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Posts Tagged ‘tax’

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

Mining Week 04/’12: First test for Vale’s CEO vs. Brazilian government

January 29, 2012 Comments off

Top Stories of the Week:

  • Vale starts to fight back against tax rulings
    • Vale announced its plans to appeal to the governments intent to charge $5.6bln worth of taxes on foreign earnings. The clash with the government promises to be the first real test for the new CEO Murilo Ferreira.
    • Mr. Ferreira took over the leadership of the company from Roger Agnelli, who was not reelected partly based on a disagreement with the government (which is control Vale via state-controlled shareholders) over $2bln taxation.
    • Sources: Vale press release; Financial Times; Bloomberg
  • Rio Tinto assumes full control of Oyu Tolgoi

Trends & Implications:

  • Vale estimates the impact of a review of the tax code on the company’s earnings to be approx. 4-5% of earnings. Taxation regimes around the world for specifically iron ore and copper mining are reviewed to make the countries benefit more from ‘extreme’ profits, which could be seen as a temporary phenomenon. However, the key issue in Vale is facing now is a debate about double taxation; paying taxes over profits after taxes realized in countries where the company is operating.
  • Rio Tinto’s control over Ivanhoe will help the company to put in place its management structure and have the project managed by some of its top project developers. Gaining full control of the project in this stage will help Rio Tinto to build the project according to the company’s standards, preventing costly and above all time-consuming future transitions in the operating structure. The global standards that enable effective project management more and more set the world’s largest miners apart from the ‘small’ mining firms with only a few operating assets. Very much like GE has become known as a great ‘project management company’, the world’s largest miners are more and more developing into ‘mine development’ companies in which development speed is the key success factor and navigating politics in developing countries is a key skill.

 

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 48/’11: Change in Brazil & Tax in Australia

November 27, 2011 Comments off

Top Stories of the Week:

  • Australia’s Mineral Resource Rent Tax approved by lower house
    • The new 30% tax on profits above A$75mln for coal and iron ore projects has been approved by the lower house and is now only to be approved by the senate. The tax has been debated for approx. 2 years. Initially proposed by Kevin Rudd, the former premier, the regime has been tuned down and now includes arrangements to stimulate and protect investments.
    • Sources: Wall Street Journal; Financial Times; Australian Treasury MRRT explanation
  • Vale appoints new CFO: Tito Martins
    • Tito Martins, Vale’s head of base metals, has been appointed as the new CFO of the company. Several executive management positions changed in the first major move of the new CEO to strengthen control. Mr. Martins was involved in the acquisition of Inco, which turned into Vale’s base metals division which was led by Mr. Ferreira.
    • The change of top management of Vale was started by appointing Murilo Ferreira CEO in the place of Roger Agnelli after the presidential elections in Brazil. One of the reasons of conflict between government and Vale was the building of a fleet of iron ore carriers in Asia rather than domestically. This fleet was in the news this week as Chinese ports are refusing to host them, trying to protect the interest of incumbent shipping lines.
    • Sources: Vale’s press release; Financial Times
  • Rio Tinto bids for uranium explorer

Trends & Implications:

  • The changes at Vale should prepare the company for further changes to the business environment for the major iron ore producers. The introduction of the MRRT mainly hits Rio Tinto and BHP Billiton, but all three majors are figuring out how to react to increasing uncertainty about demand. Asian steel producers are pushing for adaptations to the recently changed pricing mechanisms, moving the pricing system to shorter term contracts. At the same time various Asian players are starting to buy iron ore assets in the price range of hundreds of millions to several billions of dollars; threatening the dominance of incumbents.
  • Rio Tinto is trying to buy into uranium at a moment where industry shares are depressed because of the nuclear disaster in Japan last year. The bid for Hathor signals Rio’s management still believes in the potential of the industry. The company says it accounts for 16% of the world’s uranium production from mines in Australia and Namibia.

©2011 | Wilfred Visser | thebusinessofmining.com

Zambia’s new president worries miners

September 26, 2011 Comments off

“Mining companies are waiting anxiously as Michael Sata, Zambia’s new president, settles into office, wary that the former opposition leader may put past threats against foreign investors into practice now that he has been elected. Rupiah Banda, the incumbent president’s gracious acceptance of defeat in last week’s vote paves the way for a democratic transition, still something of a rarity in Africa.

