Tags: Australia, Commodities, Energy, Kerri Shannon, Martin Hutchinson, Mining, Money Morning Mail Bag, Taxes

Money Morning Mailbag: Investors Should Steer Clear of Australia's Mining "Super Tax"

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By , Associate Editor, Money Morning •

Money Morning Contributing Editor Martin Hutchinson last week introduced readers to the Australian mining "super tax" that will disrupt the industry's cyclical nature and threaten mining companies' profitability.

Reader questions and comments poured in immediately, especially from our friends in the land down under. Some criticized the government's greed, others saluted the tax, and many wondered what action to take as investors. The result was a passionate, well-informed, and at times combative, reader dialogue. 

Australian Prime Minister Kevin Rudd has proposed an additional 40% tax on mining company earnings and hopes to use the revenue to snag some hefty cash piles from the profitable natural resources industry. But instead he is putting the economy in danger of future funding shortfalls: If the mining industry's revenue stream starts to run thin, the projects the money is supporting will be strapped and funds will have to be squeezed from elsewhere.

He's also tampering with the future pricing and supply of raw materials - something that could have far-reaching, global consequences.

One reader - and Australian - "Ed" supported the tax: "We are not a quarry for others to enrich themselves at our expense."

But many other Australian readers shared the sentiment that the prime minister was too eager to tax Australia's healthiest industry.

"Why is it that there is an automatic tendency to tax the golden goose rather than recognize that without it our economy will surely falter?" asked a reader, "Tanja."

Australia's Treasury Secretary Ken Henry devised the tax plan and continues to defend it, saying it will encourage growth in the mining industry. But Australia's House of Representatives Opposition Leader Tony Abbott slammed the tax on Thursday.

"(Kevin) Rudd's great new big mining tax doesn't just hit BHP [Billiton Ltd. (NYSE ADR: BHP) and Rio [Tinto PLC (NYSE ADR: RTP)], it hits every product that comes out of the ground," Abbott told reporters. "It hits quarries, that means your road-making material, your home-building material goes up in price, it hits phosphate mines, that means that fertilizer goes up in price, that means that food goes up in price. This is a tax on food, not just on overseas capitalists."

Money Morning's Hutchinson says that even if the government wanted to increase its cut of the loot, this proposal is too radical to accept.

"A super tax at 10%-20% would have been tolerable, but 40% is too high," he says. "Anyway, government in Australia - as elsewhere - has gotten bloated and needs to go on a diet."

Hutchinson said the tax not only will affect how mining companies operate and how much exposure they have to Australia, but could dissuade investors from getting involved in the country's other industries. 

"I think it will deter mining companies from capital investment - however in silver and gold the price is currently going up faster than they can think of new taxes, so they won't be deterred," said Hutchinson. "I think it is already putting people off Australia - witness the collapse of the Macarthur Coal deal."

Queensland-based Macarthur Coal Ltd. was slated to merge with New South Wales' Gloucester Coal Ltd. but announced yesterday (Thursday) it was terminating the deal. Macarthur is considering a takeover bid from U.S. coal company Peabody Energy Corp. (NYSE: BTU), which lowered its offer price after the tax proposal announcement. The new offer is one Australian dollar per share less than the original - a $400 million dollar reduction.

Australia's "super tax" proposal also caused international mining company Xstrata PLC to stop a $30 million Queensland exploration initiative.

"Exploration is the lifeblood of the mining industry but it is not possible to justify Xstrata Copper's ongoing funding of additional exploration activities when the fundamental economics of the industry in Australia are being challenged," Steven de Kruijff, chief operating officer for the Queensland unit, told The New York Times.

As far as what investors should do to stay on the right side of the mining industry's future profitability, Hutchinson recommends companies with less exposure to political profit hunting.

"Investors in mining companies should focus on countries that don't have much political risk - Canada and Chile are the obvious examples. In the gold sector I like Yamana Gold Inc. (NYSE: AUY), in silver Pan American Silver Corp. (NASDAQ: PAAS), and in copper/coal Teck Resources Ltd. (NYSE: TCK)." 

[Editor's Note: Money Morning readers are often amazed by Martin Hutchinson's profit-focused writing - an unerring ability to paint a picture of what's to come. He's able to show us the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner.

So it's no surprise that Hutchinson has pulled off a string of forecasting successes in the face of the worst financial crisis since the Great Depression - a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time.

For those who aren't regular readers, and who might like an additional illustration of Hutchinson's abilities, consider dividends, the icon of the super-conservative investing set, and gold, the safe-haven nest of perpetual inflation hawks.

With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson has managed to combine dividends, gold and growth in a winning, but low-risk formula that has developed eye-popping returns for subscribers.

Take a moment to find out more about the opportunities related to dividends, gold, "Alpha-Bulldog" stocks and The Permanent Wealth Investor, please click here. You'll likely find it time well spent.]

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