Home > Investments, Market change > Xstrata suspends A$586m spending

Xstrata suspends A$586m spending

June 4, 2010

“Xstrata, the Anglo-Swiss miner, said it had “suspended” A$586m (US$498m) in spending on coal and copper projects after reviewing operations in Australia in the weeks since Canberra announced plans for a new 40 per cent resources super profits tax.

It comes as the world’s biggest mining houses battle the Australian government over a tax that is scheduled to come into force in just over two years, provided it clears the legislative process. Miners have waged a high-profile campaign to warn that the tax will damage Australia’s international competitiveness and jeopardise mining projects and jobs.”

Source: Financial Times, June 4 2010

Observations

  • Until now only a limited number of companies have announced suspension of development. $0.5 bln by Xstrata, $15 bln by Fortescue (on very early stage projects) and a withdrawn takeover bid of Macarthur by Peabody.
  • The tax proposal is unlikely to be passed before the Australian elections, making the actual implementation very uncertain.

Implications

  • Mining companies and investors fear that other countries may follow Australia’s example and take a larger part of miner’s profits.
  • The government has various options to get a deal on reforming mining taxes:
    • Increase the “tax-free” rate of return of 6% to a threshold percentage more common in mining investments (12-15%)
    • Only apply tax to new projects that didn’t start development. In this way current developments are not threatened. However, this will not solve the miner’s problem in the long run.
    • Combine tax proposal with cut in state royalties (paid per ton of product instead of over profit). Only paying when making a profit reduces risk for the miners significantly. However, ideologically this is not in line with giving the locals a part of the value of the extracted resources.

Further reading:
Overview of implications of super profits tax

©2010 – thebusinessofmining.com

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