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Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©2012 | Wilfred Visser | thebusinessofmining.com

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Resource industry angry at tax increases

May 4, 2011 Comments off

“High commodity prices are triggering a fresh wave of resource nationalism around the world as governments impose higher taxes on oil and mining companies to extract a bigger share of the profits generated from mines and wells. ‘There has been a tendency to raise taxes and royalties when oil prices are high to grab a larger share of the economic rent from oil resources,’ said Amy Myers Jaffe, energy expert at Rice University. Today, with many governments struggling with budget deficits, the temptation to extract ‘an economic ransom’ from oil and mining companies is even higher.

Meanwhile in Australia, the government has tried and failed to implement a 40 per cent ‘resources super profits tax’ on metals, minerals, oil and gas. Julia Gillard, Mr Rudd’s successor, watered down the tax, days after taking office in June in face of strong opposition from miners. The tax rate will be lowered to 30 per cent and apply only to coal and iron ore. But Ms Gillard’s government still faces a battle to pass the tax into law. The main opposition parties argue the tax is too harsh while the Green party opposes it because it does not hit miners hard enough.”

Source: Financial Times, May 2 2011

Observations:

  • Many countries are looking to copy the Australian model of increasing taxes on profits above a threshold level for specific industries.
  • Many developing countries (e.g. Guinea; Mongolia) try to create a situation that gives them income from resource projects in the long term by demanding an equity stake in projects and trying to stimulate investments from foreign multinationals.

Implications:

  • The increase in tax rates and other creative ways governments use to gain part of the income of resource companies are driven by a combination of increasing resource supply insecurity and the troublesome financial position of many governments. Resource-rich countries need to find a balance between benefiting from the mined resources and maintaining an attractive investment climate for mining firms; something the initial plan for tax reform in Australia by mr. Rudd failed to do.

©2011 | Wilfred Visser | thebusinessofmining.com

Fresh victory for miners on Australian tax

March 25, 2011 1 comment

“Canberra will refund any increase in royalties that cash-rich mining companies are forced to pay Australian states, amid concerns that governments around the world may not be receiving a fair share of their mineral wealth.

Julia Gillard, Australia’s prime minister, last year tried to end a dispute with mining multinationals, including Rio Tinto and BHP Billiton by watering down a proposed “super profits tax”. But the issue of who would pay higher royalties in states such as Western Australia, where much of the world’s iron ore is mined, remained a bone of contention. The minority Labor government said on Thursday that it had agreed to all 98 recommendations from a policy review group led by Don Argus, the former chairman of BHP . These included a provision that miners should receive credits for “current and future royalties” charged by state governments.”

Source: Financial Times, March 24 2011

Observations:

  • The minority government needs to secure enough votes for a tax to get it approved. The (Green) Liberal-National coalition has announced it might vote against the proposal, as it is favoring a higher tax rate.
  • The new tax is a watered down version of the super profits tax proposed by former prime minister Kevin Rudd. The new tax, which could increase tax revenues for Australia by several billion dollars, should become effective next year.

Implications:

  • By ensuring that miners are not hurt by royalty increases from local and regional governments the policy review group tries to reduce uncertainty for Australia’s miners. Being able to accurately predict royalty and tax cash flows is of great importance to investment planning.
  • Colin Barnett, the premier of Western Australia could play an important role in securing support for the MRRT. Barnett does not agree with federal influence on state royalty systems, arguing that the resources are owned by the state (of Western Australia) and that too much money is going from his state to other parts of Australia. He is campaigning to stop the reform.

©2011 | Wilfred Visser | thebusinessofmining.com