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Australian PM rounds on tax critics

May 7, 2010

“Kevin Rudd, Australia’s prime minister, has told mining companies he is firmly committed to Canberra’s proposed 40 per cent tax, in spite of an intensifying industry campaign against it.
Mr Rudd met mining executives including Sam Walsh, chief executive of the iron ore division at Rio Tinto, and Ian Ashby, head of iron ore at rival BHP Billiton on Tuesday. He said he would not ‘walk away’ from the ‘controversial’ plan.
‘They were very forthright in putting their views and their concerns about the super profits tax that we’re proposing. I was equally forthright in explaining why we believe this is necessary,’ Mr. Rudd told a radio programme.”

Source: Financial Times, May 6 2010


Observations:

  • Analysts estimate the profit decrease caused by the tax increase to be 21% for Rio Tinto and 17% for BHP Billiton.
  • Rio Tinto plans to decrease capital expenditure in Western Australia by $11 bln because of the negative change in project financials.
  • Share prices of Rio Tinto and BHP have decreased approx. 20% since the first rumors of the new tax.

Implications:

  • The tax increase will reduce the change on a quick new take-over attempt of Rio Tinto by BHP Billiton, as net earnings resulting from the merged company will decrease the total effect of synergies that could be achieved.
  • As China and India require the iron ore from Australia in order to grow, the demand is rather inelastic to price changes. The move by the Australian government will therfore eventually lead to higher iron ore prices, so that the miner’s profits are restored. The price for the higher income of the Australian goverment will thus be paid by Chinese construction companies.
  • The shareholders seem to have overreacted to the news. Share price with likely return to pre-announcement levels when the storm has passed. Miners will gain additional goodwill from the government, that will not dare to stir them up again quickly.
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