Australian mining stocks drop on tax concerns

Finance

BHP Billiton Ltd and Rio Tinto Ltd, the two biggest mining companies in Australia, paced declines in mining stocks in Sydney on concern the nation may raise taxes on resource projects.

The Sydney Morning Herald said a review of Australia’s tax system may recommend taxing mining projects in the same way as energy projects, a change that would have raised an extra A$14 billion (US$13 billion) over the past three years, the newspaper cited Treasury estimates as saying. Matthew Coghlan, a spokesman for Treasurer Wayne Swan, declined to comment on the report.

It’s “likely to be a huge impediment on Australian-based, highly profitable resource projects, such as Pilbara iron ore, alumina and eastern state coal projects,” said Tim Schroeders, who helps manage US$1.1 billion at Pengana Capital Ltd, including BHP and Rio, in Melbourne.

“It’s quite irresponsible to canvas a rent tax like that without any consultation with industry,” said Peter Chilton, who holds BHPB and Rio shares at Constellation Capital Management Ltd in Sydney. “There needs to be proper clarity on this thing rather than some very broad thing which no one can one actually do any calculations to see the effect.”

Recommendations from a review of Australia’s tax system led by Treasury Secretary Ken Henry were given late last month to Treasurer Wayne Swan, who has said he’ll publish the document in the early part of this year.

The government will have a cash deficit in the 12 months ending June 30 of A$57.7 billion, and the nation’s net debt will peak at 10% of gross domestic product in fiscal 2014, according to forecasts published by Swan in November.

“It clearly means it’s A$14 billion less for the resource sector and that would have some implications on investment decisions,” Mark Pervan, senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne, said by phone.

A review of the nation’s tax system recommended replacing state-based royalty charges on mining projects with a national resource rate, which is likely to be set at 40%, according to the Sydney Morning Herald.

BHPB and Rio are estimated to report higher profits this year as the global economy rebounds, pushing demand for metals higher. Profits were slashed last year as commodity prices plunged and sales were crimped.

“It’s very opportunistic and it’s going to rip out a lot more money,” said Peter Arden, a Melbourne-based senior mining analyst at Ord Minnett Ltd, an affiliate of JPMorgan Chase & Co in Melbourne. “Big companies will just decide that if the government is too greedy they are just not going to go there.”

The move may curb future profits for the country’s largest mining companies including BHPB and Rio Tinto, Ord Minnett’s Arden said. “It’s targeting the really big, robust, highly profitable” projects. “They are saying ‘we want you to pay more’.”

BHPB spokeswoman Kelly Quirke declined to comment. Rio spokesman David Luff wasn’t immediately available when contacted. BHPB chairman Don Argus, in an industry speech delivered at the Melbourne Mining Club on Oct 22, acknowledged that the tax review would consider resource companies.

“Clearly, any regime must be carefully designed from an international competitiveness perspective,” Argus said at the time.

The so-called resource rent tax wouldn’t be levied until exploration and development costs were paid and would only take effect when the project made a profit, the Sydney Morning Herald reported, without saying where it got the information.

Jan 22 (Bloomberg)