Scenarios: Future of Australia mining tax hangs on election

By James Regan

SYDNEY (BestGrowthStock) – Australian Prime Minister Julia Gillard plans to bring in a 30 percent tax on profits at larger iron ore and coal mining firms from 2012 if she wins Saturday’s election. Her opponent, Tony Abbott, has pledged to dump the tax.

An election-eve poll indicates a risk Australia could have its first minority government in 70 years, adding to uncertainty facing the mining sector. Even if Gillard wins the Greens could end up as kingmakers in the senate and push for a stronger tax.

HERE ARE SOME SCENARIOS:

GILLARD WINS, PARLIAMENT VOTES ON TAX

If Gillard is elected, iron ore and coal miners will brace for a 30 percent tax on profits starting in 2012.

The so-called Minerals Resource Rent Tax, which aims to raise A$10.5 billion in the first two years, is a watered-down version of an initial proposal and was fashioned with input from BHP Billiton, Rio Tinto and Xstrata.

Green senators may determine the final outcome of the tax and could even call for the tax on profit to be raised to 50 percent. Gillard’s Labor party would present legislation for the tax to parliament for ratification by mid-2011.

Green Senators are on course to control the balance of power in the upper house and are demanding more financial details of the tax before backing it. The Greens also want any tax collected placed in a sovereign wealth fund for future generations.

TONY ABBOTT WINS, TAX DROPPED

BHP Billiton, Rio Tinto, and all other miners of coal and iron ore breathe a collective sigh of relief after they avoid paying billions of dollars more in taxes.

Rio Tinto sticks to plans to lift annual iron ore production in west Australia’s Pilbara region by 100 million tons to 330 million tons in five years. Longer term, Rio Tinto holds blueprints to raise output to 600 million tons.

Fortescue Metals Group, Australia’s third-largest iron ore producer and a strident critic of the tax, likely to immediately reinstate $9 billion of proposed investment in a mine with a capacity of 160 million tons a year. A further $6 billion in proposed investment would also be reconsidered by the Fortescue board.

Abbott plans to introduce a A$418 million ($375 million) exploration and development funding program if elected.

WINNERS VS LOSERS

A Gillard defeat should give shares of mining companies directly impacted by her proposed tax a boost.

Because the proposed tax applies only to coal and iron ore mining companies earning A$50 million ore more, some 2,000 copper, silver, lead, zinc, gold, nickel and other minerals producers are unaffected either way.

If Gillard wins, small-capped miners may lose write-offs that would have assisted in offsetting exploration costs. The prime minister has hinted at a willingness for further concessions to junior miners, though none has materialized yet.

But lobbying efforts are under way to double the profit threshold to A$100 million and introduce a flow-through shares scheme based on a Canadian model that allows miners to pass on tax loss credits to investors.

Miners say flow-through shares encourage more investment in exploration and development when there is no cash flow.

Under Gillard, magnetite iron ore producers such as Atlas Iron, Gindalbie Metals, Citi Pacific Mining, Grange Resources, Centrex Metals, Royal Resources, Murchison, Onesteel and Emergent Resources will pay the tax despite facing much higher production costs compared to other iron ore miners.

Similarly, producers of brown coal, which face additional costs of around $25 per tons to extract water from the mud-like coal, will be taxed at the same rate as black coal miners. Brown Coal producers include: Great Energy Alliance Corp, International Power Australia and TRUenergy Holdings

BHP Billiton, Rio Tinto, Xstrata and Fortescue fall squarely in the sights of the tax. Commodity diversification will enable most of the big miners to offset some of the heavier tax burden on their iron ore and coal divisions.

But Fortescue faces a more direct tax bill because it mines only iron ore.

UBS estimates the effective tax rate for companies affected would increase to 44 percent from 38 percent under the new tax.

(Editing by Ed Davies)

Scenarios: Future of Australia mining tax hangs on election