(BHP, RTP): BHP, Rio Shares Drop on Australian Mine ‘Super’ Tax (Update3)
By Gemma Daley and Rebecca Keenan
May 3 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group, led declines in mining stocks in Sydney trading on concern Australia’s plans to impose the world’s heaviest tax regime on resource companies will cut billions from profits.
BHP and Rio fell the most in 3 months after Australia announced the so-called super tax yesterday. The 40 percent tax on resource profits will start from 2012 and raise A$12 billion ($11 billion) in its first two years. BHP, with 51 percent of its assets in Australia, said taxes on its operations there will increase to 57 percent in 2013 from 43 percent now.
“These proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,” Marius Kloppers, chief executive officer of BHP, the world’s largest mining company, said in an e-mailed statement.
Australia, the world’s biggest iron ore and coal exporter, is now the most highly taxed mining nation, reducing its competitiveness, Citigroup Inc. said. The move may reduce BHP’s earnings by 17 percent and Rio’s by 21 percent in 2013, UBS AG said today in a report.
BHP traded 3 percent lower at A$39.53, its biggest decline since Feb. 5, at the 4:10 p.m. Sydney time close. Rio, the third-biggest, declined 4.3 percent to A$69.00., also its biggest fall since Feb. 5.
Credit Swaps
The cost of protecting Rio Tinto and BHP bonds against default surged to the highest in almost two months. Credit- default swaps on Rio Tinto jumped 7 basis points to 83 basis points as of 4:34 p.m. in Sydney, the highest since March 5, according to Nomura Holdings Inc. and CMA DataVision in New York. Swaps on BHP rose 4 basis points to 64 basis points, the highest since March 8, Nomura and CMA prices showed.
Fortescue Metals Group Ltd. slipped 4.2 percent and Newcrest Mining Ltd., the largest Australian gold mining company, fell 3.1 percent. Morgan Stanley said the tax may cut its valuation of Fortescue by 36 percent.
“It’s a worst-case scenario,” Citigroup mining analyst Craig Sainsbury said. Mining companies will be taxed about 58 cents for every dollar of earnings, compared with 35 cents before the new regime, he said. The resource profits tax is on top of corporate tax and companies payments of state royalties will be rebated.
Mergers and acquisitions may “dry up” because of the uncertainty created by the proposed changes, Sainsbury said. This is “bad news for mid-cap Aussie miners,” he said.
Peabody’s Bid
Peabody Energy Corp., which has provisionally offered A$4.1 billion for Macarthur Coal Ltd., is assessing the likely effect of the tax changes on the bid, spokeswoman Jennifer Morgans said by phone. Macarthur declined 9.5 percent to A$14.00, 13 percent less than Peabody’s offer of A$16 a share.
Peabody may reduce its bid because the proposal may affect its valuation of Macarthur, Macquarie Group Ltd. said today.
The government runs the risk of “taking away from Australia the strongest industry we have and the one that saved us from the global financial crisis,” Keith De Lacy, chairman of Brisbane-based Macarthur, the largest producer of pulverized coal, said yesterday. “Always 50 percent of our net profits went into development and exploration and so much of that is going now so obviously we’ll grow slower.”
Government Spending
Taxing resources companies to help fund government spending is designed to give Australia’s 20 million population a greater share in a China-fueled boom for iron ore and coal. Prime Minister Kevin Rudd, preparing for an election within a year, said the changes will help the government pay for hospitals, retirement benefits and company tax reductions.
“The royalties regime was outdated,” Treasurer Wayne Swan said in an interview with Bloomberg Television today. “It certainly did not extract for the Australian people a fair share of those very big profits that are coming through on the back of the mining boom.”
Resources companies make up 9 percent of the economy and last week warned that a 40 percent levy and double taxation with payments to states would threaten $108 billion of planned investment. The government yesterday said it will compensate companies for the state royalties they have paid.
“It is not the right solution and will ensure Australian commodity exports become less competitive globally and investment in Australia is reduced,” Charlie Aitken, director of Southern Cross Equities Ltd., said today in a report.
‘Curtail Investment’
The changes to taxation will “erode Australia’s competitiveness, severely curtail investment and limit jobs growth”, Rio Tinto, which has 35 percent of its assets in Australia and New Zealand, said in a statement. Xstrata Plc, with coal, copper, zinc and nickel mines in the country, said the tax may curb investment.
Xstrata, which has 33 percent of its assets in Australia and New Zealand according to data compiled by Bloomberg, declined 4.1 percent in London on April 30. Glencore International AG, the world’s largest commodity trader, is studying a merger with Xstrata as a way to restructure its ownership and improve access to capital, according to two people familiar with the matter.
“Australia will have the highest taxed mining industry in the world,” Minerals Council of Australia Chief Executive Officer Mitch Hooke said in an e-mailed statement. “Australia’s hard-earned reputation as a stable investment environment will be dramatically undermined.”
Slower Growth
“Some will undoubtedly be paying some more tax,” Swan said. “But what Australia needs as we go forward is an efficient tax. We need one which gives to the Australian people the fair value they deserve for their resources and also recognizes the very substantial investments that are made in mining ventures.”
Chinese and Indian demand for resources from Australia helped the A$1.2 trillion economy skirt recession during the financial crisis.
Rudd’s Labor government, which has led the opposition Liberal-National coalition in opinion polls, commissioned the tax review two years ago.
“It is like standing on quicksand, relying on a resources rent tax,” Opposition Treasurer Joe Hockey said yesterday. “This is a cowardly response to a very substantial report.”
The government will use the resource tax revenue to create a A$5.6 billion infrastructure fund, cut company taxes to 28 percent from 30 percent and boost retirement funds, now worth A$1.3 trillion. It will also give a tax concession for resource exploration, including geothermal power, affecting 4,300 companies, Swan said yesterday.
Small Businesses
The corporate tax rate, reduced to 30 percent from 36 percent by the previous Liberal-National government, will be cut by mid-2014, with 720,000 small businesses getting a one-year head-start. The government may decrease the rate further.
The government will also increase the amount companies have to pay into people’s retirement funds to 12 percent from 9 percent of their gross salary in mid-2019. Australia will make it more attractive for some 8.4 million workers to increase their own contributions to the pool, and the changes will add A$85 billion to the A$1.34 trillion funds, Swan said.
In total, the government said its tax policy changes will add 0.7 percent a year to the economy.
To contact the reporters on this story: Gemma Daley in Canberra at gdaley@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net
Last Updated: May 3, 2010 04:02 EDT
