BHP Billiton Ltd. and Rio Tinto Group may join Xstrata Plc in reviving investment plans in Australia after forcing the government to water down a tax on mining profits in the world’s biggest exporter of coal and iron ore.
Prime Minister Julia Gillard agreed to cut the tax to 30 percent from 40 percent and raise the levy’s trigger level, a week after ousting Kevin Rudd as the nation’s leader to defuse a dispute that’s damped the government’s election prospects.
“The reduction in the headline rate is an amazing concession,” said John Robinson, chairman of Global Mining Investments Ltd., which oversees about A$300 million ($254 million) of assets, including shares of BHP, Rio and Xstrata. “It’s certainly better than I had expected.”
Xstrata, which resumed work today on a copper project in Queensland state, BHP and Rio led the campaign against the initial tax proposal, which Moody’s Investors Service estimated would have cut mining company earnings by almost a third. Marius Kloppers, chief executive officer of BHP, said the new tax is a material improvement after earlier saying projects were very difficult to approve under the initial Rudd proposal.
Shares of BHP, the world’s biggest mining company, Rio and Fortescue Metals Group Ltd. gained in trading on the Australian stock exchange. The cost of protecting BHP and Rio bonds from non-payment dropped. Credit-default swaps on BHP fell 4 basis points to 88 basis points as of 9:42 a.m. in Sydney, the lowest since June 22, according to Nomura Holdings Inc. and CMA DataVision prices. Rio swaps had the biggest drop since June 21.
“There’s no doubt the changes have moved in the direction of the miners,” Chris Drew, an analyst at RBC Capital Markets, said today by phone from Sydney. “It’s a better outcome than the previous proposal. The impact of the tax is going to be lower, so profitability is going to improve.”
Xstrata, which shelved spending on projects worth A$6.6 billion ($5.5 billion) in Australia, resumed work on a A$586 million expansion at its Ernest Henry copper mine, citing the new tax deal, the Zug, Switzerland-based company, the world’s fourth-largest copper producer, said today in a statement.
Xstrata may also restart early work on its A$6 billion Wandoan coal project, spokesman James Rickards said in an interview. Xstrata and Fortescue had suspended work on a total of $21 billion of projects because of the tax.
BHP and Rio had warned that the initial tax proposal threatened investment in mining in Australia, while the Minerals Council of Australia estimated the proposed tax would give the nation the world’s highest tax rate for mining companies.
“Mining investment in Australia going off the table as a result of the earlier super tax proposal was very real,” Hunter Hillcoat, analyst at Investec Plc, said by phone in Sydney. “With that regime now altered you’d think investment will now be back on.”
Gillard’s compromise minerals tax will now only apply to coal and iron ore mines and affect 320 companies instead of the 2,500 under Rudd’s proposal. The book value hurdle will kick in at the higher level of the 10-year government bond rate, currently about 5 percent, plus 7 percent, compared with just the long-term bond rate under the previous proposal.
Projects also will be entitled to a 25 percent extraction allowance that reduces taxable profits and mining companies will be allowed to use the market value of a mine instead of the book value for the purposes of the tax. The levy won’t apply to minerals such as gold, copper and nickel.