Australia M&A Bankers Buoyed as Gillard Extends Olive Branch on Mining Tax

Mining takeovers in Australia may reverse a slump after new Prime Minister Julia Gillard signaled a desire to resolve a dispute over a minerals tax that prompted the downfall of her predecessor, investment bankers said.

“A lot of our clients are interested in making increased investments in resources,” said Simon Ranson, head of mergers and acquisitions at Citigroup Inc. in Sydney. “The developments are being taken very positively. Clients are much happier now.”

Mining acquisitions in Australia tumbled to a more than four-year low this quarter after Kevin Rudd, dumped as leader yesterday by his party, proposed the resources levy on May 2. As companies including Xstrata Plc and BHP Billiton Ltd. lobbied to change the tax, buyers and sellers of assets struggled to agree on valuations, bankers have said.

Gillard, hours after being elected the new Labor Party leader, yesterday told reporters she “will seek consensus” over the 40 percent levy on mining profits. “We need to negotiate, we must end this uncertainty,” she said.

The number of mining transactions in Australia tumbled to 48 this quarter, valued at a total of $879 million, according to data compiled by Bloomberg. That compares with 89 deals worth $9.11 billion a year earlier, and is on pace for the lowest value since the fourth quarter of 2005.

Rudd wanted to start the tax from 2012, raising an estimated A$12 billion ($10 billion) in the first two years. Miners attacked the government with a blitz of television advertisements. Rudd’s ratings suffered and he was forced out.

‘Open Their Minds’

While Gillard, 48, told parliament yesterday that miners can pay more tax and Australians deserve a larger share of the country’s mineral wealth, she also promised “genuine negotiations.” She axed government television advertisements in support of the tax and asked the miners to do the same.

“The government is opening its door and I’m asking them to open their minds,” the new prime minister told lawmakers yesterday. “At the appropriate time, the government will make further announcements.”

Her comments cheered Australia’s dealmakers, who have seen transactions dry up since the policy was proposed. Peabody Energy Corp., the biggest U.S. coal company, in May cut its takeover offer for Macarthur Coal Ltd. 6.3 percent to A$3.8 billion, citing the tax. Macarthur rejected the bid.

“Uncertainty is the enemy of the transaction,” said Ian Maxton, Sydney-based head of investment banking at Nomura Holdings Inc. in Sydney. “The new prime minister’s aim to enter negotiations and get some resolution will remove uncertainty. She’s certainly offering an olive branch.”

Union Support

Australia is the second-biggest producer of nickel and alumina, and the third-biggest producer of manganese and zinc, according to data compiled by UBS AG. The resources tax risks driving foreign investment in Australia’s miners into other regions, Citigroup Inc. said in a June 17 report.

“The first thing the government will want to do is sort it out,” said Andrew Pridham, head of Australian investment banking at Moelis & Co. “In terms of M&A, it’s a long-term process that companies go through. If there’s a stable political environment in terms of policy, people are going to be more prone to making decisions.”

Gillard is more likely to alter than scrap the proposed mining tax, said Credit Suisse Group AG.

“The unions -- who have a strong influence in this Labor government -- have supported the proposed resource super profits tax and so too has the International Monetary Fund,” Credit Suisse analyst Paul McTaggart said in a report. “The IMF has (behind the scenes) been calling for developing nations to move to a RSPT type tax regime with higher taxes for mining.”

Sign of Progress

BHP Billiton and Rio Tinto Group agreed yesterday to stop advertising campaigns against the tax after Gillard ordered the cessation of the government’s ads. That may be “a sign that we can expect more progress on the resource super profits tax issue in the coming weeks,” McTaggart said.

Rio Tinto, the world’s third-largest mining company, is “hopeful” the dispute over Australia’s proposed mining tax will be resolved before the next federal election.

“I’m very hopeful that with the recent changes in the structure of the government we can actually get in and engage and negotiate an arrangement,” Sam Walsh, the head of Rio’s iron-ore operations, told reporters in Perth. “We will support a proper tax reform.”

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