TAX NEWS - June 2010

BHP, Rio Jump on Report Australia May Change Tax Plan

BHP Billiton Ltd., the largest mining company, Rio Tinto Group and Xstrata Plc jumped in London trading after Australia's Herald Sun said Prime Minister Kevin Rudd will make concessions on his planned mining-profits tax.

BHP, based in Melbourne, gained 3.2 percent to 1,875.5 pence, London-based Rio rose 3.7 percent to 3,262 pence and Xstrata climbed 4.3 percent. Rudd will release the changes today or tomorrow, the Australian daily said in a report dated June 11, without saying where it got the information.

"Tinkering at the margins will not avoid the significant long-term damage this tax could do to mining investment in Australia," Xstrata Chief Executive Officer Mick Davis said in an e-mailed response to questions today. "Despite numerous comments to the contrary, the government still has not allowed consultation to take place on the key issues with this tax."

Australia said in May it would impose a 40 percent levy on mining profits from 2012, raising an estimated A$12 billion ($10 billion) in the first two years of the levy. Rudd will raise the threshold at which the profit tax applies to more than 10 percent from about 6 percent, the Herald Sun reported.

Rio isn't able to comment on speculated changes, Faeth Birch, a spokeswoman for the company, said today. Ruban Yogarajah, a BHP spokesman in London, declined to comment.


Hoping for Dialogue

"We hope to have dialogue with the government and come up with a constructive proposal," Rio's Chief Financial Officer Guy Elliott said earlier today in London in a presentation. "Australia is certainly setting a bad example. I hope that they will change the proposal to something more sensible."

The changes to be announced include shifting coal seam gas projects into the Petroleum Resource Rent Tax and removing a 40 percent underwriting of losses, today's newspaper report said. The government will also remove quarries and gravel from the tax to counter fears of rising building costs, it said.

"Any additional tax must only apply to new investments," Andrew Mackenzie, chief executive officer of non-ferrous at BHP, said in a presentation posted on the company's website yesterday. "The overall tax rate should not make the Australian mineral resources industry less internationally competitive."

Xstrata, which shelved spending on A$6.6 billion of Australian projects because of the planned tax, said June 6 it was "optimistic" the levy would be changed after talks with the government. Xstrata today gained to 1,003 pence.


Open to 'Refinements'

"The current form of the tax is too onerous and our expectation has been that there would be changes made to it taking on board the issues that the mining companies have," Olivia Ker, a London-based analyst at UBS AG, said today by phone. "Increasing this allowance rate doesn't really materially impact valuations for BHP and Rio. We still think it's too onerous."

Resources Minister Martin Ferguson has said the government is open to "refinements" to the tax that would be imposed on resource companies' returns that exceed the rate on long-term Australian government bonds, currently about 6 percent, and be offset by a credit for royalties paid to state governments, according to government documents.

Australia may raise the lower limit for its proposed tax from 6 percent to 11 or 12 percent of company returns, the Australian newspaper reported May 27.