BHP, Rio gain on optimism mining tax may be dropped

Finance

The share prices of BHP Billiton and Rio Tinto rose after the ruling Australian Labor party failed to win a majority at the weekend election, raising optimism that its proposed mining tax may be scrapped or diluted.

“We are seeing some cautious optimism in major stocks like BHP and Rio,”said Tim Schroeders, who helps manage about US$1.1 billion at Pengana Capital Ltd in Melbourne. “There’s a glimmer of hope for the mining sector that things aren’t as dire as they appeared on Friday in terms of a mining tax.”

Prime Minister Julia Gillard, 48, and opposition leader Tony Abbott, 52, who’s vowed to scrap the tax on iron ore and coal, need to broker deals with independent lawmakers after neither major party won enough seats to form a government. Under Labor’s plan, BHP, Rio and rival producers will pay A$10.5 billion (US$9.4 billion) more in tax in the first two years.

“If the Liberals were to form a government, there’s no mining tax,” Peter Chilton, a fund manager at Constellation Capital Management Ltd, which holds shares in both BHP and Rio. “That’s potentially positive for the mining sector."

BHPB rose 0.5% to A$38.11/share at the close on the Australian stock exchange. Rio gained 0.9%. The benchmark index closed little changed. The nation’s currency slid 0.3% to 89.15 US cents as of 4:23 pm in Sydney.

“It was clear after the first hour or so of trade that the market had determined that a resource rent tax was now less likely,” CMC Markets Ltd analyst David Taylor said in an e-mailed note. “This is by no means written in stone, but it is the prevailing viewpoint.”

Labor has 72 seats out of 150 and Abbott’s Liberal-National coalition has 70 as of 4:24 pm Sydney time, according to the Australian Electoral Commission’s website in Canberra, after the officials had counted 75% of the vote on a two-party preferred basis.

Four seats are undecided and as many as four independents and one Australian Greens party member could be involved in talks with the two major parties. Seventy-six seats in the 150-seat lower house are needed to form a government.

While Independents Bob Katter, Robert Oakeshott and Tony Windsor are former members of junior coalition partner, the Nationals (who traditionally draw support from rural Australia) have not yet indicated which party they would back.

“There are three independents that are ex-Nationals. They represent the bush, and they won’t want that tax,” said Cameron Peacock, a market analyst at IG Markets in Melbourne. “If you look at the breakdown of the votes, of those independent candidates, Labor is the least-favourite party.”

The three spoke to Ms Gillard and Mr Abbott yesterday. “We will meet to go through the process of a hung parliament, who we will support, and what needs to happen constitutionally from here,” Mr Oakeshott said yesterday.

Greens leader Bob Brown, whose party now looks to hold the balance of power in the upper house, has said he wants to renegotiate the mining tax to raise an extra A$2 billion. If Labor forms an arrangement with the Greens, there’s more uncertainty, Constellation’s Chilton said.

Even should Labor be able to form a government, the party’s mandate to introduce the new tax has gone, Atlas Iron Ltd chief executive David Flanagan said. Australia is the world’s biggest exporter of coal and iron ore.

“Those independents that they will try to do a deal with will want to side with someone who’ll have a mandate to rule,” Flanagan said in a phone interview from Perth yesterday. “If the tax still keeps coming, we won’t give up.”

A perception of political risk in Australia has deterred foreigners from investing in the nation’s stock market, according to Gary Head, who co-manages UBS AG’s equities business in Australia and New Zealand. Investor nervousness increased after the proposed tax deepened concerns over government intervention in other industries, he said last week.

“The Australian brand has been damaged and it’s going to be some time before overseas investors come back and say ‘well those Australians are not as crazy as we thought they were,’” said Peter Strachan, a Perth-based analyst for independent advisory firm StockAnalysis. He expects Australian coal and iron-ore companies to rally on the stock markets this week.

Ms Gillard, who today re-iterated her commitment to the tax, ousted Kevin Rudd as prime minister in June after his plan for a 40% levy on “super profits” helped sap support for Labor. She negotiated a new proposal with BHP, Rio and Xstrata plc, cutting the tax back to 30%.

Fortescue Metals Group Ltd, Australia’s third-largest iron-ore company, said the tax threatened its planned A$17 billion expansion.

“I’m sure the mining tax cost Labor the election,” Clive Palmer, an Australian billionaire who shelved two mining projects in response to Labor’s initial tax proposal, said yesterday. “Tony Abbott looks like he’ll be the next prime minister.”

Morgan Stanley estimated the 40% levy 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% and earnings at BHP by 17% in 2013.

Mr Brown, whose Green party had proposed a 50% levy on mining earlier this year, will push Labor to restore the 40% rate, Citigroup analyst Craig Sainsbury said in an Aug 2 report. Ms Gillard’s deal to scale it back will cost taxpayers A$7.5 billion in revenue in its first two years, Mr Brown has said.

“All things being normal, the mining tax should be dead, but the Labor Party has shown an incredible capacity to be very Machiavellian,” BC Iron Ltd Managing Director Mike Young said in a phone interview yesterday.

“Julia Gillard quoted Bill Clinton as saying ‘the public have spoken, we just don’t know what they’ve said yet.’ I think they said ‘we don’t want a mining tax,’ so she’d better listen.”

Aug 23 (Bloomberg)