The next few months will be a game of bluff and negotiation in Australia’s dealings with the major miners over the proposed 40% RSPT super tax on miners profits. The bluff has already started with mining companies scaling back bids for competitors in M&A activity and in the case of Xstrata putting on hold some A$30m in planned exploration expenditure for Queensland, according to a Reuters article in Mineweb. Peabody Energy has cut its offer price for Macarthur Coal by US$200m this week as it “seeks to clarify what the tax means. BHP is reported to have said it will be forced to pay twice as much tax in Australia than it paid in Canada, Brazil, China and other resource-heavy countries. “The uncertainty is in place, it would be very difficult to approve any of those projects (that are on the drawing board),” Chief Executive Marius Kloppers told Australian Broadcasting Corp.
The tax will be a hotly debated issue in the upcoming election and both sides are positioning themselves to support or scupper the proposal. Success in getting it through to law could, according to BHP, make the firms’ major Olympic Dam project doubtful. That could impact copper prices as the project is currently expected to boost copper output from 200,000 tons to 730,000 tons per year and uranium from 4,000 to 19,000 tons.
Big though BHP and Rio are in copper and other metals they are bigger still in iron ore and arguably it is the iron ore market of the last few years that has prompted the politicians drive for a slice of the rewards. How does this new tax proposal impact the profits of miners in its present form and what are the chances of a super tax of some sort becoming law? Credit Suisse is one of several banks to have done an analysis and have kindly shared some of their findings with us here. The bank has modeled a theoretical new iron ore project under the existing and proposed tax regimes. Using US$100/t installed capacity for capex and US$30/t of opex, their modeling suggests the economics are the same under both tax scenarios at a long term iron ore price of US$60/t. At prices below US$60/t, the new tax regime is actually more favorable and at prices up to US$70/t the impact on IRR in percentage change terms is less than 10%. Given the level of uncertainty around operating costs, capex, demand etc. the bank thinks it is safe to say that at an iron ore price of between US$55/t and US$70/t an investment decision is unlikely to be materially impacted by the RSPT. However above US$70/t the impact is about 10% and increases by a further 1% for every US$5/ton increase in the iron ore price.
There is a good reason why the new RSPT tax proposals might make it to the statute book and that is because they would replace the existing state royalties scheme which is based purely on revenue not on profitability. Consequently higher cost mines still pay the same level of tax as lower cost mines and hence act as a disincentive to invest in lower cost but still potentially profitable ventures. The new RSPT based as it is on profitability, reduces the burden of taxation on miners in times of low commodity prices arguably supporting the long term viability of mining operations through good times and bad. The final legislation, if it makes law, will almost certainly look different from today’s “worse case scenario presented to miners by Prime Minister Kevin Rudd’s government and in the meantime there will be a long game of bluff and negotiation to come.