Miners stunned by Australia’s tax overhaul

[miningmx.com] — LAST week I wrote how Brian Gilbertson’s Pallinghurst Resources was able to attract $100m from sovereign funds for its little known platinum prospect, Platmin. The investment sum was less important than the fact historically conservative pension funds had decided to break with tradition and invest in South Africa’s politically hot and volatile investment climate.

Today’s Henry Review, which sees the Australian government slap hefty tax increases on its mining industry adds, more interesting perspective on political risk. Certainly, the proposed tax changes make South Africa, by comparison, somewhat less risky than before; and show that surprise, regulatory changes are not restricted to the African neighbourhood.

South Africans have long been critical of the government’s Royalty Act in which miners pay 3% or 4% of pretax earnings. But that barely compares to the Henry Review which increases BHP Billiton’s effective tax rate to 57% from its current 43%.

In a nutshell, the Australian government wants to impose a 40% Resource Super Profits Tax while at the same time cutting the company tax rate to 29% from 30% from mid 2013, and to 28% by mid 2014. It will also refund state-based royalties currently on mining projects. But these latter concessions are cold comfort to the impact of the super profits tax.

According to a Merrill Lynch report, the move could cut BHP Billiton’s earnings by 19% and Rio Tinto’s earnings by as much as 30%.

Marius Kloppers, BHP Billiton’s CEO, has not held back: “If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardise future investments and will adversely impact the future wealth and standard of living of all Australians’.

It’s critical to understand that prime minister Kevin Rudd is expected to be embroiled in elections in the second half of 2010. He’ll be seeking a second term in office so the fact that the tax is expected to boost savings for pension funds is all important.

Australia’s treasurer Wayne Swan told Reuters that government expected strong opposition to its plan from both the resources industry and conservative opposition parties. “We are under no illusions about how difficult it will be to win support for this package,’ he told Reuters adding that support would never be unanimous for such a vote.

And with heavy capital planned for Australia’s mining industry – Rio Tinto and Xstrata are set to raise about $11bn (A$12bn) in the first two years of implementation of the tax – a major sell off of mining stocks is expected on Monday.

Yet there are some ominous, wider implications. Swan said the new tax would help all Australians share the benefits of a prolonged mining boom. Australia avoided the global recession which stemmed from 2008’s financial crisis, but it’s eagerness to cash in for the next mining boom could see other nations taking Australia’s cue.

We saw this the last time there was widespread talk of the supercycle. In 2008, Zambia introduced a windfall tax on base metals at a minimum rate of 25% and then lifted royalties to 3% of gross value from 0.6%. The corporate tax rate also increased to 30% from 25%.

One wonders whether Australia’s interest in participating more heavily in the profits of mining companies might see other nations following a similar route. There’s a compelling case for it: the Australian government is saying that it barely participated the last time commodity prices enjoyed sustained high levels.

Swann said the Australian government had only received A$9bn extra from resource charges over the past 10 years while resource profits were A$80bn higher.

“The issues have created a great deal of uncertainty for investors and this could continue for some time until a final tax structure is decided,’ said RBC Capital Markets in a report to clients last week. “In our view, an increase in taxes is a virtual certainty, not only in Australia, but in other parts of the world given strong commodity prices,’ it said.

Interestingly, the tax proposals – if implemented one hastens to add – could have a positive spinoff for Australian’s junior mining industry which has never needed much encouragement in the past. That’s because as part of the concessions put forward, one is to offer a tax rebate to offset the cost of resource exploration. The move, planned for implementation from July 2011, is expected to benefit 4,300 companies, Reuters said.

Australia’s government is also expected to establish an infrastructure fund with an initial payment of A$700m from 2012 to 2013 to help pay for roads, ports, railways and utilities for resource industries.