Preview - impact of various Australian election outcomes on the mining tax

21 July 2010 | 04:47 Code : 20097 Geoscience events
Australian Prime Minister Julia Gillard is likely to call an election on Saturday...

Australian Prime Minister Julia Gillard is likely to call an election on Saturday, broadcaster ABC reported on Friday, in a move that could seal the fate of the Labor government’s proposed mining tax.The government aims to raise A$10.5 billion from 2012 under the watered-down 30 percent tax agreed by global miners BHP Billiton (BLT.AX)(BLT.L), Rio Tinto (RIO.AX)(RIO.L) and Xstrata (XTA.L), but the conservative opposition has vowed to dump it.Opinion polls published in Fairfax and News Ltd newspapers put Labor ahead of the conservative opposition at 52 percent versus 48 percent. For a Reuters poll trend, see: Here are some scenarios:If Labor is re-elected, Green senators are set to decide the fate of the tax. A Labor government is expected to present legislation to parliament by mid-2011. Green Senators are on course to be kingmakers in the upper house and are demanding examination of financial details of the tax, before backing it.Greens have already said the tax revenue should be saved in a sovereign wealth fund for future generations.The tax applies only to coal and iron ore mining and exploration companies earning more than A$50 million in annual profit. More than 2,000 copper, silver, lead, zinc, gold, nickel and other minerals producers not covered by tax.But Gillard has signalled a willingness for further concessions to junior miners, which lost exploration write-offs under the watered-down tax. This could lead to a doubling of the profit threshold to A$100 million and a flow-through shares scheme based on a Canadian model that allows miners to pass on tax loss credits to investors.Miners say flow-through shares encourage more investment in exploration and development when there is no cash flow.If the government amends the tax proposal, key beneficiaries would include magnetite iron ore producers such as Atlas Iron (AGO.AX), Gindalbie Metals (GBG.AX), Citi Pacific Mining (0267.HK), Grange Resources (GRR.AX), Fortescue Metals Group (FMG.AX), Centrex Metals (CXM.AX), Royal Resources (ROY.AX), Murchison (MMX.AX), Onesteel (OST.AX) and Emergent Resources (EMG.AX).Mining heavyweights BHP Billiton, Rio Tinto and Fortescue fall squarely in the sights of the tax. Commodity diversification will enable BHP and Rio to offset some of the heavier tax burden on its iron ore and coal divisions. Fortescue faces a more direct tax bill because it mines only iron ore.UBS estimates the effective tax rate for companies affected would increase from 38 percent to 44 percent under the new tax.An exploration rebate was also scrapped under the revised tax that would have equalled 30 percent of exploration costs and benefited large and small miners.Magnetite iron ore producers are taxed at the same rate as the rest of the iron ore sector, despite shouldering additional processing costs of around $15 per tonne to create a saleable product. Calls by the burgeoning magnetite sector for exemptions have met a lukewarm response from the government so far.Similarly, producers of brown coal, which face additional costs of around $25 per tonne to extract water from the mud-like coal, will be taxed at the same rate as black coal minersBrown Coal producers include: Great Energy Alliance Corp, International Power Australia (IPR.L) and TRUenergy Holdings (0002.HK)Opposition leader Tony Abbott has indicated he would scrap the tax. BHP Billiton, Rio Tinto, and all other miners of coal and iron ore breath a sigh of relief and removes any lingering threat that billions of dollars in new projects could be scrapped and investment diverted offshore.Rio Tinto is already making plans to lift annual iron ore production in west Australia’s Pilbara region by 100 million tonnes to 330 million tonnes in five years. Longer term, it wants to raise output to 600 million tonnes.Fortescue would likely immediately reinstate its $9 billion proposed investment in an iron mine with a capacity of 160 million tonnes a year put on hold under the original tax proposal. A further $6 billion in proposed investment would also be reconsidered by the Fortescue board. ($1=1.133 Australian Dollar) (Additional reporting by Michael Perry; Editing by Ed Davies and Ed Lane)

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