June 25 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group financed a seven-week advertising campaign to end a mining tax in Australia. Instead, they got a new prime minister.
The ruling Labor party yesterday dumped Kevin Rudd, the architect of the tax, for Julia Gillard, who opened the door to talks on the proposed 40 percent tax that Morgan Stanley estimates would have taken A$85 billion ($74 billion) from the mining industry during the next decade.
“It’s amazing that one policy killed the prime minister,” Jason Teh, who helps manage $2.6 billion at Investors Mutual in Sydney. “The mining tax was a big thorn in the side for Rudd. I’m sure Gillard knows that and she will try to negotiate a better outcome to make herself look popular.”
Compromise may encourage producers to proceed with projects worth at least $21 billion that were stalled by Xstrata Plc and Fortescue Metals Group Ltd. By dropping the tax the government will need to cut spending to meet its goal of getting into budget surplus by 2013.
Gillard immediately ended the government’s A$38.5 million television and newspaper campaign backing the levy. BHP, the world’s biggest mining company, and Rio responded by suspending the advertising campaign against the tax, saying they are encouraged by Gillard’s invitation to talks.
“This looks to me like a circuit-breaker,” Owen Hegarty, vice-chairman of G-Resources Ltd. and a director at Fortescue, Australia’s third-largest iron ore exporter, said in an interview at Bloomberg’s Melbourne bureau. “The unpopularity of the previous prime minister was to do with introducing, slam-dunking, this penal resource super profit tax.”
BHP dropped 2.1 percent to A$38.80 at the 4:10 p.m. Sydney time close on the Australian stock exchange. Rio fell 3 percent, Fortescue slid 4 percent and Macarthur Coal Ltd. dropped 2 percent. The new leadership is more likely to alter than scrap the tax, Credit Suisse Group AG said today in a report, citing the influence of pro-levy unions.
“My priority is to deal with the mining tax, it has caused uncertainty,” Gillard, who has undertaken to call an election in coming months, told reporters today in Canberra. “I want to genuinely negotiate.”
She also met with Treasurer Wayne Swan, who has become her deputy, and Minister for Resources and Energy Martin Ferguson today to discuss talks with mining companies. Gillard, 48, said yesterday the parties need to reach a consensus on the tax.
“There is some prospect that she’ll drop the tax, which would effectively extinguish the row with miners,” said Rob Henderson, markets chief economist at National Australia Bank Ltd., the nation’s biggest corporate lender. “Or she may defer the tax until after the election with much greater consultation.”
Rudd, 52, stood down after refusing to relent on the tax, estimated to raise A$12 billion in the first two years from 2012, in the face of sliding support in the polls and mounting opposition within his own party.
“Mining is our strongest industry and it’s just been kicked in the guts,” said David Flanagan, chief executive officer of Atlas Iron Ltd., which is developing the A$3 billion Ridley iron ore project. “We are not going to get our mojo back until the government is prepared to negotiate all aspects of the tax.”
Under the Rudd proposal, miners will pay a 40 percent tax on all profits above a 6 percent return on investment on their projects in Australia, the world’s biggest shipper of iron ore and coal. The tax would give the nation the world’s highest tax rate for mining companies, according to the Minerals Council of Australia.
Miners want the government to exclude existing projects, reconsider the trigger level and vary the rate for different minerals. Possible changes needed to make the tax work include an increase in the rate of return hurdle to a minimum of 10 percent and preferably 15 percent, as well as a reduction in the headline rate to 20 percent from 40 percent, Morgan Stanley said June 16.
“Gillard’s appointment is a positive outcome because the tax was too high at 40 percent,” Khiem Do, Hong Kong-based head of multi-asset strategy at Baring Asset Management (Asia) Ltd., which oversees about $10 billion, said in an interview with Bloomberg television. “Gillard will water down the tax, maybe to even lower than 20 percent.”
Gillard, who draws support from the Labor Party’s left wing faction, signaled the government won’t scrap the tax, saying “Australians are entitled to a fairer share of our inheritance, the mineral wealth that lies in our grounds.”
Morgan Stanley strategist Gerard Minack said Gillard was still likely to introduce a tax on resources profits after a negotiation process with the industry, given her close connection to Rudd’s policy decisions. “We will still get a super profits tax on the mining sector,” said Minack. “You can’t assume that a change in prime minister means that the tax gets dropped.”
Support for Rudd began to slide after he shelved the government’s carbon-trading plans in April, a key campaign pledge when he won office in November 2007. His popularity dropped further after the mining tax was announced May 2, retreating to 41 percent from 60 percent two months earlier, a Nielsen survey published June 7 showed.
“It was without a doubt the mining tax that felled Rudd - that people didn’t want it,” said Clive Palmer, Australia’s third-richest mining magnate with a A$3.92 billion fortune, according to BRW magazine. “The real issue is whether or not you should have a tax. That’s what we need to discuss, not the terms and conditions and how it’s supposed to be implemented.”
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