Who will follow Australia’s lead on mining tax? (May 31, 2010)

The global mining team at UBS Investment Research is fingering Brazil, the Democratic Republic of the Congo (DRC) and Mongolia as “potential early adopters” of taxes similar to Australia’s proposed new mining tax. “The scale of Australia’s proposed change will encourage a range of countries to revisit the mining tax take,” UBS predicts.

Countries least likely to follow in Australia’s footsteps are Canada (Australia’s traditional rival for investment dollars), Kazakhstan and Russia, UBS argues, because they see an opportunity to attract investment and take away market share from Australia.

The Resource Super Profits Tax (RSPT) on mining proposed by Australia “is likely to embolden other resource rich countries to lift their mining tax take,” the investment bank’s equity research team argues in a May 18 report entitled: “Who will follow Australia’s lead on mining tax.”

(Australia’s proposals would take the effective mining tax rate from 40% to about 55%), UBS argues, and the push for steeper taxes in mining “follows a strong established trend in the oil industry where national resource tax take is rising and linked to oil prices.”

UBS estimates that if the new tax regime becomes law in Australia, large diversified mining companies like BHP Billiton and Rio Tinto could lose 15-18% of their value. Analysts at UBS also believe that the market is “pricing a 60-70% chance of the proposals being effected in some form.”

UBS points to the impact uncertainty about black empowerment and rising royalties had in South Africa from 2001-2008. During that period, mining’s value added to gross domestic product was a negative 1%, while mining in the rest of the world grew 8% annually over the same period.

Australia’s proposals have “undercut valuations” and threatened investors and superannuation funds, the bank explains, and lower valuations may encourage Asian buyers to pursue more acquisitions.

Anglo American, Barrick Gold and Teck Resources would be “the direct beneficiaries in terms of relative value with Australian companies” if the tax becomes law, UBS argues. Its top pick remains BHP Billiton, even though 40% of its earnings come from Australia- based assets, “because of the quality of its resource base and its ability to leverage the increased M&A potential.”

By contrast, it remains cautious about Vale because Brazil could follow Australia’s lead. “The Australian rationale for the tax is paralleled in Brazil,” the report asserts.

“Both are federations with the states controlling mineral rights; together they dominate seaborne-traded iron ore; both have vigorous highly taxed energy sectors; both are facing elections with social pressures on higher tax takes to pay for pensions.”

Mongolia, Zambia, Chile and the DRC are other potential advocates of a similar profits tax, UBS states.