Continued from Part I: Xstrata on warpath.
Amid the howls of pain from miners over Australia’s proposed 40 per cent resources ‘super profits’ tax — the latest manifestation being Thursday’s outburst from Xstrata’s combative CEO Mick Davis — come some more sobering figures.
Ivor Ries, a long-time commentator on Australia’s resources industry with Melbourne broker EL & C Baillieu, disputes Canberra’s claims that the tax will help boost government revenues, saying it will generate no new income for five years. Not only that, he notes, even before the tax has come in, it has “stopped new projects dead”.
Indeed, as previously mentioned, Reuters estimates in a report on Thursday that the value of new mining projects shelved since the government proposed the tax earlier this year now exceeds $20bn.
Of course there are those who argue that the tax is no bad thing, and point out that the mining industry in Australia is itself divided over the issue.
But Ries and his colleagues at Baillieu are clearly in the other camp.
In a note that leaves no doubt of this, he writes (our emphasis):
There are 270 major resource projects in Australia undergoing feasibility studies and financing, with a total capital value of A$320bn. These projects would have employed somewhere around 120,000 people during the construction phase.
The Resources Super Profits Tax has stopped them dead in their tracks. All of those projects are now frozen. There are probably about 20,000 engineers working on these projects and by the end of the month half of them will be unemployed.
Over the past few days I’ve been struggling to come up with a couple of phrases that sum up the new Resource Super Profits Tax and after considering a great many options – most of them unprintable – I’ve settled on two: “sheer arrogance” and “vast stupidity”…
This tax will generate no new revenue (until 2015) because the forecasts in the RSPT document failed to take into account all the projects that are going to be put on ice as a result. The Government’s forecast of an additional A$9bn in revenue from 2013-14 is rubbish and I bet there’s not a single Treasury official who will stand behind that number today.
The truly scary aspect of this is the lack of understanding from [PM Kevin] Rudd and [Treasurer Wayne] Swann towards equity risk premiums. The equity risk premium is the extra return an investor is paid in return for taking equity risk. The new tax is slated to apply if a business earns more than a 6% return (equal to the rate paid on “risk free” Government bonds). Effectively they are saying we should not bother investing in industry that offers a better return than Government bonds or they will double tax you.
Our strategist asked Treasurer Swan a question yesterday on this issue and asked why the tax kicked in when returns exceeded the bond rate, rather than the bond rate + an equity risk premium of say 5% (otherwise known as a company’s cost of capital). Swan did not understand the question no matter how it was re-phrased – in other words the Treasurer ofAustralia does not know what the cost of capital is for Australian companies. This is economics 101!
The above-mentioned strategist, Neale Goldston-Morris, comments:
Capital will continue to flow from Australia until either Labor loses the election or this tax is dropped. This is the greatest sovereign event Australia has faced since 1974 when [Labor PM] Gough Whitlam was ousted. I will continue to direct my clients’ funds towards the US until we see clarity in this situation.
And now, because we promised you a light look at the resources-tax saga, we bring you a report from The Australian newspaper on Thursday, which spent some frustrating time trying to get through to Canberra’s mining tax “hotline”.
“What happens”, asks the paper’s Peter van Onselen, “when you ring the information number at the bottom of the government’s A$38.5 million taxpayer-funded advertisements on the new mining tax?”
If The Australian‘s experience is a guide, “you certainly won’t get any information, and you might even be told you are calling the wrong people”, he writes, adding:
“It’s a misrepresentation in the ad” is how one call centre supervisor responded yesterday.
When The Australian called the 1800 hotline (which operates only in business hours) to ask about basic details of the tax, we were first told, “We are solely to do with the Henry review. I am sorry; you need to call the tax department.”
But wasn’t the super-profits tax the government’s version of the resource rent tax contained in the Henry review? “Please hold,” said the phone operator, who, after a pause, said she could send me a copy of the Henry review but “we aren’t trained to elaborate on the review details”.
“We are not familiar with it; we only send out copies of it,” she added.
But wasn’t she familiar with the super-profits tax, as explained in the ad with her number on it? “Sorry, no,” was the answer.
The supervisor wasn’t any help either. Why couldn’t we get information about the mining tax by calling the number that appears at the bottom of the print ads? “Unfortunately it does,” the supervisor said. “It’s a misrepresentation in the ad.”
So were many people calling and being turned away? “Yes indeed.”
As van Oselen concludes:
Given that the justification for the new $38.5m ad campaign has been the need to inform the public about the new tax plans in the face of an industry scare campaign, the inability of operators on the 1800 number to provide any information at all will be extremely embarrassing for the government.
Last night, The Australian contacted the Prime Minister’s office for comment but the office handballed the question to the Treasurer: “That’s something for Swannie’s office,” a spokeswoman said. A spokesman for Wayne Swan said staff were supposed to direct people to the website or offer to send out fact sheets on the new tax. “The need to increase public awareness is the key reason why we are conducting an information campaign,” he said.
Related links:
Mining super-tax rage (Part I): Xstrata on warpath – FT Alphaville
The not-so-horrid Henry tax – FT Alphaville
Miners spend big Down Under, but where’s the outrage? – FT Alphaville
Forget banking. in Australia, miners make the dosh – FT Alphaville