TAX NEWS - June 2010

Xstrata Says Mine-Tax 'Tinkering' Won't Curb Damage to Industry

Xstrata Plc, which halted investment in A$6.6 billion ($5.6 billion) of Australian mining projects after the government proposed a new tax, said "tinkering" with the levy won't be sufficient to prevent damage to the industry.

Prime Minister Kevin Rudd will reveal "major changes" to the plans today or tomorrow, Australia's Herald Sun reported, without saying where it got the information. Rudd will raise the threshold at which the 40 percent profit tax kicks in to more than 10 percent from about 6 percent, it said.

"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 Chief Executive Officer Mick Davis said in an e-mailed response to questions. "Tinkering at the margins will not avoid the significant long-term damage this tax could do to mining investment in Australia."

Xstrata on June 3 said the 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 weren't viable under the new tax. The decision heightened pressure on the government to wind back its proposals. Rudd, battling a slump in approval ratings ahead of an election likely to be held this year, said the move was just the "argy-bargy of a very tense debate."

Xstrata, BHP Billiton Ltd., the largest mining company, and Rio Tinto Group jumped in London trading yesterday after the Herald Sun report. 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.


Building Costs

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.

Changes 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 newspaper report. The government will also remove quarries and gravel from the tax to ease concern that building costs would rise, it said.

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.