UPDATE 5-Australia tax threatens $15 bln in projects – Fortescue

* Iron ore miner cites tax for shelving two big projects

* Investors say it is wake-up call for government

* Stalled Solomon project aimed to produce 160 mln
tonnes/yr

* Fortescue shares fall as much as 6.4 pct, end down 4.7
pct

* Sector index at 28-wk low: lost A$40 bln since mid-April
(Adds closing share price, graphics link)

By James Regan

SYDNEY, May 19 (BestGrowthStock) – Australian iron ore miner
Fortescue Metals Group (FMG.AX: ) threatened on Wednesday to
abandon $15 billion in new projects unless the government drops
or substantially waters down a plan for a new mining tax.

China-backed Fortescue, Australia’s third-largest exporter
of the steel-making raw material, said the tax would make it
impossible to arrange financing for its $9 billion Solomon Hub
project and its $6 billion Western Hub development.

Both projects were now on hold pending the outcome of a
fierce lobbying campaign by miners to persuade the centre-left
government to either reverse the tax or at least make major
changes to it.

Shares in Fortescue, which ranks behind local iron ore
giants Rio Tinto (RIO.AX: ) (RIO.L: ) and BHP Billiton (BHP.AX: )
(BLT.L: ), slumped on the announcement, which fund managers and
mining analysts described as a wake-up call for the government.

“It casts a shadow over the whole industry,” fund manager
Peter Chilton of Constellation Capital Management said of the
proposed 40 percent tax, due to be introduced in 2012.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For full coverage of the ‘super tax’: [ID:nAUTAX]

For INSTANT VIEW market reaction: [ID:nSGE64I01N]

For iron ore graphics: http://r.reuters.com/bez94k

For FACTBOX on mining prjects hit by tax: [ID:nSGE64I06L]

For StarMine valuations data: http://r.reuters.com/vaj74k

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Fortescue said bankers were unwilling to “step up to the
plate” for its two new projects in the iron ore-rich Pilbara
region of west Australia, noting the tax would hit profits
before financing costs, leaving less room for debt repayments.

CEO Andrew Forrest, an ex-stockbroker and once Australia’s
richest man through his majority stake in Fortescue, said this
meant local miners would need to rely more on offshore equity
capital, especially from China.

“If we can’t rely on our own revenue to finance a project,
it absolutely means the only source of revenue, particularly
for Australia’s mining industry, will be the government of
China,” he told a news conference.

He said he had received two approaches already for Solomon
and Western Hub, but declined to identify the prospective
bidders, adding he “wasn’t returning their calls” while there
remained a chance the tax could be scrapped or changed.

GOVT UNDER PRESSURE

Canberra has come under increasing pressure to back down
over the tax from miners who say it risks destroying
investment, jobs and Australia’s reputation as a safe place to
do business.

Treasurer Wayne Swan said miners were waging a scare
campaign against the tax and noted that Fortescue might have
other reasons for shelving projects, unrelated to the tax.

“We need to have a bit of perspective here. The government
is talking to the industry in a constructive way,” he said.

Canberra has hinted it may compromise on the tax.

This week, Resources Minister Martin Ferguson acknowledged
it could hurt investment, and said he wanted to find a “middle
ground” with miners and aimed to wrap up negotiations quickly.
[ID:nSGE64G01U]

However, the architect of the tax, top Treasury official
Ken Henry, on Tuesday warned that Australia risked turning the
new tax into a subsidy for miners if it bowed to pressure to
change the way it was calculated. [ID:nSGE64H0C9]

Prime Minister Kevin Rudd’s Labor Party only has a 7-seat
majority in the lower house and, although bleeding opinion poll
support in recent weeks, is still expected to win a second
term.

Australia’s conservative opposition, which has promised to
overturn the tax if it wins elections expected around October,
said the government had not properly thought through the
implications of the impost.

“When the government does not think through its policies,
that is when you not only increase the risk of investment in
Australia, but it starts to cost real jobs,” opposition
treasury spokesman Joe Hockey told the National Press Club in
Canberra.

RIO, BHP EYED

Fortescue’s move may also intensify talk that Rio Tinto
will ditch a planned $116 billion iron ore venture with BHP
Billiton.

The two giants have said they are still committed to the
venture, which would merge their Australian iron ore
operations, but they are fighting the tax. Earlier, the
Australian Financial Review quoted BHP’s chief as saying the
tax might lead to a dividend cut.

Fortescue shares fell as much as 6.4 percent to a 6-month
low, and closed down 4.7 percent in a wider market (.AXJO: ) off
1.9 percent.

The market capitalisation of the ASX 300 Resources index
(.AXKR: ) had already contracted by almost A$40 billion ($34.5
billion) by the start of the week from its mid-April highs. The
index touched a 28-week low on Wednesday.

The sell-off, which started amid concerns about Europe’s
debt woes and China’s efforts to cool its economy, have
accelerated since May 2 when the government announced the new
tax.

Fortescue has done little work so far on the two shelved
projects, but said the new tax would make it tougher to finance
them, especially the Solomon Hub. Forrest described Solomon as
“the most valuable undeveloped mining project in the world”,
capable of producing 160 million tonnes a year.

Fortescue did, however, keep its commitment to the much
more advanced Chichester project, where $4.5 billion has
already been spent and where it still plans to ramp up
production to 95 million tonnes a year from 55 million tonnes
now.

Stock Market Advice

($1=1.161 Australian Dollar)
(Additional reporting by Koh Gui Qing in SYDNEY and Rob Taylor
in CANBERRA; Writing by Mark Bendeich; Editing by Ian Geoghegan
and Lincoln Feast)

UPDATE 5-Australia tax threatens $15 bln in projects – Fortescue