Australian miners and analysts on Monday warned that Canberra’s plan for a 40 per cent tax on profits generated by resource companies would cut deeply into earnings and dividends and jeopardise the viability of already approved projects.
Mergers and acquisitions in Australia’s mining sector could also be curtailed if the tax, which Canberra said at the weekend it wanted to introduce in 2012, is approved by the country’s parliament.
Rio Tinto, the Anglo-Australian miner, on Monday followed rival BHP Billiton in condemning the new tax, which it said was a threat to Australia’s competitiveness.
“Taxing 40 per cent of profits over the long-term bond rate, together with corporation tax, would make the Australian minerals sector the highest taxed in the world,” said David Peever, Rio’s managing director for Australia.
Shares in Rio and BHP recovered from their lows in Australian trading to end Monday down 4 per cent and 3 per cent respectively. However, Macarthur Coal dropped 10 per cent down to A$14 on fears Peabody Energy of the US may abandon its A$16 a share takeover offer.
Analysts on Monday said the tax could threaten BHP and Rio’s proposed Australian iron ore production joint venture if a material change clause was triggered.
But Kevin Rudd, Australia’s prime minister, said he was prepared to take on the miners.
“The Australian people deserve a fair return on the resources which they themselves own,” he said, adding that BHP was 40 per cent foreign owned and Rio was more than 70 per cent foreign owned.
He said mining companies had generated A$80bn (US$74bn) in “higher profits” over the past decade. “At the same time governments, on behalf of the Australian people, received only an additional A$9bn over that period.
“That means these massively increased profits . . built on Australian resources are mostly in fact going overseas.”
Craig Sainsbury at Citigroup said the so-called resources super profits tax (RSPT) was messy and complex and would damage offshore investment in the Australian mining sector.
“Given the uncertainty surrounding the new RSPT proposal, we believe M&A in the Australian mining space is likely to dry up. Bad news for the mid-cap Aussie miners,” Mr Sainsbury said.
“[Australia’s] effective tax base is now 58 per cent versus our old tax base of 43 per cent,” Mr Sainsbury said. “The next most heavily taxed regions is the US at 40 per cent and Brazil at 38 per cent.”
Analysts said the RSPT would apply at the earnings before interest and tax line, and would be deductible against company tax, which is due to fall from 30 to 28 per cent, with concessions for capital spending, exploration and development.
Glyn Lawcock, analyst at UBS, estimated the tax proposal would cut Rio’s 2013 earnings by 21 per cent and reduce BHP’s by 17 per cent.
“While the RSPT targets profits only, and the proposed impost will be offset by rebates and a cut to the corporate tax rate – we still regard this change as a large new burden that slashes miners’ profits/dividends beyond 2012,” Mr Lawcock said.
Merrill Lynch last week said the proposed tax could cut Rio’s earnings by 30 per cent and BHP’s by 19 per cent. Those numbers are expected to be revised after taking into account proposed cuts to the company tax rate.
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