New tax raises miners’ ire in Australia (May 10, 2010)

Australia’s reputation as a mining-friendly country with a stable tax regime was thrown into doubt after the national government announced plans to create a new tax that specifically targets miners in the country.

The tax would see a 40% tax rate levied on mining profits on top of the corporate tax rate which would be reduced to 28% from 30%, and the new tax would be applied to projects already up and running.

“The government’s intention to change the basis on which existing mining investments were entered into sends a particularly worrying signal and undermines Australia’s reputation as a stable investment destination, hampering the ability of mining companies. . . to commit to future long-term investment,” Xstrata’s (XSRAF-O, XTA-L) chief executive Mick Davis said in a statement.

The idea behind the tax hike is to generate new government revenues that would help increase workers’ incomes by reducing payroll taxes and also increase mandatory pension contributions.

The broader context of the move is that Australian Prime Minister Kevin Rudd is up for re-election in the latter part of the year, and is likely banking on the new taxes’ popular appeal to help win over voters. Mining companies, however, are unimpressed.

“We are concerned about the inclusion of existing operations and the apparently arbitrary way the new resources tax was set at 40%,” Rio Tinto’s (RTP-N, RIO-L) managing director in Australia, David Peever, said in a statement. “Taxing 40% of profits over the long-term bond rate, together with corpora- tion tax, would make the Australian minerals sector the highest taxed in the world, seriously eroding competitiveness.”

Along with Rio Tinto and Xstrata, BHP Billiton(BHP-N), the other big player in the country, also issued a statement condemning the tax and warning that new investments in the country could be lost.

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,” BHP’s chief executive officer Marius Kloppers said in a statement.

But the government seems prepared to fight for the new tax, arguing that the Australian public hasn’t shared in enough of the wealth generated by the bull-run in commodity prices over the last 10 years.

It estimates that the new tax, which would be implemented in 2012 if approved, will raise roughly $11 billion in its first two years.

In an effort to tap into public support, Rudd has also played the nationalism card, suddenly arguing that BHP and Rio Tinto — companies which are normally proudly touted as Australian — are somehow no longer Australian enough.

The Prime Minister was quoted on Australian radio as saying that: “BHP is 40% foreign owned, Rio Tinto is more than 70% foreign owned. That means these massively increased profits. . . built on Australian resources, are mostly in fact going overseas.”

But the miners quickly pointed out the benefits of a healthy mining sector to the country.

“All Australians benefit from a strong mining sector. In the same way all Australians are affected by measures that hurt the mining sector,” Rio’s Peever said. “Australia was saved from the worst of the global financial crash by the strength of the resources sector, but the same industry is now being portrayed by the government as not paying its way.”

Mining accounts for close to half of Australia’s export revenue and in the last three years the resources sector has contributed to 18% of Australia’s gross domestic product.

“It is highly regrettable that the Australian government intends to single out one of the country’s most important and competitive industries for punitive tax treatment, potentially damaging the entire nation’s global competitiveness,” said Xstrata’s Davis.

The tax still has to be approved by the Senate — something which may prove difficult since Rudd’s Labor party is seven votes shy of a majority in the upper chamber.

Rio Tinto and BHP Billiton, with their large iron ore exposure in the country, would be hit hardest by the new tax should it pass, with BHP estimating that its effective local tax rate would rise to 57% from 43%.

BHP’s Kloppers said the company is more amenable to a new tax structure that meets four key requirements: preserving the basis upon which past capital investments have been made; maintaining the future international competitiveness of Australia’s resources industry; acknowledging that different products have different return characteristics; and encouraging private investment in infrastructure and processing.

Kloppers also said it was still too early to tell what the full effects of the tax would be since the government hasn’t defined all aspects of it.

The government says it will consult with the industry regarding this new tax.

The news had the expected effect on Australian mining shares as Rio Tinto shares fell 4% and BHP shares dropped 2%.

Macarthur Coal (MCC-A) also felt the sting as its shares plunged 9.5% to A$14.00. Peabody Energy (BTU-N) had tabled a $3.7-billion bid for Macarthur but the talk of the new tax has instilled fear that the offer could be pulled.