Proposed Australian mining tax riles sector
Andy Hoffman
RTGAM






Vancouver - Australia's move to impose a massive new tax on mining company profits is sending shock waves through the global resource sector and raising fears the surprise measure will embolden other countries to levy similar taxes on the industry.

Endowed with significant stores of iron ore, coal, copper, nickel and gold, Australia's booming mining sector accounts for 18 per cent of GDP and helped the country largely sidestep the global economic downturn. Continued strong commodity demand from nearby China, India and other Asian countries, coupled with a stable tax and investment regime, has made Australia a prime destination for the world's largest mining firms.

Now Australian Prime Minister Kevin Rudd says those companies have failed to share enough of the wealth created by the resource boom. His Labour government has unveiled plans to slap a 40-per-cent tax on profits derived from Australian mining operations by 2012, which would make it the world's most heavily taxed mining industry. The increased government revenue, estimated at $11-billion in its first two years, would be funnelled into infrastructure projects and pension funds for Australian workers, a plan that is expected to prove popular with voters when they go to the polls later this year.

Analysts say the example of a global commodity production leader such as Australia inflicting such an onerous tax on its miners could inspire similar moves by cash-strapped governments. Many need to replenish coffers that were ravaged by stimulus spending and incentives to counteract the global recession.

"Governments all have fiscal imbalances and they need to readdress those. China is credited with having a super boom in commodities and that will likely be a new source of tax dollars for governments across the world," Tony Robson, co-head of mining research at BMO Nesbitt Burns, said in an interview Monday.

If Australia's proposed Resource Super Profits Tax on mining companies is instituted, governments from Chile to Democratic Republic of Congo to British Columbia could follow suit. Higher taxes on mining companies could cause a spike in commodity prices that would increase prices for consumer goods.

Mining company shares, particularly those with operations in Australia, were roundly pummelled Monday. The S&P/TSX Capped Metals and Mining index skidded more than 3.6 per cent with all of its 14 members posting declines.

Canadian companies including bullion behemoth Barrick Gold Corp., gold miners Northgate Minerals Corp. and New Gold Inc., copper miner First Quantum Minerals Ltd. and uranium producer Cameco Corp. , all have operations in Australia.

Vince Borg, a spokesman for Barrick, which derives about 17 per cent of its annual production from Australia, doubts that the Super Profits Tax will be implemented as proposed. Nonetheless, he conceded that the measure could have an "adverse impact" on the industry as a whole.

International mining giants are outraged by the proposal, vowing to fight the measure, which needs to be approved by Australia's upper house of Parliament, where the government does not have a majority.

BHP Billiton Ltd., the world's largest mining company which has more than half its operations in Australia, expects the tax rate on its profits would jump to 57 per cent from current levels of 43 per cent.

"If implemented, these proposals seriously threaten Australia's competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians," said Marius Kloppers, BHP Billiton's chief executive officer.

The move could reduce BHP's earnings by 17 per cent and those of rival Rio Tinto Ltd. by 21 per cent in 2013, analysts at UBS AG estimated.

Anglo-Swiss miner Xstrata PLC, which mines coal in Australia, warned that the proposed tax would force it to look elsewhere to develop new mines.

"It is highly regrettable that the Australian government intends to single out one of the country's most important and competitive industries for punitive tax treatment, potentially damaging the entire nation's global competitiveness," said Mick Davis, Xstrata's CEO.

U.S. coal miner Peabody Energy said it would study the impact of the proposal on its $3.7-billion bid for Australia's Macarthur Coal, whose shares dropped 9.5 per cent in trading to $14 (Australian), well below Peabody's $16 per share offer.

GaveKal Dragonomics, a Beijing-based research firm, dubbed the planned tax hike a decision by Australia to "pull a mini-Chavez" (referring to Venezuela's President Hugo Chavez's penchant for nationalizing resource assets), that could threaten Australia's economic performance.

"We would have thought that the sports-mad Australians would be the first to know that you should not mess with a winning team," the GaveKal report said.