UBS Sees Mining Tax Revenue Below Forecast; BHP, Rio Profit Cut

Australia’s mining tax will raise less than half the amount forecast by its Treasury in the next two years and reduce profit estimates for BHP Billiton Ltd. and Rio Tinto Ltd., UBS AG said.

Mining companies, including BHP, Rio and Fortescue Metals Group Ltd., will pay A$1.8 billion ($1.8 billion) in the 2013 fiscal year and A$1.4 billion in 2014, compared with government forecasts for revenue from the tax of A$6.5 billion in both years, Glyn Lawcock, a Sydney-based analyst at UBS, wrote in a report dated June 22. The bank cut its estimates for profits at both BHP and Rio by 4 percent for 2013, citing the impact of the mining and carbon taxes, which take effect on July 1.

The mining levy “is designed to be a volatile stream of tax revenue for the Australian government, but funding a stable and growing series of government obligations,” Lawcock wrote. “As a result of this mismatch of a declining revenue position - - on our commodity price forecasts -- and rising obligations, we believe a future Labor government may seek to either raise the tax rates or bring in other commodities.”

The government, seeking to return the nation’s budget to a surplus in the year ending June 30, 2013, has said A$1.8 billion in revenue from the mining tax will be diverted to increases in family payments. Australia’s price on carbon emissions, set at A$23 a metric ton, is expected to raise A$24.7 billion in four years. The nation will transition in 2015 to an emissions trading system that lets the market determine the cost.

Carbon Price

The carbon price will contribute to Australia’s economic growth, which will include the creation of an extra 1.6 million jobs by the end of the decade, Treasurer Wayne Swan said in his weekly economic note yesterday, citing Treasury modeling. The average income per person will rise about 16 percent, he said.

The levy will increase electricity prices by an average of A$3.30 a week, raising the cost of living by 0.7 percent, he said. More than 98 percent of households with incomes of as much as A$150,000 will receive some government assistance in the form of tax cuts and increased payments, and all families making less than A$100,000 will get help, he said.

“In the years to come no first-rate economy can be anything other than a clean-energy economy,” Swan said. “Every cent raised from a price on carbon will be used to provide tax cuts and increased benefits to households, to support the most affected industries and the jobs that depend on them, and to tackle climate change.”

Transportation Hit

The carbon price is projected to increase power supplier AGL Energy Ltd.’s earnings-per-share by 10.8 percent in the 2013 financial year, while lowering profit at Qantas Airways Ltd. by 11.6 percent and Virgin Australia Holdings Ltd. by 14.7 percent, JPMorgan Chase & Co. Ltd. said on June 18. Transportation companies including Asciano Ltd., Toll Holdings Ltd. and QR National Ltd. will also be hurt, it said.

Australia, the developed world’s biggest per-capita polluter according to the government, has set a target of generating 20 percent of its power from renewable energy sources by the end of the decade. The nation has created a A$200 million renewable energy venture capital fund as part of its plan to drive investment in wind, solar, geothermal and other clean-energy technologies.

Demand Wanes

Iron-ore prices have declined 20 percent, and mining company valuations 24 percent, over the past year as slowing economic growth erodes demand. Rio in April pulled out of talks for a potential coal port expansion in Queensland state, citing uncertainty in global economic markets.

BHP, the world’s largest mining company, will pay $715 million in mining tax and about A$300 million in carbon tax in the year ending June 30, 2013, Lawcock said. The mining tax will cost Rio, the third-biggest, $676 million, and the carbon tax $202 million in the 2013 calendar year, he said.

The most emissions-intensive businesses, including those belonging to BHP, Rio and Alumina Ltd., as well as liquefied natural gas projects, will be eligible for carbon tax assistance from the government, Lawcock said.

While this will help Alcoa Worldwide Alumina reduce its carbon tax liability to about A$20 million from A$380 million before the assistance, Lawcock still cut Alumina’s 2013 earnings estimate by 5 percent to A$130 million. Alumina owns 40 percent of Alcoa Worldwide Alumina.

UBS also downgraded Whitehaven Coal Ltd.’s expected earnings for 2013 by 8 percent, Mount Gibson Iron Ltd. by 6 percent and BC Iron Ltd. by 5 percent.

Annual Profits

The mining tax, levied on 30 percent on earnings of iron ore and coal, is payable when a company’s annual profits reach A$75 million, so as not to burden smaller businesses. BHP and Rio’s coal divisions won’t be required to pay any mining tax in the near term, and other coal miners’ liabilities may also not be large, he said.

The government expects to raise A$3.2 billion from the mining tax in fiscal 2015 and A$3.7 billion in 2016, compared with UBS’s forecasts of A$1.1 billion in the year ending June 30, 2015 and A$538 million in 2016.

UBS’s model assumes a long-term exchange rate of 80 U.S. cents per Australian dollar, inflation of 2.5 percent per annum and iron ore prices retreating from $145 per metric ton in the 2012 calendar year to $80 per metric ton in 2016 in nominal terms.

The Greens, the Labor Party’s partner in a minority government, favor raising the mining tax rate and including gold and uranium, Lawcock said.

Fortescue, the nation’s third-biggest iron-ore exporter, is suing the government, saying the tax discriminates between states, curtails their sovereignty and restricts their ability to encourage mining.

Western Australia state Premier Colin Barnett has pledged to participate in any action, saying opposing the tax would be in the best interest of all state citizens, the Western Australia Today newspaper reported on March 20.

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