Editorial: Aussie gov’t retreats, waters down RSPT

The past few days have lived up the old adage that a week is a lifetime in politics.

Miners active in Australia have scored a big win as newly installed Aussie Prime Minister Julia Gillard – who ousted her anti-mining predecessor Kevin Rudd in a shocking caucus revolt on June 24 – announced on July 2 that the Labor government had abandoned its plan to impose a retroactive 40% resource super-profits tax (RSPT) on all mineral production in the country.

But don’t pop the champagne corks just yet; it’s by no means a total victory for miners.

Instead, the government is proposing to replace it with a 30% windfall “minerals resource rent tax” (MRRT) on mined iron ore and coal. As well, the tax would not be retroactive and it would only be applied to mines making more than A$50 million in annual profits.

This limiting of the tax to two commodities is, of course, a great relief to the nation’s many gold, copper and nickel producers, among others, and it lifts a considerable burden off the proposed mega-expansion of the Olympic Dam uranium-copper-gold-silver mine in South Australia.

The list of North American-based winners active at non coal or iron ore mines in Australia includes Barrick Gold, Newmont Mining, NewGold, First Quantum Minerals, Coeur d’Alene Mines, Cameco and Northgate Minerals.

For iron ore and coal miners, the 30% surtax would be calculated on profit at the mine gate, and there would be a 25% “extraction allowance” that would result in only 75% of taxable profits being subject to the MRRT. The new surtax would be applied to profits above about 12%, compared to around 6% under the RSPT.

The hardest hit companies under the MRRT would still be the three biggest miners in the country: BHP Billiton, Rio Tinto and Xstrata, who would see the effective tax rates on their Australian mines climb from 30% to about 40% – difficult indeed, but still lower than the punishing 58% under the RSPT.

Two American majors – iron ore miner Cliffs Natural Resources and coal miner Peabody Energy – would also get whacked by the MRRT.

BHP Billiton, with its long-established mines in the country, notes that there would be an option of having the starting valuation base be the market value of the project, and not the previously proposed book value.

Still, there’s no getting around it: the MRRT would be a massive tax hike. It’s due to bring in an extra A$10.5 billion to government coffers in the first two years compared to US$12 billion under the RSPT.

Apart from the cash hit, one of the most rankling aspects for miners of the RSPT debacle was the fact that the government had not consulted at all with the mining industry before unveiling the proposed tax in May.

Things haven’t improved much with the unveiling of the MRRT, as the government primarily consulted with BHP, Rio Tinto and Xstrata, and ignored the nation’s mid-tier and small miners, many of whom have seen their markets caps chopped in half and equity financings dry up since the RSPT was announced.

There are a few bones being thrown to the iron ore and coal juniors.

For instance, Australian Resource Minister Martin Ferguson was quoted in The Australian as saying he might consider reintroducing a A$1.1-billion exploration rebate that was part of the RSPT but not the MRRT. And magnetite might also be excluded from the MRRT, which would help out a few low-value projects.

The reduced taxes taken from miners means there will likely be some delay in the federal government in Canberra returning to surplus. It had predicted a deficit of A$41 billion for fiscal 2011, with net debt forecast to peak at 6.1% of gross domestic product (GDP) in 2010-11.

In today’s fallen world, that’s actually pretty good: net debt in the world’s advanced economies is expected to average a whopping 82% of GDP in 2011.