4th UPDATE: Australian Government Unveils Major Changes To Mining Tax

2nd Jul 2010 09:13

(Adds comment from Fortescue, analyst) 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 and clearing the way for an early election, hot on the heels on the sudden installation of a new prime minister. The reworked tax scheme, which includes a reduction in the headline rate of the tax to 30% from 40%, will only apply to iron ore and coal mines instead of all mined commodities. The compromise deal was welcomed by the nation's biggest miners, with analysts saying it should go a long way to easing investor fears about the impact of the controversial tax on the mining sector. The new proposal, hammered out in talks with Australia's big three miners, marks a major government backdown from the original proposal launched in May. But for Australia's new Prime Minister Julia Gillard, who ousted Kevin Rudd from the top job only last week, partly due to concerns about his handling of the bitter public stoush with miners over the tax, the quick compromise deal on the tax is considered an endorsement of her leadership. The end of the government's confrontation with the powerful mining sector paves the way for Gillard to call a quick election to capitalize on a lift in voter sentiment for the ruling Labor government in the past week. Gillard said an 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". The new proposed 30% Minerals Resource Rent Tax, or MRRT, will apply to iron ore and coal mines, with other types of mining to escape the new tax. Under the original proposal, the tax would have kicked when a project's rate of return reached the long-term bond rate, currently about 5%. The reworked MRRT sees this threshold rise to the bond rate plus 7%, for a total of about 12%. In a major concession to what the mining sector had described as the retrospectivity of the tax, the government will allow companies to use the market value of a mining project rather than its book value to calculate depreciation against the MRRT. This will make a significant difference to the MRRT paid by the giant iron ore mines operated by BHP and Rio, which have had their book values written down over decades to well below the current market values, which have soared on booming iron ore demand. UBS analysts, identifying this as the most important of the compromises on the proposed new mining tax, said Fortescue Metals Group Ltd. (FMG.AU), Australia's third-biggest iron-ore miner behind BHP Billiton and Rio Tinto, had been facing a drop in net present value, or NPV, of about 23% under the original tax proposal. The change in the tax threshold meant the negative impact to Fortescue's NPV was 20%, UBS said, but the bigger impact would be the miner's ability to calculate its assets for the new tax regime at a market value of US$10.5 billion instead of the 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. The MRRT also features a extraction allowance of 25% which will apply across all projects before the 30% resource tax is applied, meaning that the effective levy from the mine tax could be considered to be 22.5%, little more than half the original proposed 40%. Nomura analysts said the new tax plan dealt with most of the problems that had threatened future spending on Australian mining projects and should 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, however, 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. Labor has a majority in the lower House of Representatives but 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" and a blow to the manufacturing sector. 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. Under the new 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%. Not All Miners Happy With Process Or Outcome Some miners, including Fortescue, are unhappy with the way the tax talks were carried out exclusively with the three biggest miners, with some worrying their interests were not necessarily represented by the majors. Fortescue Chief Executive Andrew Forrest said the process was disappointing but the compromise was a reasonable framework for ongoing industry consultation. Patersons analyst Alex Passmore said the tax would make it harder for iron ore and coal juniors to raise funds for new projects, whether it be from banks, which are already wary of lending to smaller miners, or on the volatile equity markets. 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. 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 in Queensland, both of which were put on hold last month, when the company said the resource super profits tax made them unviable. 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. -By Alex Wilson and Rachel Pannett, Dow Jones Newswires: 613-9292-2094; [email protected] (David Fickling in Sydney contributed to this story) (END) Dow Jones Newswires July 02, 2010 04:13 ET (08:13 GMT)