The Australian mining sector has seen a revival in investment after newly appointed Prime Minister Julia Gillard scrapped the disastrous super profits tax proposed by her ousted predecessor, Kevin Rudd.

Rudd had suggested a 40% tax on what government labelled “super profits”, which would have applied after allowing for extraction costs and recouping capital investments.

The super profits tax would have netted the federal government around A$12-billion in additional taxes. Rudd had said that the funds would be applied to help fund retirement superannuation, as well as tax breaks for small companies.

However, miners responded heavily to the proposed tax, halting billions of dollars in spending. Metals producer Fortescue Metals suspended A$15-billion worth of investment into its Pilbara iron-ore operations, while diversified miner Xstrata put a A$586-million investment on hold.

Amidst a war cry from the mining sector, and gleeful glances from competing resource countries, Rudd found his popularity dwindling in the political sector, and the ruling Labour party ousted Rudd, and replaced him with his deputy, Gillard.

In her first address as Prime Minister, Gillard threw open her doors to the Australian mining houses, calling for a ceasefire and asking for time to develop an alternative to the super profits tax.

The mining companies complied and, within a week, Gillard had scrapped the super profits tax in favour of a mineral resources rent tax (MRRT).

The New Tax
Gillard appointed federal treasurer Wayne Swan as her deputy Prime Minister, and charged him with renegotiating with miners. After an eventful meeting with mining com-panies BHP Billiton, Rio Tinto and Xstrata, the new MRRT emerged, under which a tax rate of 30% rather than the previous 40% would apply, and no longer across the board, but only to iron-ore and coal profits above the government bond rate plus 7%. All other mineral resources are MRRT exempt.

The new resource tax arrangement will also only apply to the value of the resource, rather than the value added by the miner, while projects will be entitled to a 25% extraction allowance that reduces taxable profits subject to the MRRT.

It also recognise the preference of industry for more generous recognition of past investment, through a credit that recognises the market value of that investment written down over a period of up to 25 years.

For companies that prefer to use their current written-down book values, an accelerated depreciation over five years will be available.

Also, small miners with profits below A$50-million a year would not have to pay the new tax.

The proposed MRRT would extend the current petroleum resource rent tax (PRRT) regime to all Australian onshore and offshore oil and gas projects, including the North West Shelf.

Swan said that government had chosen to focus on iron-ore, coal and oil and gas as they represented three-quarters of the value of Australia’s exports and resource operating profits, and accounted for an even greater share of resource rents in the mining industry.

They also represented the vast bulk of growth in the sector over the coming decades.

Since the beginning of the mining boom, prices for iron-ore have increased by over 400% and prices for black coal have increased over 200%.

“The improved resource taxation reforms focus on the most profitable resources, raise the uplift factor for tax losses, remove refundability and offer generous depreciation arrangements to promote new investment. They are more generous to industry in some respects, while industry has given ground in other areas,” Swan said.

While Rudd’s super profits tax would have added A$12-billion to federal coffers, Swan said, the improved resource tax reforms were estimated to reduce this revenue by only A$1,5-billion over the forward estimates.

Optimism and Criticism
While the large BHP Billiton, Rio Tinto and Xstrata diversified miners gave the modified tax proposal the nod, junior and midcap miners expressed their disappointment at not being involved in the negotiations on the mining tax reform.

The Association of Mining and Exploration Companies (Amec) said that government’s decision to exclude junior miners from the preliminary negotiations had shaken the juniors’ trust in government.

“The announcement that was made this morning should have been delayed until government had talked to the junior sector,” Amec CEO Simon Bennison said.

“Since Gillard put the truce on the table, we contacted her office and the offices of Swan and Resource and Energy Minister Martin Ferguson to engage in this process with the goodwill that was established in the truce. That delivered nothing for us.

“We feel like we have been hoodwinked through this process. I think the biggest moral issue we now have would be the lack of trust we have in this government, and that will make future negotiations very difficult,” Bennison added.

“The juniors feel that we suspended the advertising on the basis that we would be negotiated with, and, subsequently, the Prime Minister sat down with the big end of the town and we feel as if we were frozen out of that process,” said iron-ore miner Atlas Iron MD David Flanagan.

“We have some real concerns moving forward. We will continue to engage in the process, but we feel that this has set a precedent whereby companies that work hard and take risks, and have the promise of making money in the future, will be slapped with a new tax,” he added.

“My issue is that the developing sector should have the same break as the multi- nationals that created this deal, and that should start with levelling the playing field. If you level the playing field, you allow infrastructure in, and if the uplift rate comes at an agreed margin, it should be above borrow- ing cost so that the junior miners are not prejudiced,” said Fortescue MD Andrew Forrest.

To smooth the implementation of the new arrangements, government is establishing a policy transition group (PTG) led by Resources Minister Ferguson and previous BHP Billiton chairperson Don Argus to consult with industry and advise on the MRRT roll-out and PRRT arrangements. The Reawakening

The mining sector is reviving investments, Xstrata is allocating A$186-million of its previously suspended investment into its coal growth projects in Queensland and, while the A$15-billion funding for Fortescue’s expansion projects has fallen by the wayside, Forrest notes that banks are again willing to discuss the funding.

Forrest was also quick to add that nothing was set in stone.

Since the announcement, the Australian Stock Exchange has also been flooded with news of mergers and acquisitions (M&A).

“M&A activity should now be more viable,” Deloitte mining lead tax partner Gordon Thring said.

However, Thring noted that iron-ore and coal miners would need to ascertain the market value of their mining rights, and their effective life, which were essential in order to work out the value of the deductions now available under the MRRT.

“Of course, junior miners and explorers, and also those with marginal projects, will no longer benefit from any royalty refunds or under- writing of losses, and will need to re-evaluate their modelling for the coming year,” Thring added.

Although more clarification is being sought by the onshore oil and gas sector, which has been included in the petroleum resources rent tax, which differs significantly from the proposed MRRT, the bulk of mining com- panies previously included in the super profits tax proposal will be excluded from the new regime altogether.

“This will be particu-larly beneficial for industries such as nickel and alumina, where significant processing and refining caused difficulties with the taxing point,” Thring said.

The Penny Drops
But the MRRT has not been without its share of naysayers, most notably in the political arena.
Gillard has come under attack over the potential loss of revenue as a result of the new MRRT, with the Liberal Party doubting the figures portrayed.

“There has been a misstatement of a magnitude of three times by the government of the effect of these changes,” Liberal Senator George Brandis told the local television.

Brandis said the country stood to lose $4,5-billion as a result of the new tax regime, based on the evidence provided by Treasury Secretary Ken Henry, instead of government’s original estimate of A$1,5-billion.

The latest controversy started after super- profits-tax proposer Henry said that the lost revenue estimate was based on higher commodity forecasts. “I am aware that the price increases were quite significant,” local media quoted Henry telling a Senate Committee.

Coal and iron-ore are Australia’s top two exports, accounting for over a quarter of last year’s A$250-billion export revenue. Their share is expected to rise this year as commodity prices soar and export volumes rise.

The Australian Bureau of Agricultural and Resource Economics has forecast that the country’s iron-ore export volumes for this year are estimated to increase by 20%, to 389-million tons, while iron-ore export earnings are forecast to increase by 50%, to A$47,7-billion, during next year.

Meanwhile, Australia’s thermal coal pro-duction is estimated to increase by 4%, to 213-million tons, during this year, rocketing a further 10%, to 234-million tons, next year.

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