Replies to post #2402 on The Rising Influence of Rising Affluence

[DewDiligence]

Thanks for the update. This federal-vs-state conflict with respect to mining royalties is roughly analogous the situation in the US vis-à-vis estate taxes. (Prior to 2011, US state estate taxes were fully credited against the federal take, but now they’re additive.)

How do you think the mining tax will shake out? Will the deal BHP and Rio thought they had hold up when all is said and done?

[DewDiligence]

BHP Commits $10B for Australian Projects

[This is the first definitive statement about how BHP plans to utilize its colossal cash hoard; the $10B amount is the first installment toward BHP’s previously announced $80B of cap-ex during the next five years and is in addition to the planned $10B share buyback (#msg-60136197). Management does not appear to be concerned in the slightest about changes to the Australian mining tax or implementation of the proposed carbon tax.

BHP’s own PR’s on these expansion plans are in:
http://www.bhpbilliton.com/public/redirect.jsp?id=8336 ,
http://www.bhpbilliton.com/public/redirect.jsp?id=8337, and
http://www.bhpbilliton.com/public/redirect.jsp?id=8338 ;
webcast slides (17 pages) are at http://www.bhpbilliton.com/bbContentRepository/docs/110324investingInHighQualityGrowthmRandolph.pdf .]

http://www.marketwatch.com/story/bhp-billiton-to-pour-billions-into-australia-2011-03-24

›March 24, 2011, 2:59 p.m. EDT
By William Spain, MarketWatch

CHICAGO (MarketWatch) — In a sign of confidence in demand for coal and steel, BHP Billiton will pour billions of dollars into expanding its operations in Australia, the mining and energy giant said Thursday.

BHP Billiton will sink almost $7 billion worth [actually $7.4B according to BHP’s own PR] of capital investment to increase production of iron ore in Western Australia to build the capacity to deliver more than 220 million tons a year, with the first production expected from a new mine in early 2014.

Of that sum, $3.3 billion will go to the development of the Jimblebar mine and rail links and new mining equipment and rolling stock, while about $2 billion will be used to improve Port Hedland, adding new berths, ship loaders and other equipment. The rest of the investment is targeted to port blending facilities and rail yards to enable ore blending, the expansion of resource life “and to prepare for the future growth of the business beyond the inner harbor,” the company said.

The company also approved three metallurgical coal projects in the Bowen Basin in Central Queensland that will add 4.9 million tons of annual mine capacity while 11 million tons of annual port capacity will be added at the Hay Point Coal Terminal. The total price tag will be $5 billion, of which Billiton will shell out half. [Mitsubishi will pay the other half.]

Further, it will put a $400 million investment into expanding Hunter Valley Energy Coal in New South Wales, in a move to increase thermal coal production by 4 million tons a year.‹

[DewDiligence]

Gillard Goes to China

http://online.wsj.com/article/SB10001424052748704677404576284451077249210.html

›APRIL 25, 2011, 6:45 A.M. ET
By DINNY MCMAHON in Beijing and ENDA CURRAN and DAVID FICKLING in

Australian Prime Minister Julia Gillard was scheduled to land in Beijing on Monday for her first visit to China since taking office, attempting to make her mark on an increasingly complex economic and security relationship.

Ms. Gillard, whose Beijing visit coincides with what's being billed as Australia's biggest-ever trade delegation to China, intends to discuss trade, investment flows, regional cooperation and human rights in meetings with officials including President Hu Jintao and Premier Wen Jiabao, according to the Australian government.

Australia's close economic ties with China helped its economy weather the global financial crisis far better than many developed economies. Unlike in many developed countries where people regard China's rise as having diminished their own economic prospects, Australians are broadly positive about their relationship with China. According to poll results released Monday by the Sydney-based Lowy Institute for International Policy, three quarters of respondents believe China's growth has been good for Australia.

But mounting unease over Beijing's increasingly assertive stance in the region, and over Australia's dependence on Chinese demand and the growing inflow of Chinese capital, has colored the relationship. The Lowy Institute poll, for example, also showed that 57% of respondents think the government has been allowing too much Chinese investment into the country, and 44% believe it is likely China will become a military threat to Australia in the next 20 years.

The China trip, which ends Thursday, will be an important test for Ms. Gillard, who took office in June as a relative foreign-policy novice. Australia's former Prime Minister Kevin Rudd, a fluent Mandarin-speaker and former diplomat, dominated Australia's relationship with China during his stint as leader. Mr. Rudd continues to have a hand in China relations as Australia's foreign minister.

Reflecting the importance of the business relationship, Ms. Gillard, who has also traveled to Japan and South Korea on her trip, will be speaking in Beijing to the Australia China Economic and Trade Cooperation Forum, a conference of dozens of senior executives from some of Australia's largest companies, including BHP Billiton and Australia & New Zealand Banking Group Ltd.

"Australia is more dependent on the Chinese economy than any other economy in the world other than Taiwan's," Australian Ambassador to China Geoff Raby said in remarks to reporters in Beijing last month. "No other country on earth can ever or will ever replace China in importance for the Australian economy."

Australia has benefited from China's enormous demand for resources, a hunger that's not showing any sign of letting up. [The same can be said for such companies as BHP and VALE.] In the latest mega-deal between the two countries, China Petrochemical Corp., known as Sinopec Group, last week signed an agreement to buy 4.3 million tons of liquefied natural gas annually over the next 20 years from a project planned for Australia's eastern coast—a deal worth billions of dollars.

