The day after Australia’s government and miners talked of a compromise Xstrata last night released an announcement that it is immediately suspending expenditure on two Australian projects, the A$6bn Wandoan Coal Project and the smaller A$600m life extension project for the Ernest Henry copper mine, citing the proposed Resources Super Profits Tax (RSPT). Xstrata said if the tax is implemented as proposed its initial internal review findings have concluded it will impact the economics of these projects and they will become uneconomic under its long-term assumptions. The suspension means the immediate loss of jobs for Queensland.

Australian Prime Minster Kevin Rudd’s description of the miners threats of pulling investment on Tuesday as “balderdash” and “bunkum” might just have been the catalyst for Xstrata to put out last night’s press statement in Australia.

The Wandoan Power Project is essentially in the design phase and the immediate suspension means around A$586m of design and further exploration has been stopped and contractors laid off.

Interestingly the Wandoan Project might hit home harder than if it was just another coal mine. Is a coal project in the Surat Basin in Queensland and part of a larger integrated Gasification Combined Cycle plant (400MW) and development of a 200MT potential carbon storage scheme. Xstrata has spent some A$200m to date on the project feasibility studies and early work was due to start next month on construction of accommodation blocks and further exploratory drilling. This work is now suspended.

The war of words between the miners and the Australian government continue, with the miners redirecting investment spend into a mounting media attack on the Rudd’s government’s plans in an effort to draw the government to the discussion/negotiation table. Whilst a full back down by the government is too much to hope for, one can sense a compromise can be struck. The question is how many more projects are going to be shelved before this happens and could it be settled before the General Election, if so it would probably seal Rudd’s return to power?.

Despite European macro risks, the EU ad agencies offer exposure to more robust drivers of global growth (e.g. c70% WPP revs from US, Germany & EM) whilst being listed in relatively weak currencies. We were previously more cautious on the risk-reward for WPP & Publicis given our belief that the shares reflected over-inflated investor expectations – but recent market weakness provides an opportunity to now acquire this GDP / FX exposure at more attractive valuations.

We update our forecasts for recent sterling & euro weakness (as well Publicis’ recent share buyback). This leads to a 2% upgrade for WPP, c3% EPS upgrade for Havas and a 5% upgrade for Publicis, based on £/$ 1.45 & €/$ 1.23.

With WPP now the cheapest of its peers at 10.5x 2011E earnings and having under-performed Publicis by >10% YTD, we upgrade it to Buy. This weakness partly reflected their recent relative under-performance in organic growth delivery, but this growth differential could start to close in Q2, helping them revert away from their cyclical valuation low relative to Publicis & their un-stretched valuation relative to the market. We remain Buyers of Aegis & Havas in the mid-cap space.