Mining super-tax rage (Part I): Xstrata on warpath | FT Alphaville

Mining super-tax rage (Part I): Xstrata on warpath

Xstrata’s chief executive Mick Davis is on the warpath.

On Thursday he captured headlines with his threat to scrap $5.4bn in coal and copper projects in Australia, blaming Canberra’s plan to slap a 40 per cent “super profits tax” on mining companies.

In a statement posted on its website, Xstrata, which last month halted some copper exploration in Queensland, said it had decided to suspend A$586m ($496m) of expenditure to develop both the $6bn  Wandoan thermal coal project and an A$600m expansion of its Ernest Henry copper mine.

The shelved expenditure forms part of a total planned capital investment of more than A$6.4bn to complete both of the Queensland developments, with the coal project accounting for the vast majority of this.

“Neither will be viable if the (tax) is imposed,” Davis said.

The multinational miner’s move brings the value of cancelled or postponed new resources projects since the Australian government first raised the idea of the mining tax early this year to more than $20bn, according to Reuters.

It is also the latest example of the mounting outrage in the resources industry and follows similar warnings by virtually all top mining companies — foreign and domestic — operating in Australia about the impact of the tax (with Rio Tinto chief Tom Albanese sounding off not long before Davis).

It also follows his — err, rather spirited, response on Wednesday to the FT’s recent editorial comment which suggested that mining companies should shoulder the added tax burden in much the same way that oil and gas companies have accepted a “petroleum rent tax” of 40 per cent on profits.

“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”, the FT said, noting that a profit tax is “much more efficient, and will, Canberra promises, finance lowering corporation taxes to 28 per cent”.

What particularly riled Davis was the FT’s conclusion:

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 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.

In a letter to the FT published on Wednesday, Davis wrote that the comment “betrays a disturbing level of ignorance of the proposal and utterly misrepresents the mining industry’s position”.

He argued:

The RSPT [Resources Super Profits Tax] is fundamentally more punitive than the 40 per cent rent tax imposed on the petroleum industry in Australia – a) the RSPT applies to existing investments; the petroleum tax was prospective only; b) the RSPT applies to any profit over the 10-year bond rate (6 per cent), well below any mining company’s cost of capital; the petroleum rent tax includes a 5 per cent premium to the risk-free rate; c) the petroleum tax allows the full recovery of capital invested but the RSPT tax is payable before companies can recover the capital invested; d) the Australian government refuses to consult on the key elements of its proposal; the petroleum tax involved two years of industry consultation.

And continued:

No mining company is against the principle of a profit-based tax or sensible taxation reform. But the RSPT is a long way from that. It effectively introduces the government as an unwanted, noncontributing 40 per cent partner into our existing assets at a depreciated book value excluding intangibles, ignoring the substantial risks that have been borne by our shareholders.

As for ‘mining tax contagion‘:

The mooted risk of other countries following suit is largely overdone. No other country is considering imposing such a punitive tax on its mining industry. Australia’s resource taxation will be isolated as the highest in the world at 57 per cent. Indeed, many resource-rich nations regard this tax as an opportunity to gain a larger share of global mining investment – unfortunately for Australia, it is.

So tell us what you really think, Mick…

See also: Mining super-tax rage (Part II): The dark and the light side.

Related links:
Miners spend big Down Under, but where’s the outrage? – FT Alphaville
What does the Aussie mining tax really mean? – FT Alphaville
Forget banking. in Australia, miners make the dosh – FT Alphaville
Australia’s super-controversial, super mining tax – FTAlphaville