But it has also triggered unease among investors in Africa’s biggest copper producer. Any mining policy changes would affect a host of international companies – including Glencore, First Quantum, Barrick Gold and Vale – which were expected to invest billions of dollars in the sector over the next five years. The jitters are caused partly because Mr Sata, 74, and his Patriotic Front are relatively unknown quantities. Mr Sata has gained a reputation for populist attacks against investors and complaints that Zambia’s resource wealth has not been adequately distributed.”

Source: Financial Times, September 25 2011

Observations:

  • Some of the largest mining operations and prospects in Zambia are Barrick/Equinox’ Lumwana copper projects; Metorex Chibulama copper mine; Vale’s Konkola north copper project; CNMM Muliashi copper mine; and Collum coal mine.
  • Tensions against foreign, and especially Chinese, ownership of mines rose after two Chinese mine managers allegedly shot a group of protesting miners at Collum coal mine last year.

Implications:

  • It is likely that the new government will try to increase taxes to make the state benefit more from high copper prices. Additionally regulation of working conditions might be strengthened, as much of the unrest in the country’s sector was driven by dissatisfaction about labor rights.

©2011 | Wilfred Visser | thebusinessofmining.com

Lex: Nationalisation of South African mines

June 30, 2011 Comments off

“Calls for the nationalisation of South Africa’s mines by Julius Malema, recently re-elected leader of the ruling African National Congress’s Youth League, are raising concerns in the industry. Lex’s Edward Hadas and Richard Stovin-Bradford discuss the threat, and whether mine nationalisation is good for the nation.”

Source: FT: Lex – video, June 29 2011

Observations:

  • Julius Malema, a leader of the Youth League of the ANC, has been calling for nationalisation of South African mines to increase control over resources and make the country benefit more from the earth’s riches.
  • Though not set up to facilitate nationalisation, this year’s launch of a state mining company (AEMFC) is seen by many industry experts as a threat to a free mining market in the country.

Implications:

  • An internal power struggle in the ANC party could take long before any moves for nationalization would be taken. However, due to the long horizon of mining projects investors will certainly take this risk in account when looking at South African opportunities.
  • A potential compromise demanded by the ANC to satisfy the demands for more mining benefits for the South African people would be a royalty or tax increase. This would prevent a take-over of control of mining assets by inexperienced and overloaded government institutions, while transferring a larger portion of mining profits to the population.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining sector feels heat as Peru turns left

June 8, 2011 Comments off

“Shares in mining companies operating in Peru fell sharply on Monday after a leftwing former coup leader won a narrow victory in the country’s presidential election. Grupo Mexico, a metals mining company with operations in Peru, fell 8 per cent in New York trading. Hochschild, a silver miner, and Southern Copper Corp, tumbled 5 per cent and 11.3 per cent respectively. Shares in Xstrata, which is building one of Peru’s biggest mines, were off 0.86 per cent, while Volcan Compañía Minera, in which Glencore has a stake, fell 8 per cent.

Ollanta Humala’s victory has provoked widespread fears he would lead a wave of nationalisations and higher taxes on foreign companies. Mr Humala has suggested Peru could impose a windfall tax of up to 40 per cent on mining companies, and also raise the 30 per cent rate that miners currently pay. Trading was suspended after Peru’s stock market plunged more than 12 per cent. The precipitous fall dragged down other markets from Chile to Mexico. BHP Billiton, Rio Tinto and Anglo American, none of which have Peruvian operations, escaped the sell-off.”

Source: Wall Street Journal, June 7 2011

Observations:

  • Current corporate tax rate for miners in Peru is 30% + 3% royalties/duties + 4.1% on dividends, which is below international benchmarks (see PWC Global mining tax comparison for details)
  • The most active international mining companies in Peru are Xstrata, Newmont, Freeport-McMoran, and First Quantum. The effect of the election results on the stock price of Newmont is displayed below, showing a sudden 2% loss vs. other gold miners.

