Amid all the mining industry outrage Down Under about Canberra’s plan to slap a 40 per cent “super profits tax” on resources companies, one is almost tempted to side with the Australian Treasurer, Wayne Swan. Almost.
The industry’s No. 1 Aussie hate figure recently accused miners of conducting a “fear campaign” over the tax and insisted the plan would help “encourage investment”.
Well, what do you know. The latest news on Wednesday is that 13 top coal-mining companies, foreign and domestic – led by BHP Billiton, Rio Tinto, Xstrata and Peabody Energy – have bid $4bn for Australia’s biggest coal railroad.
BHP Billiton Ltd, XStrata Plc and 11 other coal miners in Australia bid A$4.85 billion ($4 billion) for the nation’s biggest coal railroad to head off the state government’s planned initial public offering of the assets.
The bid is more than what Queensland state would be able to achieve in an IPO, Nick Greiner, chairman of the Queensland Coal Industry Rail Group, said today in a statement. An IPO may raise A$3 billion, according to the Australian newspaper.
The 13 miners including Rio Tinto Group and Peabody Energy Corp. may have more incentive to add tracks than a single owner, who may seek to profit by raising fees on a monopoly asset. They plan to spend A$2.05 billion to expand the railroad to meet demand from Asian steel mills, Greiner said.
Hold on. Aren’t these some of the very same companies that have been threatening to scupper deals or reduce planned investments as a result of Canberra’s proposed tax?
We hate to say this, but their willingness to spend $4bn to secure transport networks for all that lovely, lucrative coal might bolster the words of Ken “Horrid” Henry, when he recently defended the tax plan, saying: “It is the strong and clearly stated view of Treasury that the Resource Super Profit Tax will grow the mining sector and the economy…”
So what about those arguments that a likely downturn in global demand for commodities will slash resources companies’ earnings, amid dark mutterings about how Europe’s travails will hit China’s export industries and wipe out its demand for commodities.
Some see the glass as more than half-full, not least, Rio Tinto’s CEO Tom Albanese. As Reuters reports on Wednesday (our emphasis):
Global miner Rio Tinto predicted strong iron ore demand to continue and gave an upbeat outlook for aluminium on Wednesday, defying sharp slides in commodity prices and fears of a double-dip global recession.
Chief Executive Tom Albanese, addressing the firm’s annual meeting in Australia, voiced some caution over near-term prospects and said he would manage capital cautiously, but made no substantial revision to the firm’s overall bullish outlook.
“The outlook for global iron ore remains very positive and growth fundamentals remain the same as before the financial crisis, dominated by the rise of China,” Albanese said, echoing comments he made in April to a London meeting of UK shareholders.
And hey presto, as Bloomberg reports: Asian stocks rallied from a 10-month low, led by commodity producers, as speculation of rising demand in China overshadowed European debt concerns that dragged the euro lower. The won stabilized as South Korea’s government pledged to intervene in markets amid tensions with the North.
Hold on again. Was this upbeat, confident mining executive the same Albanese who was all blustering gloom on Monday, implying that Rio may pull projects or scale them back in Australia, which he described as his “number one” sovereign risk globally?
We’re only playing devil’s advocate here. Ultimately, as Lex notes, both sides appear to have some case, although the miners should lobby either to apply the tax rate to new projects only, or to reduce that rate from 40 per cent – not both – while the government should “stop its mixed messages”.
Meanwhile, the resources companies operating in Australia are themselves divided on the issue, remarked Crikey commentator Bernard Keane on Monday. Highlighting an NBER paper that suggests miners pay relatively low tax rates in Australia, Keane wrote that “the credibility gap between what the miners and their cheerleaders say and reality grows ever bigger”. He writes (our emphasis):
Far from the government preparing to cave in on the issue, as some hysterical commentators are trying to suggest, its resolve is hardening. Labor knows a back flip on the issue will be politically fatal to its credibility. It is prepared to negotiate aspects of the new regime, but it is also aware that different sections of the mining industry have different stakes in this — so far we’ve mainly heard from the big foreign companies, not smaller local companies that will benefit from the shift from a royalty to a profits-based regime.
As for Wednesday’s news of the $4bn bid for QCIG by the 13 coal miners, the deal, according to a separate comment by Keane and his colleague Glenn Dyer:
…puts all the claims from the mining industry and its media, lobbyist and political mates that the proposed resources profits tax has caused a “capital strike”… in sharp relief.
Big deals like this require big finance, they note, citing banks involved in the QCIG offer as among the many which “haven’t been scared off stumping up new money for Australian resource infrastructure deals”.
ANZ, BNP Paribas and Citibank are not only underwriting the proposed purchase to the tune of A$1.35bn but they will finance a maintenance and capex facility totalling “in excess of A$2.05bn”.
That, more than anything, note Dyer and Keane, is “a real vote of confidence that the money will come rolling in from higher coal exports”. The conclusion?
All these companies are entitled to their views on the tax (and should try and get the best deal for themselves and their shareholders), but this proposed purchase exposes the hypocrisy underlying their reaction: if they really felt Australia was no longer a place where investment could be made, they simply would not be in this deal. End of story.
Related links:
Oh no, now it’s mining tax contagion – 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