TAX NEWS - June 2010

Australia Tax: BHP, Xstrata Seek Overhaul of Australia Tax Plan, Consultations

BHP Billiton Ltd., the world's largest mining company, and Xstrata Plc called on Australia's government to redraft a planned mining tax to avoid a flight of investment from the country.

"Substantive redesign of this proposed tax is necessary and, if this can't address its fundamental failings, it should be abandoned," BHP Chairman Jac Nasser said today in a letter to shareholders. "Investors will think twice before making another investment in Australia -- this is sovereign risk."

BHP and Xstrata have joined Rio Tinto Group and Peabody Energy Corp. in reviewing, suspending or slowing Australian projects after the government proposed a 40 percent tax on so- called super profits. Prime Minister Kevin Rudd, under pressure to scale back the plan, may raise the threshold at which the levy kicks in to more than 10 percent from about 6 percent, the Herald Sun newspaper reported today.

"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-mail. "The government still has not allowed consultation to take place on the key issues with this tax -- namely its application to existing investments and the 40 percent rate."


Xstrata Investments

Mining companies insist that any new tax be applied only to new investments rather than existing ventures. On June 3 Xstrata, the biggest exporter of power-station coal, halted spending on A$6.6 billion ($5.6 billion) of Australian projects, saying the tax created "significant uncertainty for the future of mining investments into Australia and would impair the value of previously approved projects."

Rio Tinto will be forced to consider mining investments outside Australia because of the proposed tax, Reuters reported today, citing an interview with CEO Tom Albanese. Albanese urged the government to rethink the plans and recognize they're not in the country's interests.

Rudd, battling a slump in approval ratings ahead of an election likely to be held this year, told Seven Network Ltd.'s "Sunrise" program there will be "weeks, months" of talks on the tax. Xstrata's move to suspend investment is just the "argy- bargy of a very tense debate," he said earlier this month.

Xstrata halted A$586 million of work on the expansion of the Ernest Henry copper mine, approved in December, and the A$6 billion Wandoan coal project.


Peabody Projects

Peabody Energy, the largest U.S. coal producer, slowed work on five expansion projects in Australia, Jennifer Morgans, a spokeswoman for the St. Louis-based company, said today.

BHP said it's assessing its Australian investment plans as details of the proposed tax become clearer. "The government has not defined all aspects of the design, implementation and application of the proposed super tax," Ruban Yogarajah, a London-based BHP spokesman, said today by e-mail. "This level of uncertainty makes it difficult to approve projects."

BHP lost 0.1 percent in London trading as of 2:51 p.m. local time, while Rio declined 1.2 percent and Xstrata was unchanged.

"Unfortunately there has been no acknowledgement by the government of the major flaws of the proposed tax and the significant impact on the industry," BHP's Nasser said.

Rio spokeswoman Faeth Birch said the company isn't able to comment on speculated changes.

Alterations to the tax plans include bringing coal-seam gas projects under the Petroleum Resource Rent Tax and removing a 40 percent underwriting of losses, according to the Herald Sun. The government will also remove quarries and gravel from the tax to ease concern that building costs would rise, it said.


'Fundamental Misunderstanding'

In an open letter to Rudd, miners including Rio, BHP, Barrick Gold Corp., Newcrest Mining Ltd. and Xstrata said any suggestion the petroleum tax model is suitable for mining companies shows a "fundamental misunderstanding" of the differences between the two industries, the Herald Sun said today.

Resources Minister Martin Ferguson has said the government is open to "refinements" to the tax. The levy 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.