In the 2009 to 2010 fiscal year, China was the third-largest source of foreign investment into Australia, while two-way trade totaled around 90 billion Australian dollars (US$96.68 billion). The world's second-largest economy accounts for some 25% of Australia's exports, up from just 4% a decade ago.

Relations between China and Australia have fluctuated in recent years, reaching a low point in 2009 when Rio Tinto executive and Australian national Stern Hu was detained and subsequently imprisoned on corruption charges. [I posted about this incident extensively on this board.] That episode coincided with domestic political opposition to a burst of Chinese investment proposed for Australia's resources sector.

The security implications of China's rise have also become a concern, with muscle-flexing from Beijing over territorial disputes last year rattling governments around the region. Security issues were on the table for Ms. Gillard's discussions with Japan and South Korea's leaders.

At the end of 2009, then-Prime Minister Rudd singled out China's military mobilization as warranting increased spending on Australia's defense.

"We encourage China to engage as a good global citizen and we are clear-eyed about where differences do lie," Ms. Gillard said in an address to the U.S. Congress last month.‹

[DewDiligence]

Mining Shares Drop on Australia’s Carbon-Tax Plan

http://www.reuters.com/article/2011/07/11/us-australia-carbon-idUSTRE7690C520110711

›By Michael Perry
SYDNEY | Mon Jul 11, 2011 6:59am EDT

(Reuters) - Coal miners, steel firms and airlines were sold off on Monday a day after Australia's unpopular government introduced a carbon tax scheme, while power suppliers warned the tax could risk A$4-6 billion in assets if banks tightened financing.

But economists said the tax on the top 500 carbon polluters would have little impact on economic growth, which is riding on the back of China's appetite for its mineral resources.

Prime Minister Julia Gillard on Sunday unveiled her long awaited climate policy which will see big polluters, including steel and aluminum manufacturers, pay a A$23 a metric ton tax from mid-2012. That will rise by 2.5 percent a year before moving to a market-based trading scheme in 2015.

"The nation's future needs to be a clean energy future. We've opted for the cheapest way of cutting carbon pollution," said Gillard, as she kicked off a nationwide campaign to sell the tax, opposed by most Australians.

Australia's parliament twice rejected attempts to price carbon in 2009. But Gillard, with the support of Green and independent MPs, hopes the latest carbon tax will see her Labor party regain political momentum ahead of elections due by 2013.

Green groups hope the tax package will aid global efforts to fight carbon pollution, largely stalled since U.S. President Barack Obama last year ruled out a federal climate bill during his present term. Outside the European Union, only New Zealand has a national carbon scheme.

Australian stocks were heading for their biggest fall in nearly a month on Monday, dropping 1.5 percent, with coal miners, steel and transport firms such as Macarthur Coal, Bluescope Steel sharply down as investors digested the impact of the tax.

Australian airline shares also tumbled. Qantas said the carbon tax will cost it an estimated A$110 million to A$115 million, while Virgin Australia said it was likely to face a cost impact of A$45 million in fiscal year 2013.

Both airlines said they would pass on the cost to passengers.

Clean energy firms are expected to be the winners from the carbon tax and an associated A$10 billion ($10.7 billion)clean energy package initiative. Geodynamics soared 25 percent and Infigen Energy rose 5 percent on Monday.

AUSTRALIA RELIES ON COAL

The scheme, likely to be passed by parliament this year, aims to cut emissions by 5 percent off 2000 levels by 2020. Australia is the developed world's worst per-capita greenhouse gas emitter due to its heavy reliance on cheap coal for power.

Power suppliers said the tax would help retire the worst polluting brown coal power plants, but warned it also put at risk A$4-6 billion in black coal plant assets.

"Our sector has assets that...last 40 to 50 years and have payback periods of 20 to 30 years and are constantly having to be maintained and reinvested in," said Brad Page, chief executive officer of the Energy Supply Association of Australia.

"When it comes to refinancing these facilities, which occurs every few years, the banks will take a very hard view on this. These black coal facilities may struggle if that refinancing is not available to them."

The government plans to set up loan guarantees for electricity generators, to help the industry refinance loans of between A$9 billion and A$10 billion over the next five years.

Power suppliers and manufacturers have warned of rising prices due to the carbon tax. To compensate, the government said more than A$24 billion to be raised from pollution permit sales over three years will go to households through tax cuts.

"CARBON TAX EXPERIMENT"

Under the scheme, coal miners like global giants Xstrata Ltd, Rio Tinto, BHP Billiton would be eligible for a A$1.3 billion compensation package.

The tax is estimated to add, on average, a mere A$1.80 per metric ton to the cost of mining coal at a time when coal prices are at near record highs above US$300 a metric ton.

But Rio Tinto said Australia should not impose a price on carbon before its competitors.

"We have to be careful about imposing policy experiments on the Australian economy," said Rio Tinto managing director Australia David Peever.

UBS said, however, it remained a good time to buy Australian mining stocks as issues such as European debt worries, Chinese economic tightening and U.S. quantitative easing were abating.‹

[DewDiligence]

Australia’s mining tax passes parliament vote:

http://online.wsj.com/article/SB10001424052970204443404577054863236177058.html

The MRRT will apply to all companies earning more than 75 million Australian dollars (US$73.7 million) in annual profits from coal or iron ore production. It will be levied at an effective rate of 22.5% on all profits earned more than 7% above the long-term government bond rate—in effect meaning that it would only be paid on earnings above a 12% profit margin [assuming that the government bond rate is 5%].

The tax is slated to go into effect 7/1/12 after it is rubber stamped by Australia’s Senate.

The mining tax is separate from the proposed “carbon” tax (#msg-65052684).