were in the early days of the GFC , things are a lot of better. Certainly for us things are improving. I think you
can point to a number of industries that had a tough time and say that they appear to be bottoming out. The wine industry in that area and also residential housing is in that stage too.”
Several lawyers have noticed more cranes appearing on the Adelaide skyline, a trusty indicator of commercial sentiment. However, another important indicator is also up – the number of companies in distress. “South Australia isn’t avoiding some businesses going into insolvency or administration,” says Kelly & Co CEO Stuart Price. “That is one area we see from the service side of things; we see there has been an increase in those types of activities. That’s not inconsistent with other states.”
All of this raises a perennial question: is Adelaide insulated from the worst effects of the global economy, or does it simply lag behind? “I’ve never worked out whether we’re ahead or behind – if
someone knows the answer, give me their number!” laughs Britten- Jones. For Piper Alderman’s national practice, Adelaide remains the best performing office with Melbourne not far behind. "Does that mean Adelaide is yet to feel the brunt? I don’t think so. Are we ahead? I don’t think so either – it’s very hard to pick,” says Britten- Jones.
Around Adelaide, you’ll hear the same stories of woe which have beset other cities. “I think the best example I can give of what’s happened in the last year is a retail client of mine who has about nine significant stores in shopping centres in South Australia and employs about 350 staff – they called last year the tsunami,” says Lynch Meyer partner Alf Macolino. “They’d done a survey at the start of 2011 and only about 15 percent of staff had gone online to any online store and bought something. By the end of the year nearly 80 percent had. He said that obviously has ramifications for retail landlords who haven’t quite got the message that the landscape’s changed dramatically and the times are tough. That’s
the best sort of example I can give of how the market is flat and challenging.”
Interstate interest
One positive aspect of the South Australian economy are reports of increased investment from overseas and interstate. Finlaysons, for example, now derives 25 percent of its revenues from outside the state, although some of this is attributable to outbound investment and matters without an SA element. “There are a lot of good SA businesses and a fair bit of interest coming in from interstate,” says Martin. However, other lawyers such as Lynch Meyer’s Macolino said that they had not seen any evidence of a new wave of interstate investment.
Private M&A is said to be on the rise, although lawyers are declining to comment on the record on the details of these transactions. Price points to an example from 2011 – Japanese trader Marubeni’s 40 percent stake in local desalination specialist Osmoflo for a reported A$50 million. “That gives you an example of the scale and the types of businesses that are investing in Adelaide,” he says. “Many transactions are not visible because they’re private and confidential but I can go on record as saying we have never been busier in that space. We are seeing record levels of activity in our M&A/corporate team.”
But if Adelaide corporates are being absorbed by the nationals, what happens to their legal advisors? That was the situation confronting Piper Alderman last year when long term client Eastern Star Gas was acquired by Santos for A$942 million. Does this represent a permanent loss of work for Piper Alderman? Piper Alderman’s Britten-Jones says that this is not a new issue for Adelaide firms and nor is he convinced that it is a problem either. He points out that his firm has had some success in pursuing post-merger work in Sydney and Melbourne with erstwhile Adelaide clients who have spread their wings.
However, the crucial point is that when an Adelaide company is sold, the vendors will inevitably look to reinvest their gains. “So normally you’ve got an entrepreneur with a bucket of cash at the end of it,” he says. “We normally work pretty hard in maintaining a relationship with those vendors and those people don’t normally sit around twiddling their thumbs. We work with them to indentify new opportunities. People that start these entities and grow them are not the sort to sit around and do nothing once they’ve cashed in.” It’s a point which will resonate with any firm with an SME client base. It may be the case that one generation of clients might be lost to the “big time”, but the next generation is always waiting to emerge from their shadows. This game is about individual relationships, not necessarily the corporate entity – and that’s a lesson that applies everywhere.