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BHP, Rio’s ‘Amazing’ Tax Win May Revive Mining Plans

Australian Prime Minister Julia Gillard
Australian Prime Minister Julia Gillard smiles during a press conference in Canberra. Photographer: Scott Barbour/Getty Images

BHP Billiton Ltd. and Rio Tinto Group may join Xstrata Plc in reviving investment plans in Australia after forcing the government to water down a new tax on mining profits in the world’s biggest exporter of coal and iron ore.

Prime Minister Julia Gillard agreed to cut the planned tax to 30 percent from 40 percent and raise the levy’s trigger level, a week after ousting Kevin Rudd as the nation’s leader to defuse a dispute that’s damped the government’s election prospects.

“The reduction in the headline rate is an amazing concession,” said John Robinson, chairman of Global Mining Investments Ltd., which oversees about A$300 million ($254 million) of assets, including shares of BHP, Rio and Xstrata. “It’s certainly better than I had expected.”

Xstrata, which resumed work today on a copper project in Queensland state, BHP and Rio led the campaign against the initial tax proposal, which Moody’s Investors Service estimated would have cut mining-company earnings by almost a third. Marius Kloppers, chief executive officer of BHP, said the new tax is a “material improvement” after earlier saying projects were difficult to approve under the original Rudd proposal.

Better Outcome

“There’s no doubt the changes have moved in the direction of the miners,” Chris Drew, an analyst at RBC Capital Markets, said today by telephone from Sydney. “It’s a better outcome than the previous proposal. The impact of the tax is going to be lower, so profitability is going to improve.”

BHP, the world’s biggest mining company, rose 1.7 percent to close at 1,723 pence in London trading, the steepest gain in almost two weeks. Rio climbed 1 percent to 2,934.5 pence. Both stocks closed little changed on the Australian stock exchange.

“We’ve continued to maintain an exposure to the heavyweight resource stocks, particularly those involved in the negotiations: BHP and Rio,” Peter Rudd, director of mining and resources at Balnave Capital Group, told Bloomberg Television today, adding that he expects the largest stocks to rise.

Xstrata advanced 3 percent to 871.1 pence in London, the biggest gain since June 21.

The Zug, Switzerland-based company, which had shelved spending on A$6.6 billion of projects in Australia, resumed work on a A$586 million expansion at its Ernest Henry copper mine following the tax announcement, Xstrata said in a statement. The company is the world’s fourth-largest copper producer.

Wandoan Venture

Xstrata may also restart early work on its A$6 billion Wandoan coal project, spokesman James Rickards said in an interview. Xstrata and Fortescue Metals Group Ltd. had suspended work on a total of $21 billion of projects because of the tax.

The new levy has no immediate impact on Fortescue’s senior secured rating, Moody’s said today in a note. Given that the tax is still under consultation and will be phased in from 2012, it’s too early to measure its “precise” effect, it said.

BHP’s and Rio’s ratings are also unaffected, Moody’s said in separate notes.

BHP, with 51 percent of its assets in Australia, and Rio had warned that the initial tax proposal threatened mining investment in the country, while the Minerals Council of Australia estimated the tax would give the nation the world’s highest tax rate for mining companies.

Investment Back On

“Mining investment in Australia going off the table as a result of the earlier super-tax proposal was very real,” Hunter Hillcoat, an analyst at Investec Plc, said by phone from Sydney. “With that regime now altered you’d think investment will now be back on.”

Rudd’s first proposal in May “upset the apple cart” for BHP’s planned expansion of the Olympic Dam copper, gold and uranium mine in South Australia, Kloppers said May 9, adding that projects may be “very difficult” to approve. Rio Tinto put projects on hold as it studied the tax proposal, Sam Walsh, head of the company’s iron ore operations, said in May.

Gillard’s compromise minerals tax will now only apply to coal and iron ore mines and affect 320 companies instead of the 2,500 under Rudd’s proposal. The book-value hurdle will kick in at the higher level of the 10-year government bond rate, currently about 5 percent, plus 7 percent, compared with just the long-term bond rate under the previous plan.

Extraction Allowance

Projects also will be entitled to a 25 percent extraction allowance that reduces taxable profits, and mining companies will be allowed to use the market value of a mine instead of the book value for the purposes of the tax. Rudd sought the tax to pay for infrastructure, retirement and company levy reforms.

“The important amendment to the proposal is to allow existing projects to enter the minerals resource rent tax regime at their market values,” Benjamin Byrne, a credit analyst at Nomura Australia Ltd., said in e-mailed note. “This delivers the miners a considerably more stable taxation environment and should go a significant way to allaying the concerns of foreign investors with respect to investing capital in Australia.”

To be sure, the new tax is still flawed and discriminates against coal, iron ore and energy miners, Western Australia Premier Colin Barnett said in an interview on ABC Radio today. Billionaire mining magnate Clive Palmer told Sky News that it’s “disappointing” Gillard didn’t speak to small miners.

The new proposal provides a “reasonable framework” for further talks, said Andrew Forrest, CEO of Fortescue, which has put $15 billion projects on hold because of the tax.

‘Extreme Disappointment’

The levy won’t apply to minerals such as gold, copper and nickel and small miners with resource profits below A$50 million a year. It was an “extreme disappointment” the government wasn’t pursuing a resource exploration rebate, the Association of Mining & Exploration Companies said in a statement. The government estimates the changes will reduce the estimated revenue take by A$1.5 billion. The first proposal was forecast to bring in A$12 billion in the first two years from 2012.

“It will be very positive for the equities not involved, the copper, gold and nickel miners,” said Peter Strachan, a Perth-based analyst for independent advisory firm StockAnalysis. Explorers will “be negatively impacted,” he said.

Morgan Stanley estimated the initial levy plan would have cost the mining industry A$85 billion in its first 10 years, while UBS AG had forecast the tax may reduce Rio’s earnings by 21 percent and earnings at BHP by 17 percent in 2013.

“The new effective marginal tax rate works out to be 45 percent,” said Mike Elliott, Sydney-based global mining and metals sector leader for Ernst & Young LLP. That compares with 56.8 percent under the initial plan and BHP’s current effective tax rate of 43.5 percent, he said.

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