Tags: Australia, BHP Billiton, Coal, Iron Ore, Minerals, Mining, Natural Gas, Oil, Oil Prices, Rio Tinto, Taxes, Xstrata

Australia Reduces Mining "Super Tax," Reviving Profitability of Resource Sector

By , Associate Editor, Money Morning •

Australian mining companies declared a huge win today (Friday) when the government announced the proposed mining "super tax" would be reduced, prompting some companies to reactivate shelved projects and reopen merger and acquisition talks.

Australia's Prime Minister Julia Gillard agreed on a compromise plan that would reduce the planned tax to 30% of profits from iron ore and coal, and 40% tax on oil and natural gas, down from the originally proposed 40% tax on all resources. The new plan, called the mineral resource rent tax, would also raise the tax's trigger level to profits that exceed a 12% rate of return instead of 6%.

"The reduction in the headline rate is an amazing concession," John Robinson, chairman of Global Mining Investments Ltd., told Bloomberg. "It's certainly better than I had expected."

Mining companies would be allowed to claim depreciation on their assets based on market value instead of book value.

"The important amendment to the proposal is to allow existing projects to enter the minerals resource rent tax regime at their market values," wrote Benjamin Byrne, a credit analyst at Nomura Australia Ltd. "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."

The levy won't apply to gold, copper and nickel and small miners with profits below about $43 million a year.

The bitter fighting over the tax contributed to the sudden resignation last week of former Prime Minister Kevin Rudd. Rudd's goal was to spread revenue from the country's booming resources sector to fund other economic projects and reduce the budget deficit. Mining industry heavyweights criticized Rudd's lack of consultation on the tax and his refusal to negotiate on the 40% rate.

Australia's mining industry shelved up to $186 billion of investment projects since the original "super tax" announcement.

"We have been stuck on this question as a nation for too long," Gillard said in a speech. "This will deliver better returns for the resources that all Australians own and that can only be dug up once. It will end uncertainty and division," and "allow us to move forward together as a nation."

Industry bigwigs like BHP Billiton Ltd. (NYSE ADR: BHP) and Rio Tinto PLC (NYSE ADR: RTP) welcomed the news after leading the campaign against the original proposal.

The revision of applying the tax to only certain major commodities cuts the number of affected companies to about 320 from 2,500.

"There's no doubt the changes have moved in the direction of the miners," Chris Drew, an RBC Capital Markets analyst, told Bloomberg. "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."

Xstrata PLC (PINK ADR: XSRAY), the world's fourth-largest copper producer, resumed a $508 million copper project in Queensland after the new deal was announced, and may restart a $5 billion coal project it had shelved.

"The proposal to retain the existing taxation and royalty structures for our copper business has given us sufficient confidence to recommence with immediate effect these significant projects that form an important part of our business strategy in north-west Queensland," said Charlie Sartain, head of Xstrata.

There is also speculation that stalled mergers might resume negotiations now that the new tax agreement has brought clarity to the industry's vague future.

"For large parts of the mining sector for them the tax is dead and they can move forward," Mike Elliott, leader of Ernst & Young Global Mining & Metals Sector, told Reuters. "The removal of large amounts of uncertainty now means that some of those deals that have lived in a state of suspension ...could be reactivated."

Peabody Energy Corp. (NYSE: BTU) reduced its fourth offer for Queensland-based Macarthur Coal Ltd. in May due to the super tax and was rejected by Macarthur, but those talks could pick up again.

Australia's Newcrest Mining Ltd. is planning to finalize an $8 billion deal to buy Lihir Gold Ltd. (Nasdaq ADR: LIHR) by September; bankers say the tax agreement reduces the risk of rival bids from competitors like AngloGold Ashanti Ltd. (NYSE ADR: AU) and Barrick Gold Corp. (NYSE: ABX) due to less favorable exchange rates for foreign buyers. 

Analysts expect the largest stocks to rise on the news, as their future profitability is more stable than with the original tax plan.

"We've continued to maintain an exposure to the heavyweight resource stocks, particularly those involved in the negotiations: BHP and Rio Tinto," Peter Rudd, director of mining and resources at Balnave Capital Group, told Bloomberg Television.

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