UPDATE: BHP, Rio Tinto Agree To Higher Australian Iron Ore Royalties

21st Jun 2010 09:58

(Adds comments by Western Australian Premier, Rio Tinto Iron Ore CEO, analyst) By Alex Wilson Of DOW JONES NEWSWIRES MELBOURNE (Dow Jones)--BHP Billiton Ltd. (BHP) and Rio Tinto Ltd. (RTP) said Monday they have agreed to pay higher royalties on their giant iron ore operations in Pilbara region of Western Australia. While the heads of agreement with the Western Australian state government isn't conditional on a planned iron ore joint venture between the two miners proceeding, analysts said it does look to be designed to win support from the government for that deal. The miners may also use the change to bolster their campaign against the federal government's planned 40% Resource Super Profits Tax, as they continue to argue they are already paying their fair share in taxes and royalties. Under the agreement, royalty rates will rise to 5.625% of iron ore fines sales revenue from 3.75% previously, while the rate for lumps will be set at 7.5%. BHP said the deal features amendments to the state agreements that the miners operate under, which will allow them to share infrastructure and blend products. "The ability to blend iron ore from any of our mines, and the flexibility in the use of all rail and port infrastructure, will be major enablers for our operations," BHP Chief Executive Ferrous and Coal Marcus Randolph said. "This will improve our operating efficiency and we are pleased to be able to share the gains from this enhancement with the people of Western Australia." The two mining giants were granted concessions on royalty rates under decades-old state agreements designed to encourage them to invest in the infrastructure needed to develop the state's vast iron ore resources. Western Australian Premier Colin Barnett has argued that if the pair are to be allowed to extract up to US$10 billion in synergies from bringing together their operations in the joint venture, they should be forced to give up the concessions and pay higher royalties. Barnett welcomed the agreement, which he said would add A$340 million to consolidated revenue in fiscal 2011 and would be accompanied by a one-off payment of A$350 million from the two miners to go towards a new children's hospital. "It provides the people of Western Australia with increased value from this state's resources and it creates a level playing field for all iron ore producers in Western Australia," he said. Rio Tinto Iron Ore Chief Executive Sam Walsh said the amendments out the state agreement contained in the deal would deliver "profound benefits" to the company's iron ore business and assist it when it is able to launch the next phase of expansion in the Pilbara. The amendments to the state agreements on infrastructure and blending would have been required for the miners to successfully proceed with their planned joint venture, which remains subject to approval by competition regulators and shareholders. RBS mining analyst Warren Edney said the change in royalty rates won't have a major impact on the miners' earnings once strong iron ore prices are factored in and since the deal looked to be designed to secure the modifications to the state agreements needed for the joint venture. "Obviously this is an enabler," he said. The Australian Competition & Consumer Commission said Monday it now plans to announce its findings on the joint venture on July 22. The ACCC had suspended the timeline for its review as it awaited further information from the two miners on the deal. Clearance from the European Union's competition regulator has always been seen as the biggest potential hurdle to the joint venture, with ACCC approval expected to be easier to achieve given the Australian regulator had previously approved the full takeover by BHP of Rio, a deal that was later scrapped. However, the potential areas of concern highlighted by the ACCC in a statement of issues on the deal in March suggested the regulator was planning a more elaborate examination of the deal than many had anticipated. Royalty Changes May Feed Into Federal Tax Row The increased royalty payments in Western Australia look likely to form part of the miners' argument that they are paying their fair share of taxes as they fight the federal government's RSPT proposal. The miners have complained that the RSPT was sprung on them without any consultation, and Barnett, who is also a trenchant opponent of the new tax, pointedly noted that the state deal was the result of "long and detailed negotiations conducted in good spirit over the past year." Walsh also said the agreement was the result of an extensive period of consultation and negotiation. Under the new tax plan, miners will still pay state-based royalties but these payments will be deducted from their RSPT bill. This raises the question of whether, in the case of an increase in royalties like the one announced Monday, the miners will get a rebate on the higher new royalties or the lower old royalties, as suggested in the federal government's original plan. The state royalties deal remains subject to approval by the partners of BHP and Rio in their iron ore operations and passage of legislation through the parliament of Western Australia. -By Alex Wilson, Dow Jones Newswires: 613-9292-2094; [email protected] (END) Dow Jones Newswires June 21, 2010 04:58 ET (08:58 GMT)