Xstrata pulls plug on investments in Australia

The backlash against Australia’s proposed Resource Super Profits Tax is starting to draw blood with Xstrata‘s (XTA-L, XSRAF-O) decision to suspend US$495.2 million worth of investments in its Wandoan thermal coal project and its Ernest Henry copper mine.

“The impact of the tax eliminates the net present value of the Wandoan coal project almost entirely and substantially reduces the value of the Ernest Henry underground shaft project,” Xstrata’s chief executive, Mick Davis, said in a prepared statement. “Neither will be viable if the RSPT is imposed.”

Xstrata’s suspended investment dollars would have included an already approved US$337.6 million underground shaft project at the Ernest Henry mine near Cloncurry in northwestern Queensland; a US$76.8 million investment in the design and workings for the first stage of the US$5.1 billion Wandoan coal project and related infrastructure; US$69.2 million of exploration and sampling in the Wandoan and Surat basin; and US$10.98 million of drilling on additional coal expansion projects including Rolleston West and Sarum, also in Queensland.

The two investments would have created 3,250 new jobs and Xstrata says further job creation is at risk as it reviews other growth projects it had been weighing in the country worth some US$18.5 billion.

Davis noted that the tax has created “significant uncertainty” for the future of mining investment in Australia and “would impair the value of previously approved projects and exploration to the point that continued investment can no longer be justified.”

He noted that the government’s decision “to change the rules for existing investments” means there is risk that any new investment in the country could again be subject to tax regime changes without consultation.

As a result, any potential Australian mining investment “now needs to show a higher rate of return to compensate for the impact of the world’s highest mining taxation on cashflows,” Davis explaiend. “Investors will also expect higher project returns to justify the increased risk of investing in Australia.”

Davis added that the proposed tax “compromises” Australia’s ability to take advantage of commodity price rises in the future.

Xstrata had approved the US$507 million Ernest Henry underground mine project in December 2009. The investment would have extended the life of the EHM operations from 2013 to at least 2024. EHM’s current open pit mining operations would have been transformed into a major shaft underground mine.

Although the development of the smaller decline underground mine is currently planned to continue, the suspension of the majority of the underground development project will halve the mine’s planned annual production rate from 2012 and reduce the planned life of the operations by at least five years, from 2024 to 2019, the company says.

Xstrata Coal, meanwhile, had spent about US$168.5 million over three years advancing the US$5.1 billion, 30 million tonnes per annum Wandoan coal project through feasibility studies. Early work had been scheduled to start in July 2010.

The coal project and infrastructure that goes with it, would have created more than 3,000 jobs over the next five years and helped open up the Surat Basin as a major new export region for Queensland, Xstrata says.