‘Super Tax’ on BHP, Xstrata May Stall Mining M&A

Kevin Rudd, Australia's prime minister
A file photograph shows Kevin Rudd, Australia's prime minister, listening to a question during a news conference at the New York Stock Exchange in New York. Photographer: Andrew Harrer/Bloomberg

May 4 (Bloomberg) -- BHP Billiton Ltd. and Xstrata Plc’s expansion and acquisitions plans may stall on Australia’s plan to increase taxes on mining companies, whose profits have surged A$80 billion ($74 billion) in the past decade.

“Any probability of mining takeovers proceeding has lessened,” Tim Schroeders, who helps manage about $1.1 billion at Pengana Capital Ltd. in Melbourne, including BHP and Rio Tinto Group, the world’s largest and third-biggest miners, said on Bloomberg TV. “It definitely increases the hurdles for prospective buyers in the resources space in Australia.”

Takeovers of Australian resource companies this year have risen to the highest since 2008, led by Peabody Energy Corp.’s A$4.1 billion bid for Macarthur Coal Ltd. Brazil and Chile may join Australia, the world’s biggest exporter of iron ore and coal, in imposing new mining taxes, prompting BlackRock Investment Management Ltd. to cite rising “resource nationalism” as a major risk for producers.

“I know from direct involvement we have as a firm there are a number of major transactions on the cusp of being announced that they are going back and rerunning their numbers now,” said Mike Elliot, global mining and metals leader at Ernst & Young in Sydney. “Not necessarily with a view that this has killed any of those deals, but it does change the balance within those deals.”

Xstrata Impact

BHP declined 7.9 percent to 1,865 pence in London trading, its biggest one-day slump in almost 16 months. Rio tumbled 6.4 percent to 3,162.5 pence, its biggest drop in six months. London markets were closed yesterday for a holiday.

BHP and Rio fell for a second day in Sydney after Australia announced the so-called super tax at the weekend. The 40 percent levy on resource profits will raise A$12 billion in its first two years, the government said.

“There could be a serious impact on any activity in the mining industry in Australia, including M&A,” Xstrata spokeswoman Claire Divver said by phone. Xstrata, which operates coal, copper, zinc and nickel mines in the country, has about a third of its assets in Australia and New Zealand, according to data compiled by Bloomberg.

Newcrest Mining Ltd., Australia’s biggest gold mining company, today agreed to buy Port Moresby, Papua New Guinea-based Lihir Gold Ltd. for A$9.2 billion in cash and stock. The takeover will cut its reliance on earnings from Australia to 52 percent from 75 percent, Newcrest said today in a presentation.

Busy Start

The combined value of takeovers announced this year in Australia in the energy and mining industries reached $27.3 billion, according to Bloomberg data. That’s the busiest start since the same period in 2008. Resource mergers and acquisitions may “dry up” because of the new tax set for introduction in 2012, according to Citigroup Inc.

If a tax had been in place over the past decade, Australia would have collected A$35 billion in revenue from miners, whose profits had risen by A$80 billion in the same period, Prime Minister Kevin Rudd said May 2.

The tax may reduce BHP’s earnings by 17 percent and Rio’s by 21 percent in 2013, according to UBS AG estimates. It also may threaten Peabody’s bid for Macarthur and a proposed iron ore joint venture between Rio and BHP, which aims to cut $10 billion in costs.

Shares of Brisbane-based Macarthur, the world’s biggest exporter of pulverized coal, dropped 2.7 percent today to A$13.62. Yesterday, they fell by the most in 11 months on concern the tax will make the deal less likely to succeed. St. Louis-based Peabody is continuing its study of Macarthur’s finances and will “factor in” the potential effect of the planned tax, said spokeswoman Jennifer Morgans.

Material Change

“A change in tax regime may be material enough to be one of the precluded conditions for a Macarthur takeover,” said Andrew Harrington, a Sydney-based analyst at Patersons Securities Ltd. “It’s quite common to have a clause pertaining to changes in the laws of the country where the takeover is taking place.”

Peabody may reduce its bid because the tax may affect its valuation of Macarthur, Macquarie Group Ltd. said. The net present value of emerging iron ore producers in Australia will be reduced by more than 30 percent should the changes be implemented, the broker said.

The new tax may see Rio withdraw from the iron ore venture with BHP as it may trigger a material change clause, Credit Suisse Group AG said. Rio and BHP, the second- and third-largest iron ore exporters, are seeking to combine Australian operations in a 50-50 venture.

Iron Ore Venture

“We would think a material change clause would be triggered in the iron ore joint venture agreement,” Credit Suisse analysts led by Paul McTaggart said yesterday in a report.

BHP is committed to the iron ore joint venture, spokeswoman Amanda Buckley said. Rio’s Melbourne-based spokesman David Luff wasn’t immediately available to comment.

To be sure, a new exploration rebate in the tax package, designed to boost discoveries, may encourage some spending, Ernst and Young’s Elliott said.

“If this is going to be a renaissance of exploration, one of the ways they back into that is to make acquisitions of some choice exploration companies,” he said.

Resources companies make up 9 percent of Australia’s economy and last week warned that a 40 percent levy and double taxation with payments to states would threaten $108 billion of planned investment. BHP, with 51 percent of its assets in Australia, said taxes on its operations there will increase to 57 percent in 2013 from 43 percent now.

“The mining tax has an adverse, and ultimately material, impact on underlying valuations,” said Angus Gluskie, who manages about $300 million at White Funds Management Pty in Sydney.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net