Miners in dark over ‘super tax’ plan

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Funding for mining projects in Australia, a golden goose of global metal supplies, is entering a potentially extended slowdown as mining companies wait to see if the Australian government can push through a “super tax” on natural resources.

There are currently more than 300 mining projects in Australia – including mines planned by London-listed Rio Tinto, BHP Billiton, Xstrata and Anglo American – that are either under construction or in the “feasibility” stage of economic evaluation, according to Intierra, an industry data service.

All of these projects were initiated before May 2, when the Labor government under Kevin Rudd proposed to raise A$9bn (£5.3bn) a year and balance the federal budget by taxing mining and other extractive companies at a rate of 40 per cent on any profits that exceed an approximate 6 per cent rate of return.

None of the companies building these 300-odd projects knows if the tax will be implemented in full or in a modified form as Labor reaches the end of its elective term. It will take months before the outcome of national elections later this year begins to answer this question.

Billions of dollars in planned investments could shift even on minor changes to the proposal, such as a decision to scrap the clause that applies the 40 per cent tax rate to past projects as well as future projects.

“Every single capital project in Australia that was due to be looked at this month is not getting looked at now as we assess the impact [of the tax proposal],” Tom Albanese, chief executive of Rio Tinto, told the Financial Times.

“If nothing else, the proposal has put a hard deferral on spending decisions, just because of the need to recalculate everything.”

Rio generated the majority of its profits last year from its iron ore mines in Australia and stands to be the hardest-hit of the multinational miners if the tax becomes law, according to analysis by Deutsche Bank.

“At its best, this is not going to create new mines,” Mr Albanese said, referring to the notional 57 per cent tax rate that miners would face if the proposal becomes law. That rate includes the 40 per cent “super profits” tax on top of corporation taxes and royalty payments. “At its worst, it will result in suspensions of current projects,” he said.

The big mining houses are busy revising their economic models in Australia under a variety of taxation scenarios. They are also assessing whether countries such as Canada or the US provide similar returns as well as better fiscal predictability.

To date, Xstrata is the only London-listed miner to formally suspend Australian projects because of the tax. But Rio is quietly reallocating resources from Australia to the US for one of its earliest-stage projects. As many as 35 projects – all of marginal economic viability – appear to be deferred or delayed but not yet announced to the market, claimed a Perth-based mining analyst.

The world of mining finance has become unusually animated over the tax, fearing that copycat policies will follow what they see as a fundamental misunderstanding of industry economics by the authors of the proposal.

They cite projects such as BHP’s uranium and copper mine at Olympic Dam in South Australia. This requires billions of dollars in upfront investment projected to be recouped by cash flows in 2020 or later. The relatively high rate of return required is a function of many risks, including cost pressures and assumptions about the uranium market in 2020.

Last week, Morgan Stanley analysts said the multiphase expansion of Olympic Dam was unlikely to go ahead. “Under the resources super-profits tax, as proposed, the project has no economic value,” Morgan Stanley said.

BHP said 200 engineers continued to work on expansion plans.

“Any tax proposal that does not take into account business risks is doomed to failure, and I don’t think they took those risks into account here,” said Tom King, a tax partner at KPMG in Toronto.

The super-profits tax is not expected to become law until 2012. Whether it comes close to being passed depends on whether the Labor party remains in power and by what margin.

Mining companies will be looking at the latest opinion poll results in Australia on Tuesday with the same interest as the copper price.

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