3rd UPDATE: Australian Government Unveils Major Changes To Mining Tax

2nd Jul 2010 04:28

(adds comment from analysts, Australian Industry Group and detail on Xstrata's Wandoan project) By Alex Wilson and Rachel Pannett Of DOW JONES NEWSWIRES CANBERRA (Dow Jones)--The Australian government announced sweeping changes to its planned new mining tax Friday, making major concessions to the mining industry including a reduction in the headline rate of the tax to 30% from 40%. The reworked tax, which will now only apply to iron ore and coal mines, has been welcomed by the biggest miners and analysts said it should go a long way to easing investor fears about the impact on the sector. The new proposal, hammered out in talks with the three biggest miners in Australia this week, marks a major government backdown from the original proposal launched in May. But for new prime minister Julia Gillard, who ousted Kevin Rudd from the top job only last week, partly due to concerns over his handling of the heated public debate with miners over the tax, it is an endorsement of her leadership, paving the way for her to call a quick election. Australians are due to go to the polls April 2011, at the latest, but analysts say Gillard could call an election for August to capitalize on a lift in voter sentiment for the ruling Labor government since she took over the leadership. Gillard said the heads of agreement signed with BHP Billiton Ltd. (BHP.AU), Rio Tinto Ltd. (RIO.AU) and Xstrata PLC (XTA.LN) late Thursday is a "very significant step forward". Under the revised tax plan, onshore oil and gas projects including the booming coal seam gas sector in Queensland state will be covered by the existing Petroleum Resource Rent Tax, levied at 40%. Iron ore and coal mines will be covered by a new Minerals Resource Rent Tax, or MRRT, to be levied at 30%, and the mining of all other commodities will be excluded. Under the original proposal, the tax would have kicked in at the long-term bond rate, currently about 5%, but the reworked MRRT sees this rise to the bond rate plus 7%, for a total about 12%. In a major concession to the industry's complaints over what it described as the retrospectivity of the tax, the government will allow companies to insert their mines into the new tax regime at market value rather than book value, thus allowing them to claim back more deductions against depreciation of the assets. This will make a significant difference to operations like the giant iron ore mines of BHP and Rio, which have had their book values written down over the decades to well below current market values, which have soared on booming iron ore demand. UBS analysts said this was the most important of the changes to the tax and gave the example of Fortescue Metals Group Ltd. (FMG.AU), which they said had been facing a drop in net present value of about 23% under the original tax proposal. The change in the threshold at which the tax kicked in would reduce the negative impact to NPV to 20%, UBS said, but the bigger impact would be the ability to start its assets in the new tax regime at market value of US$10.5 billion instead of book value of US$3.1 billion. The deductions for depreciation that this allowed would see the negative impact on NPV fall to just 8%, UBS said. Nomura analysts said the new tax plan dealt with most of the problems that had threatened future spending on Australian mining projects and should help ensure strong medium- to long-term investment in the sector. Political Maneuvering On Tax Continues The government backflip doesn't completely remove the overhang of uncertainty on the sector, as the tax isn't assured passage through parliament into law. Australia's main opposition Liberal-National coalition of center-right parties on Friday reiterated its vow to scrap the tax if it wins the next election. "We are going to oppose this tax because this tax from the Rudd-Gillard government is a bad tax for investment, it is a bad tax for jobs and it is ultimately a bad tax for Australia," Coalition Treasury spokesman Joe Hockey told Australian Broadcasting Corp. radio. "If this tax passes through the parliament, we will rescind it," he added. Labor won a majority in the lower House of Representatives in a 2007 election. But it needs the Senate support of either the Coalition, or all seven minor party senators to pass any new laws. The environmentalist Greens, who hold five of the seven balance-of-power seats, have also expressed reservations about the tax. Changing the tax will cut A$1.5 billion from government revenues over the four-year forecast period. To offset this fall in revenue, the government has pared back planned cuts to company taxes. The company tax rate will be trimmed to 29% by the year starting July 1, 2013, from 30% now--but won't be lowered to 28%, as originally planned, unless fiscal conditions improve. Australian Industry Group Chief Executive Heather Ridout said that while the mining tax deal appeared to be a reasonable compromise, the government's decision not to cut company tax to 28% was "deeply disappointing". "This is a blow for businesses in sectors such as manufacturing that need a boost to their ability to attract mobile investment," she said. Under the revised MRRT proposal, mining investments made after July 1, 2012, can be written off immediately, rather than depreciated over a number of years, allowing coal and iron ore producers to access deductions immediately. The government said this meant a mining project won't pay any MRRT until it has made enough profit to pay off its upfront investment. The new regime will also allow miners to transfer deductions from one mining project to another. Some miners, including Fortescue, had been unhappy with the way the tax talks were being carried out exclusively with the three big miners, with some worrying that their interests wouldn't necessarily be represented by the majors. In an effort to assuage these concerns, the government has set up a policy transition group led by Resources Minister Martin Ferguson and former BHP chairman Don Argus to oversee the development of a more detailed technical design for the scheme. BHP Billiton chief executive Marius Kloppers said the company was encouraged by the MRRT proposal, which addressed many of its concerns. "We are encouraged that the MRRT design is closer to our frequently stated principles of sound tax reform, in that the proposed tax will be prospective in its treatment of profits from our iron ore and coal businesses, and not apply to the other commodities in our portfolio," he said in a statement. Kloppers said there was still a lot of work to be done on the detail and design of the tax before it could be enacted. Xstrata said that in the wake of the new tax deal, it would restart its Ernest Henry underground copper project and review a possible restart to early spending on its A$6 billion Wandoan thermal coal project, both of which had been put on hold last month, with the company saying the resource super profits tax made them unviable. Chief Executive Mick Davis said the reworked tax was an acceptable outcome and he looked forward to the detail being finalized as quickly as possible to end any lingering uncertainty. "The mineral resource rent tax respects the principle of prospective application by recognizing the full value of existing investments and imposes a profits-based tax on coal and iron ore resources at an effective tax rate that does not severely disadvantage Australian mining investment compared to other resource-rich nations," Davis said in a statement. Rio Tinto Australia Managing Director David Peever said Friday's announcement was an important step toward tax reforms that will maintain Australia's international competitiveness as an investment destination. "As one of Australia's biggest taxpayers, Rio Tinto is committed to working constructively with government to ensure that the tax system continues to encourage investment in Australia," he said. -By Alex Wilson and Rachel Pannett, Dow Jones Newswires: 613-9292-2094; [email protected] (END) Dow Jones Newswires July 01, 2010 23:28 ET (03:28 GMT)