Mining stocks were among the biggest fallers in Thursday’s sell-off. One of the factors driving the sector lower was news of a new mining tax being proposed by Australian Treasury Secretary, Ken Henry.
According to the Sydney Morning Herald individual state royalty taxes would be scrapped and replaced with a national resources tax (the Henry Tax ) that would be levied on profits.
The tax could be set at 40 per cent, levied on a project by project basis, and be deductible from company tax, the paper said.
The view among analysts is that the tax is clearly not good news for the likes of Rio Tinto, BHP Billiton or Xstrata.
Here’s the mining team at Liberum Capital:
If imposed, the obvious impact vs. a revenue based royalty system would be a reduction in the beta on Australian based mining sector earnings. Under this scenario the companies with highest margin assets throughout the cycle such as Rio Tinto and BHP Billiton (think the Pilbara iron ore assets) would be relative losers vs. companies with lower margin (more cyclical) exposures such Xstrata (zinc, copper, thermal coal). On a commodity front the high margin bulks such as iron ore and coking coal would be hardest hit against base metal and thermal coal plays.
Given the currently Australian company tax rate is 30 per cent, Liberum says the net result of the Henry Tax would be an additional 10 per cent tax on earnings in exchange for the current state royalty agreements.
But as with Obama’s ‘Volcker Rule’, the key point here is ‘if imposed’.
And on the front analysts reckons the proposal will face stiff opposition. It seems Commonwealth taxes are none too popular down under.
Back to Liberum:
Resource rich states such and Queensland and Western Australia will see this as an attempt from the Federal Government to steal tax revenues. Those two states accounted for around 75% of mining total royalties in Australia last year, whilst only representing c.30% of Australias population. The states had been anticipating this type of ruling from the Henry review, with WA premier Colin Barnett asserting in June 2009, six months before the results were due to be published – “If anyone thinks we are going to give away our state royalty income for a Commonwealth tax, they might as well think again”.
In a nutshell, considering the vested interests that will oppose such a legislation, we think the proposal is unlikely to be successful in its current form. The proposal will now enter a year long consultation period and ultimately if it is to be successful we feel it could take several years beyond this before being written in legislation. We would highlight when the Kazakh national mining tax was changed in 2008 the market initially over-reacted (Kazakh miners underperformed mining sector equities by around 8% on the day of announcement)– we see little way of accounting the proposal into share prices and feel any negative movement on this news is unwarranted.
This point is also picked up by Arbuthnot Securities.
Whilst I’m certainly no expert on Australia’s constitution (and therefore I could be very wrong on this), the proposed resource tax is stated to be similar to the one currently applied to the offshore oil & gas industry which operates in territorial waters that are governed, controlled and taxed federally, as opposed to the state-based mineral royalties. The trouble is – with the federal government having limited powers to change or collect state taxes under the constitution, I imagine cash strapped states are unlikely to hand over control of lucrative royalty income to the federal government in a hurry, or without a fight.
While the mighty Goldman Sachs says it is extremely unlikely this proposal will make it into law.
We think the story about Aussie gov taxing mining companies is extremely unlikely for 3 reasons. 1) At present each of the individual states can set their own royalty rates and can also negotiate deals. They do use this power competitively and try to attract investment dollars into their state vs one of the others 2) State royalties are an independent revenue stream that gives states more freedom in determining what they spend money on (why would WA or Queensland agree to that?) and 3) In order to pass any such proposal, all states would have to agree by law
…. In order of companies with most exposure to Aus: BHP Billiton and Rio Tinto (approx 80% of EBIT). Xstrata (47%). Nyrstar (43%), Goldfields (16%), Anglo American (12%) and Harmony (3%.).
So for now, the greatest threat to the mining sector will come from monetary and fiscal tightening in China.
But longer term the Henry Tax could have ramifications, says MF Global’s Tobias Woerner notes.
In our view, this has much wider impacts. Australia once again appears to be paving the way forward as it did with raising interest rates. Higher taxes across the globe would appear inevitable given the amount of debt that has been transferred from the private to public balance sheet. The market appears to have become complacent towards the transition whereby the private sector will end up supporting the public sector, rather than the reverse situation we have enjoyed for the past year.