Fernando MonteiroThe Australian Mining Super-Tax
May 11th 2010 18:30
Four strange things happened this week in the mining industry in Australia: Xtrata cancelled an investment in a Queensland mine worth $30 million and Peabody, in its bid for Macarthur Coal decreased the amount by one dollar to $15. Values of major Australian mining companies fell on the London Stock Exchange. And, finally, just last night the Federal Government announced, as part of its budget, a “super-tax” on mining and energy companies, which admittedly will increase their total tax burden. All this requires some consideration.
What consequences would result from this super-profits tax to the mining industry? One and immediate would be that projects already started would have to be recalculated for profitability. In this sense Marius Kloppers, BHP Billiton’s CEO, appealed for it to apply only to new projects.
Another is that small mining companies, those worth around $10 million, and they are the most, might become unviable. Their margins are so slender, and a large part of them are actually unprofitable, that they could not cope with the increase in tax costs. It’s unclear whether the government would want to exclude these companies.
A third one would be that mining companies generally, international as well as Australian, would be more uninterested in doing business in Australia, logically, isn’t it? Swiss based Xtrata, as mentioned above, already announced the cancellation of a $30 million project in Queensland.
The question that remains to be answered is whether the super-profits tax would make BHP Billion and Rio Tinto uncompetitive in the international arena. The super tax is supposed to allow for mining companies to offset royalties paid to state governments. Already Western Australia doubled some royalties and the prime minister promised to cover for that. You must ask how far the Federal Government would go about this. But, anyway, the miners must in the end be paying a much higher total tax to the government. So, surely, their burden will increase and so their profitability will go the other way.
How would a BHP or a RIO look like in the London Stock Exchange after the super tax, and already their value is falling since there was some sort of prior information about the super-tax? After they got sold by some large investors and their quotation fell, what would the remaining shareholders do? Would they keep them at their net asset values?
What would be the reaction of mineral buyers such as China, India, Korea and Japan after knowing that these miners above are going to increase even further their commodity prices to them – and they have since last year doubled – with the purpose of covering for the tax? China is already officially in the lookout for other sources of iron ore and coal that could be not so expensive and Brazil’s Vale, after being put-off recently, must be giggling with the idea by now.
But, anyway, what is the political/moral argument for a super-tax on mining companies? The idea, so does the government say, is that resources – iron ore, coal, copper, gold – belong to the nation and therefore this should be taxing and benefiting from its exploration. There is some sense is this idea, I suppose.
But it begs the question whether the nation is not already receiving a benefit from the mining exploration going on that can be considered appropriate. Let’s consider the absurdity that the super mining tax is so great that mining in Australia becomes economically impossible. The fall in economic benefit from this would highlight the real contribution from the mining industry to our country.
In fact, the benefits from mining activities in Australia are multiple. BHP Billiton received, according to figures for last year, revenues of $67 billion. From this it paid salaries to countless mining workers, bought huge amounts of explosives, purchased and maintained expensive capital items such as trucks and excavators, contributed to the building of transport means such as railways and ports, paid royalties to state governments and company tax to the federal government. Moreover, it distributed part of its profits of $14 billion to shareholders who might have re-invested them in Australia. Can you imagine the ramifications and wave effects of all this money in our economy? Do you honestly think the community is not already properly compensated as it is from this activity?
As a matter of fact the mining activity contribution to our gross domestic product is actually about 40 per cent, not a small slice of it by any means. The question that imposes itself now, and it’s again a justifiably extreme one, is whether we Australians could afford not to have a mining industry? Could we then, alternatively, do with a non-competitive one where international mining and energy companies would mostly bypass Australia?
Absurd, isn’t it?
What consequences would result from this super-profits tax to the mining industry? One and immediate would be that projects already started would have to be recalculated for profitability. In this sense Marius Kloppers, BHP Billiton’s CEO, appealed for it to apply only to new projects.
Another is that small mining companies, those worth around $10 million, and they are the most, might become unviable. Their margins are so slender, and a large part of them are actually unprofitable, that they could not cope with the increase in tax costs. It’s unclear whether the government would want to exclude these companies.
A third one would be that mining companies generally, international as well as Australian, would be more uninterested in doing business in Australia, logically, isn’t it? Swiss based Xtrata, as mentioned above, already announced the cancellation of a $30 million project in Queensland.
The question that remains to be answered is whether the super-profits tax would make BHP Billion and Rio Tinto uncompetitive in the international arena. The super tax is supposed to allow for mining companies to offset royalties paid to state governments. Already Western Australia doubled some royalties and the prime minister promised to cover for that. You must ask how far the Federal Government would go about this. But, anyway, the miners must in the end be paying a much higher total tax to the government. So, surely, their burden will increase and so their profitability will go the other way.
How would a BHP or a RIO look like in the London Stock Exchange after the super tax, and already their value is falling since there was some sort of prior information about the super-tax? After they got sold by some large investors and their quotation fell, what would the remaining shareholders do? Would they keep them at their net asset values?
What would be the reaction of mineral buyers such as China, India, Korea and Japan after knowing that these miners above are going to increase even further their commodity prices to them – and they have since last year doubled – with the purpose of covering for the tax? China is already officially in the lookout for other sources of iron ore and coal that could be not so expensive and Brazil’s Vale, after being put-off recently, must be giggling with the idea by now.
But, anyway, what is the political/moral argument for a super-tax on mining companies? The idea, so does the government say, is that resources – iron ore, coal, copper, gold – belong to the nation and therefore this should be taxing and benefiting from its exploration. There is some sense is this idea, I suppose.
But it begs the question whether the nation is not already receiving a benefit from the mining exploration going on that can be considered appropriate. Let’s consider the absurdity that the super mining tax is so great that mining in Australia becomes economically impossible. The fall in economic benefit from this would highlight the real contribution from the mining industry to our country.
In fact, the benefits from mining activities in Australia are multiple. BHP Billiton received, according to figures for last year, revenues of $67 billion. From this it paid salaries to countless mining workers, bought huge amounts of explosives, purchased and maintained expensive capital items such as trucks and excavators, contributed to the building of transport means such as railways and ports, paid royalties to state governments and company tax to the federal government. Moreover, it distributed part of its profits of $14 billion to shareholders who might have re-invested them in Australia. Can you imagine the ramifications and wave effects of all this money in our economy? Do you honestly think the community is not already properly compensated as it is from this activity?
As a matter of fact the mining activity contribution to our gross domestic product is actually about 40 per cent, not a small slice of it by any means. The question that imposes itself now, and it’s again a justifiably extreme one, is whether we Australians could afford not to have a mining industry? Could we then, alternatively, do with a non-competitive one where international mining and energy companies would mostly bypass Australia?
Absurd, isn’t it?
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