FOCUS: Australia Mining Tax: A Win-Win Deal With Just One Winner?

5th Jul 2010 11:46

By David Fickling Of DOW JONES NEWSWIRES SYDNEY (Dow Jones)--Australian Prime Minister Julia Gillard may be claiming victory with her quick breakthrough over the contentious resources mining tax, but miners may end up having the last laugh when the dust settles over the new provisions of the tax plan. Though the key to the deal was "give and take" and some in the government put it, there was little given and more taken by the miners according to analysts and industry experts. Some miners could actually see their tax bills go down under the new tax regime and the benefits of the scheme will flow more to larger companies, than the smaller ones the original plan was meant to help. The Minerals Resource Rent Tax announced Friday will hit miners with a fresh 30% tax on their iron ore and coal profits, but the fine detail of the agreement offers considerable scope to manage down tax bills. "It depends on the commodity price," says Lyndon Fagan, an analyst at RBS in Sydney. "In a higher-price environment under this regime you'd pay more tax, but in a low-price environment some of the deductions will protect you to a large extent." RBS estimates the effective tax rate, including a 29% corporate tax, will settle to around 35%-40% of operating profits for most companies once such deductions are factored in, compared to the 43% BHP Billiton Ltd. (BHP.AU) paid during 2009. Goldman Sachs JB Were now sees Murchison Metals Ltd. (MMX.AU) and Centennial Coal Co. Ltd. (CEY.AU) improving their earnings-per-share performance over the first five years of the tax, when compared to previous estimates. Some brokers produced higher estimates for tax rates. UBS sees the tax rate at 44%, compared with the current 38% and an expected 56% under the previous version of the tax proposed by former Prime Minister Kevin Rudd. Fat Prophets expects it to be 45.4%, up from 41.1% earlier, but down from the 57.7% under the original plan. Goldman Sachs JB Were puts the new regime's effective tax rate at 45%. Any reduced tax bill would be an unexpected outcome for even the watered-down version of a tax, widely seen as an impost on mining companies, only justified by the sector's recent strong profits. However, the example of Papua New Guinea, which barely collected a cent from its earnings-based resources tax in nearly three decades before its abolition in 2003, suggests there is plenty of room to limit payments. "Any tax along these lines just allows for inventive accounting, ways and means to legally modify the level of operating costs," said Gavin Thomas, managing director of Kingsgate Consolidated Ltd. (KCN.AU), who worked for 27 years in Papua New Guinea for Rio Tinto Ltd. (RIO.AU) and Lihir Gold Ltd. (LGL.AU). Accountants also point to the valuation of existing assets as a key point of contention. Under the new plan, companies would be able to price their mine assets at either book value - the original purchase price, and the one usually listed on balance sheets - or at an estimate of current market value. That would likely be considerably higher than book value, particularly for the older assets held by the biggest miners such as BHP Billiton Ltd. (BHP.AU) and Rio Tinto Ltd. (RIO.AU), said Tom Seymour, a tax and resources partner at PricewaterhouseCoopers in Brisbane. Market valuations are also likely to be high for miners because they are largely based on current prices for the commodities they sell. Iron ore is currently trading at record highs, and Australian thermal coal is trading at around 240% of its 25-year average price. That provides a significant safety net for miners in the event of lower commodity prices over the next few decades: while the earnings figure from which their tax payment is derived would shrink, the depreciation which they are able to write off against tax would remain at elevated 2010 levels, aiding their cash flow. "The industry will no doubt feel: 'The higher valuation, the better'," says Seymour. According to Nick Raffan, a mining analyst at Fat Prophets in Sydney, the sizeable undeveloped coal reserves in west Africa, Mozambique and Mongolia are evidence that such a fall in prices is quite plausible. China's government is also looking at neighbouring countries to help diversify away from its dependence on Australia's iron ore, according to a weekend report in the China Business Journal. "This is an enormous back-down for the government and it's questionable why we're going down this road for an increase of only 4% in taxation," said Raffan. Seymour adds that the revised system for rebating royalty payments, under which miners would have their state royalty payments credited to them as offsets against future tax, rather than turned into immediate cash rebates, would also work more in the interests of the big miners than the smaller operations the new regime was meant to help. "One of the key things about this tax was meant to be assisting marginal mining operations, so if you didn't make a large profit you'd get a refund of your royalties. Now if you're marginal you don't get your royalties back, you just get to carry them forward for a year, so it's less favourable to the marginal projects and more favourable to the profitable ones," he said. -By David Fickling, Dow Jones Newswires; +61 2 8272 4689; [email protected] (END) Dow Jones Newswires July 05, 2010 06:46 ET (10:46 GMT)