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Gillard Scales Back Australian Mining Tax in Boost for Election

Australian Prime Minister Julia Gillard scaled back a proposed tax on mining companies to win their support, easing concern economic growth will slow and depriving the opposition of a key election platform.

The government exempted most commodities, raised the threshold and cut the tax to 30 percent on coal and iron ore earnings, compared with a previous plan to collect 40 percent of all resource profits. BHP Billiton Ltd., Rio Tinto Group and Xstrata Plc shares rallied today after they approved the revisions at a meeting with Gillard last night.

Gillard, 48, ousted Kevin Rudd last week after his support slumped in opinion polls and his brawl with mining executives threatened to make the ruling Labor Party the nation’s first one-term government in 80 years. The accord will defuse attacks by opposition leader Tony Abbott that the government is damaging an industry that helped Australia skirt the global recession, and prompted Xstrata to resume work on a A$586 million ($497 million) copper mine expansion.

“This is a massive win and it means she can go ahead and win the election, there’s no doubt about it,” said Andrew Hughes, who specializes in political marketing at Canberra-based Australian National University. “She’s done something Rudd couldn’t — get an agreement between big business and the government on this tax in what’s only her first week in the job.”

Shares Gain

BHP, the world’s biggest mining company, rose 0.6 percent in Sydney trading. Rio Tinto climbed 0.9 percent. Fortescue Metals Group Ltd., whose billionaire founder Andrew Forrest led public rallies against the tax, gained 1.5 percent. The agreement may help persuade companies to start work on $21 billion of delayed projects.

The Australian dollar rose to 85.04 U.S. cents as of 12:11 p.m. in Sydney from 84.34 cents in New York yesterday.

The swift resolution signals Gillard’s determination to break with the policies and poor communication that doomed Rudd, making him the nation’s shortest-serving prime minister in almost 30 years. Rudd, 52, decided not to run in a ballot of Labor Party lawmakers after Gillard challenged his leadership.

While Rudd said negotiations with the miners might take months, Gillard, at her first press conference after being sworn in as the nation’s first female prime minister, said reaching a deal was her top priority.

She immediately stopped an A$38.5 million government advertising campaign extolling the tax, winning a commitment from miners to halt their anti-tax ads.

‘Scare Campaign’

“There was a huge, well-funded scare campaign, it created fear and uncertainty,” Resources Minister Martin Ferguson said in an interview in Canberra today. The community “understood the need for change, they wanted the government to put in place some changes and we have done it. We all move forward now.”

The revamped resources tax will apply from July 1, 2012, and the Labor government, facing an election Gillard has said will be held in the “coming months,” doesn’t intend to rush new laws into Parliament if elected. Treasurer and Deputy Prime Minister Wayne Swan said he didn’t expect laws would go to the upper house Senate this year.

A committee chaired by former BHP chairman Don Argus will hold talks with resources companies about implementing the tax, Swan said in Canberra.

Highest Tax

Under Rudd’s proposal, miners would have paid a 40 percent tax on profits above a 6 percent return on investment on projects in Australia. That would have made the nation the world’s highest taxing for mining companies, according to the Minerals Council of Australia, an industry lobby group.

Morgan Stanley estimated the levy would have cost the mining industry A$85 billion in its first 10 years.

Gillard’s agreement applies the tax to the profits of iron ore and coal and it extends the current Petroleum Resource Rent Tax to all onshore and offshore petroleum and gas projects.

The levy will apply once a project’s return on investment exceeds 7 percentage points more than the 10-year government bond yield, currently about 5 percent. Previously it would have kicked in for any return above the bond rate.

Miners welcomed the agreement, saying it was a “positive outcome” and a “fundamental improvement” on the plan announced by Rudd and Swan on May 2.

‘Unfinished Business’

“The three key determinants of where the tax applies to profits are more commercially realistic,” Minerals Council of Australia Chief Executive Officer Mitch Hooke told reporters in Canberra. “It’s unfinished business, we still have work to do.”

Xstrata will resume full project activities at its Ernest Henry mine after the deal was announced, the company said in an e-mailed statement. Xstrata Chief Executive Officer Mick Davis said the result of the talks produced an “acceptable” outcome for the industry.

Xstrata, based in Zug, Switzerland, said June 3 that A$586 million of work expanding the Ernest Henry mine and the A$6 billion Wandoan coal project weren’t viable under the previous tax plan.

“The reduction in the headline rate is an amazing concession. It removes the uncertainty that’s been overhanging for several weeks,” said John Robinson, chairman of Global Mining Investments Ltd., which oversees about A$300 million of assets including BHP, Rio and Xstrata shares. “One would expect to see the stocks rerated as a consequence.”

Safe Haven

“It kills any debate about sovereign risk, we are a safe haven for investment,” Ferguson said. “We have got expansion around Australia.”

Ferguson said he, Gillard and Swan met with BHP Chief Executive Officer Marius Kloppers, Rio’s Managing Director for Australia David Peever and Xstrata’s coal unit Chief Executive Officer Peter Freyberg in Canberra last night.

“There was some finger food, a couple of bottles of wine and a couple of beers,” Ferguson said. “There was no celebration and no champagne bubbles — we had just completed a robust debate and said let’s just get on with life.”