Can threats of exodus from Australia be taken seriously?

“Please, President Rudd, pile on the taxes.” Not surprisingly, that is not quite the reception with which Australia’s proposed mining super taxes have been received. There have been resounding warnings from mining companies, saying, in a nutshell, “Dump those taxes on us and we’ll invest elsewhere.” Of course, they are put more diplomatically.

Rio Tinto chairperson Jan Du Plessis has said, “This proposed tax could be hugely detrimental not just to the mining industry but to Australia as a nation. I don’t say these words lightly, and I am very keen to work with the Government to get to the right policy outcome for the industry and the nation. However, retrospective taxation raises sovereign risk and will, as sure as night follows day, increase the cost of investing in this country for the next generation.”
But would it really be that bad for Australia? Sure, it might make the mining firms think twice about digging their multi-billion dollar holes in the ground, but they would do it anyway.

Iron ore is one of Australia’s gest exports, and the country has one of the gest iron ore resources in the world. While there are other major sources of iron-ore in the world – such as Brazil – many of them pose far ger risks than the threat of super taxes. Vale and Rio Tinto both recently announced they’re building multi-billion-dollar iron ore projects in Guinea. This is the country the International Crisis Group said risks becoming a “failed state”.

An argument that could be put forward for the proposed super tax is that the people of Australia benefit little from the resources in their soil, as companies like Rio Tinto and BHP Billiton Р the two largest mining houses in the country – both mostly have foreign shareholders. But BHP Billiton CFO Alex Vanzelow has highlighted the company last year paid an effective 43% tax rate to the Australian government, with total taxes paid by its Australian operations from 2004 to 2009 exceeding AUD24 billion. “The 2009 earnings of BHP Billiton’s Australian operations were almost fully reinvested back in Australia in the form of taxes, royalties, capital applied to new and existing projects and dividends to shareholders.

That may be so, but as governments around the world look for ways to pay off their massive debts, they will continue to look at the mining industry as a soft target for greater taxes. There is a perception that it’s a ‘dirty’ industry, so there would be little sympathy from the public.
In the case of Australia’s iron ore, where there are obvious advantages to the resources being closer to China, and some of the gest in the world, miners will continue to invest as long as it’s still profitable. But governments like Australia’s will also have to tread carefully to ensure they don’t hike taxes so much that it does kill the goose that lays the golden egg.

Study finds Australian mining will be hit hard by new tax
A report by global accounting firm KPMG has found that new mining projects in Australia would not be able to fill a void left by large project deferrals as a result of the controversial super profits tax (SPT). The report, which was prepared on behalf of the Minerals Council of Australia, also showed that nickel, copper and gold mines would be economically unviable if the new tax were introduced.

The Australian federal government in May announced plans to impose a 40% super tax on resources profits, from 2012. Australian miners have slammed the proposed tax. Fortescue Metals placed AUD15-billion expansion projects on hold, and diversified giants Rio Tinto and BHP Billiton indicated that they were investigating the outcomes of the tax on its project, while Xstrata has halted an AUD30-million exploration programme in the country.

The KPMG stated that the long-run macroeconomic modelling of the SPT assumed that any capital outflows from the Australian mining sector, as a result of the introduction of the tax, would be matched by new foreign or local capital inflows into the sector.  it noted that this was unlikely to happen in the short-to-medium-term because mining companies that have brought forward investment in more financially attractive projects, outside Australia, would have met demand and smaller or new entrants were unlikely to be in a position to develop multibillion-dollar projects. “The impact on the mining sector from the introduction of the SPT at 40% means that it will take a long time for the sector to recover,” the accounting firm said.

The KPGM report also said the lack of certainty in the debt markets meant that mining companies that were currently assessing projects would not be able to price in a meaningful reduction in the cost of debt, and access to debt would remain challenging. However, it noted that debt markets would likely innovate and develop over time, so that mining companies could, by virtue of credit, access a greater level of debt than present.

“The government could influence the rate at which the debt markets develop by intervening in the market or refining its approach to the SPT. In order to be effective, any change would require advancement of policy in relation to the SPT.”
In an effort to discern which commodities would be the most severely affected by the proposed SPT, KPMG developed two scenarios: ‘status quo’ and ‘RSPT today’. ‘Status quo’ assumed that the tax rate and royalties remain unchanged, while ‘RSPT today’ assumed a 40% SPT, a 28% corporate tax rate and no changes in capital structures. Using these parameters under the ‘RSPT today’, the net present value (NPV) calculated on financial models for iron-ore, coal and bauxite mines declined relative to the status quo, by 46%, 57% and 15%, respectively. Nickel, copper and gold mines became economically unviable (negative NPVs), relative to the status quo, the study found.

Super row over super tax in Australia
A proposed 40% tax on mining profits has created waves in Australia. Its opponents, among them most miners, see it as ultimately destroying the industry that sustains the country’s economy, while the government insists it is merely claiming for the people a fairer share for the resources which they themselves ultimately own. The  three articles here, taken from different sources, see the controversy from different angles.

Taxmen vs miners
Miners, like oil men, are a tough lot. They are fighting tooth and nail to derail the Australian government’s plan for a “super profit tax”. But just as oil and gas companies survived when a similar tax was imposed on them, the mining industry has broad enough shoulders to bear the new burden.
Natural resource profits are not like other types of income. Because of supply constraints, resource extraction follows the economics of treasure-hunting: once out of the ground, a treasure’s value bears no relation to the cost it took to dig it up. That potentially huge extra value should belong to the nation in which it is found. Governments are right to tax resource extraction more than other activities.

Australia has for years levied a “petroleum rent tax” of 40 per cent on oil and gas profits before applying the normal corporation tax of 30 per cent to the remainder. Canberra now wants to do the same in mining. Good. It will be a long-overdue update of the medieval practice of levying royalties on gross production. Being regressive, royalties squeeze marginal producers while letting those with the most abundant mines keep the largest share of their loot.
A profit tax is much more efficient, and will, Canberra promises, finance lowering corporation taxes to 28 per cent. That will benefit Australia’s non-resource sectors, while mining companies will face a combined tax of 56.8 per cent – perfectly bearable for large miners that routinely enjoy earnings well above 20 per cent of equity. This is all the more true as market power is concentrated through consolidation such as Rio Tinto and BHP Billiton’s joint venture in Pilbara.
Miners predictably insist that they are not just talking their own book in opposing the tax. They warn it will hurt jobs by making Australia less competitive for mining investment. But the fact is that companies must invest where the ore is. And a reasonable tax reform does not destroy Canberra’s reputation for solid and predictable mining governance. The charge that it turns Australia into the “number one sovereign risk issue”, made by Tom Albanese, chief executive of Rio Tinto, is absurd.

The plan is not perfect. It wastes an opportunity to reform royalties at the state level. It does not allow for enough cost deduction in viable projects while it exposes the government too much in unprofitable ones. But these are minor snags.
The industry’s greatest fear is that other countries follow Canberra’s lead. As the benefits of the tax reform become visible, there is no reason why they should not.

(This was published in The Financial Times as an editorial)