Tuesday, June 22, 2010

Robin Hood In Australia

"Australia's biggest mining companies Monday raised the stakes in the heated battle with the government over a planned new tax, warning that the proposal had already damaged the nation's reputation and accusing the government of misrepresentations. ... Fellow miner BHP Billiton Ltd. attacked the government for what it said were misrepresentations about the tax rate it pays on its Australian operations. ... Mr. [Tom] Albanese reiterated that Rio Tinto is carrying out reviews of all of its planned capital investments in Australia in light of the planned tax, and said the proposal had damaged Australia's reputation as a place to invest. ... The proposed levy would see companies taxed at a rate of 40% on profits above a rate of return in line with the long-term government bond rate of about 6%. ... If the tax had been enacted a decade ago, Mr. Albanese said companies such as Rio Tinto wouldn't have made the heavy capital investment in businesses like its iron ore operation in the Pilbara region of Western Australia state and the nation would have been poorer as a result", my emphasis, Alex Wilson at the WSJ, 25 May 2010, link:

"Wayne ... Swan said miners are effectively 'arguing that a government cannot change its pricing arrangements. It is the equivalent of the steel mills saying to the companies that they can't put up the price of iron ore. It has to stay the same for 40 years. That is nonsense. ... Swan rejected media reports that a visit to China later this week is intended to reassure Chinese steel makers that the proposed tax won't lead to higher commodities prices", Rachel Pannett at the WSJ, June 2010, link: http://online.wsj.com/article/SB10001424052748704875604575280444005329232.html.

"Swiss mining company Xstrata PLC on Thursday said it would stop development of two major projects in Australia, saying neither will be viable under the government's proposed resources tax. ... In its announcement Thursday, Xstrata said it will stop development of its A$6 biillion Wandoan thermal coal project and its A$600 million Ernest Henry underground copper project. The move follows Xstrata's decision in early May to also suspend a A$30 million three-year copper exploration program. ... Prime Minister Kevin Rudd cast doubts on Xstrata's move, saying it was strange that the company should stop spending on Wandoan when the legislation covering the new tax won't be drafted for 12 months and it won't come into effect for two years. ... The tax targets profits, not production. ... 'The resoruce super-profits tax has created significant uncertainty for the future of mining insvetment into Australia and would impair the value of previosuly approved projects and exploration to the point that continued investment can no longer be justified,' Xstrata Chief Executive Mick Davis said", my emphasis, Ray Brindal at the WSJ, 4 June 2010, link: http://online.wsj.com/article/SB10001424052748703561604575283461667881540.html.

"'The Australian people own those resources, and they deserve a fairer share of those resources,' said Kevin Rudd, prime minister, in a television interview", William MacNamara at the FT, 4 June 2010.

"'The impact of the tax eliminates the net present value of the Wandoan coal project almost entirely and substantially reduces the value of the Ernest Henry underground shaft project,' Mr. Davis said", Peter Smith at the FT, 4 June 2010.

Will Australia return 40% of a company's deficiency if an investment yields less than 6%? We note Australia wants to change taxes on existing investments. Does Australia's government believe mining ventures, 95% of which fail to find an economic orebody, are government bonds? Or are Australian government bonds as risky as mining ventures? Of course the investments wouldn't have been made. When Rio did its IRR calculations ten years ago, it assumed existing tax rates. If Rio had assumed a higher tax rate, its projected after-tax cash flows would have been smaller. What's not to understand? A substantial amount of ore in Australia will become "extra-marginal" if this tax goes through. In addition, the hurdle rate for all investments in Australia will increase as a result of "tax uncertainty". But "the ore belongs to the people". It did until Australia leased the land. See my 28 March 2008 post: http://skepticaltexascpa.blogspot.com/2008/03/stripper-well-economics.html. This proposed tax reminds me of 1980's "Windfall Profits Tax" which failed to produce the revenues Jimmy Carter & Co. projected, link:http://en.wikipedia.org/wiki/Windfall_profits_tax.

I reject Swan's argument. If one has a long-term supply contract at a fixed price, that's it. The price is fixed. If one forms a partnership, he also agrees to a profit division. Over the long run as mining investments decrease, the new tax will cause some increase in commodities prices.

Is Rudd really this stupid? Suppose Xstrata did an IRR calculation on a project which its expects to have cash flows for the next 25 years. If the new tax comes into effect in two years, it will reduce the project's cash flows in years 3-25. What's strange Rudd? The change in projections is made now. Henry, raise your own army. See my 21 March 2010 post:

Rudd ignores Australia's agreeing to its cut when the resource projects started. Australia and the miners made a deal. Stick with it. See my 12 June 2010 post:

Net present value? Have you ever heard of the term Rudd?

1 comment:

Anonymous said...

Totally disagree with you IA.

Governments raise and lower tax rates all the time.

Mineral rights are a form of tax.

Companies face many risks in exploration.

This is "regulator risk".