Implications:

  • The average stock price decrease of around 10% of Peruvian companies reflects the risk of a tax increase. As the market value is the market’s expectations of future profits, the 10% increase corresponds well with a high likelihood of an approximate 10% tax increase (i.e. 10% after-tax profit reduction) plus the additional risk of increased government control.
  • Besides the risk of tax increase and increased government control, foreign companies face the risk of rapid employment cost increases as the new government will quickly try to make a mark in supporting wage increases.

©2011 | Wilfred Visser | thebusinessofmining.com

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

Rio Tinto signs agreement with Guinean government

April 25, 2011 Comments off

“Rio Tinto’s most troubled mining project appears poised for multibillion-dollar development after the company agreed to pay $700m to the government of Guinea and grant it a 35 per cent stake in its iron ore mine. The deal was reached on Friday ahead of plans by Guinea, a west African country rich in iron ore and bauxite, to review all mining licences as part of its push to secure bigger returns from its mineral wealth.

Vale and other multinational miners active in Guinea now have a precedent for their negotiations with the government. Vale, the Brazilian company that is the biggest iron ore miner, paid $2.5bn for a stake in a Guinean deposit last year. Rio’s deal allows Guinea to move towards a 35 per cent stake in Simandou, the iron ore deposit – located in a remote corner of the country – that is thought to be one of the world’s best untapped lodes of the ore.”

Source: Financial Times, April 23 2011

Observations:

  • Last month Guinea announced a review of mining licenses, including the demand to get minority stakes in all major mining projects in the country.
  • Rio Tinto controls blocks 3 and 4 of the Simandou deposit, with Brazil’s Vale controlling blocks 1 and 2. First shipment of iron ore by Rio Tinto is expected by mid-2015.

Implications:

  • The agreement of Rio Tinto to construct a railway through is a major blow for the government of Liberia, which hoped to convince the miners to export the ore with a shorter route via Liberia. The decision on the export route will further trigger challenging negotiations with Vale about using the same infrastructure to export ore from the area.
  • The 35% government stake can be build up over time, with the final 10% to be bought at market value in 15-20 years time. Tax rate is set at 30% after the first 8 years, with additional 3.5% royalties. The $700mln payment is only made conditional on granting the concession and approving the Rio Tinto / Chalco joint venture. Based on these conditions it appears Guinea intends to be a friendly host to international mining companies in the long term, but requires strict payment and infrastructure development contribution in the short term.

©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

World Steel Association: World crude steel output increases by 15% in 2010

January 27, 2011 Comments off

“World crude steel production reached 1,414 million metric tons (mmt) for the year of 2010. This is an increase of 15% compared to 2009 and is a new record for global crude steel production. All the major steel-producing countries and regions showed double-digit growth in 2010. The EU and North America had higher growth rates due to the lower base effect from 2009 while Asia and the CIS recorded relatively lower growth.

Annual production for Asia was 881.2 mmt of crude steel in 2010, an increase of 11.8% compared to 2009. Its share of world steel production increased to 65.5% in 2010 from 63.5% in 2009. China’s crude steel production in 2010 reached 626.7 mmt, an increase of 9.3% on 2009. China’s share of world crude steel production declined from 46.7% in 2009 to 44.3% in 2010.”

Source: World Steel Association, January 21 2011

Observations:

  • Annual steel production has increased to a new record, fully recovering from the reduced production in 2009. This reduction was fully caused by production outside China. Chinese production has increased every single year for the past decade.
  • The new iron ore pricing system leads to complaints about higher raw materials costs with many steelmakers (current spot price at $175/tonne). The recent spike in coal costs (currently up to $350/tonne) further reduces the margins of the steel makers. American producers are posting significant losses.

Implications:

  • Focus of the industry is on the new tax policies to be introduced in China to cool down the economy. Increased consumer prices of steel might have a significant impact on the growth rate of the Chinese industry, starting in the second half of 2011.
  • Across the world the increased prices of raw materials will be passed on to customers, as the mining and transportation costs are not likely to return to the levels of early 2009 with global supply conditions.

©2011 | Wilfred Visser | thebusinessofmining.com