TAX NEWS - June 2010

Xstrata hits back on distortion claims in profits tax debate

Attempts to demonise the Swiss-based mining group Xstrata show how desperate the Rudd government is becoming over its ill-considered resource super-profits tax.

Mining companies, big and small, have rushed to warn of the dangers posed by the tax, universally attacking the proposal as ill thought through and damaging in its present form.

But Xstrata went a step further and announced immediate suspension of almost $600 million spending on two projects as a direct consequence of the tax -- the $6 billion Wandoan thermal coal project and a $600m project to extend the life of the Ernest Henry copper mine.

Xstrata's moves added weight to the miners' claim that the tax would cut investment in the minerals industry and lead to deferrals or cancellations of projects.

In response, Kevin Rudd suggested it was "passing strange" that Xstrata would issue such a statement 12 months before legislation was drafted and 24 months away from the start of the new tax system.

That revealed more about Rudd than it did about Xstrata. It demonstrated the Prime Minister's total lack of understanding as to how the mining industry works and the long lead times and expenditure that must go into a project such as Wandoan.

It also demonstrated that he thinks like a bureaucrat.

Rudd also implied that Xstrata was either not telling the truth in the reasons it cited for suspending work on Wandoan or was telling half-truths. "It is our understanding that there are a number of other existing issues impacting on this particular development, including rail access, port infrastructure and power supply," the Prime Minister said.

Wandoan was never regarded as a high-margin project and the matters raised by Rudd may well have been issues in the economics. But it is the tax, as proposed, that is the killer. Xstrata says the impact of the tax eliminates the net present value of the Wandoan project "almost entirely".

Xstrata's executive general manager for the project, Steve Bridger, has reportedly said the tax would reduce the return on Wandoan to $7m over 30 years compared with a projected $500m without the tax.

That's the key issue, and it is being ignored by Rudd and his government.

Instead, the government has sought to attack Xstrata's credibility, claiming it has been spreading misinformation and exaggerating the extent of job losses. Small Business Minister Craig Emerson has been at the forefront of this attack.

What Xstrata said was that Wandoan and the Ernest Henry expansion would have created 3250 new jobs which were now "at risk". It also said suspending the sinking of an underground shaft at Ernest Henry involved the loss of 60 contractor jobs "with immediate effect" and a further 190 jobs that would have been created over the next 18 months.

Xstrata came under attack after much of the media interpreted its remarks as relating to the loss of 60 existing contractor jobs, whereas the positions would have been created had the company given the go-ahead to sink an underground shaft.

Yet it matters little whether the jobs existed or were about to be created.

The Sydney Morning Herald, in particular, was scathing.

It challenged Xstrata's claim to have paid more than 40 per cent in taxes and royalties since 2003.

The newspaper claimed that its analysis showed Xstrata had paid tax at an average effective rate 16.2 per cent, which rose to 33.6 per cent if royalties were included. Xstrata hit back, saying it had generated a total of $44bn of revenue from its Australian operations from 2002 to last year, and during the same period had reinvested $45bn in Australia.

During that period the company paid $4.8bn in taxes and royalties on pre-tax profits of $12bn, which represented an effective tax rate of 40 per cent.

The SMH ignored the Xstrata correction. Instead it ran a report that, despite shelving a planned $400m expansion of the Ernest Henry mine Xstrata was keeping its options open by awarding a $3.4m services contract relating to earthworks for its tailings storage facility. At the same time, The Australian Financial Review reported that Xstrata was continuing to buy up farmland within its Wandoan exploration lease.

Emerson went feral. He said the services contract at Ernest Henry showed Xstrata had misled the public and was more evidence that it was engaging in a campaign of misinformation.

As to the buying of farmland in the Wandoan exploration lease, that constituted dishonest behaviour to the local communities, which were hearing one thing from Xstrata and seeing another.

He also claimed it was yet another blow to Xstrata's "highly questionable" claims about the impact of the tax.

Of course, it was nothing of the kind.

The tailings storage contract is merely business as usual and the amount to be spent is peanuts. Xstrata hasn't abandoned Ernest Henry. It is still operating an open-cut mine, which has several years of life left. It had intended to extend the life of the mine by sinking a shaft and developing underground mining.

The latter project is at risk because of the super-profits tax.

Xstrata, like the rest of the mining industry, is still hopeful that the government will realise the damage it is doing and restructure the tax on a basis that would be acceptable and equitable or, if not, that it will be thrown out of office at the next federal election and the tax will never be imposed.

For that reason, development of Wandoan and the Ernest Henry underground project has not been scrapped.

Xstrata also makes a point that it is a publicly listed company with the legal obligation to ensure that information it publishes is accurate, and not misleading.

The advertising campaigns of the Minerals Council of Australia and the government capture much of the attention, but a steady stream of mining companies have been releasing statements to the ASX commenting on the expected impact upon them of the tax -- and they universally conclude that it will lead to less investment than would otherwise have been the case, and will damage Australia's reputation overseas as a stable place of investment.

BHP Billiton's chairman Jac Nasser has sent to the ASX a copy of a letter to shareholders in which he claims the government has misrepresented (that is, understated) the amount of tax that the company pays and that, contrary to its assertions, the government has not constructively engaged with the company.

The directors carry liability for those remarks and they would no doubt have been carefully vetted by the company's lawyers.

Of course, politicians like Rudd and Emerson are protected by parliamentary privilege and almost certainly would also have immunity from prosecution under the Shield of the Crown.

There's little doubt there is considerable misinformation being spread during the debate over the resource super-profits tax, and it's not difficult to see which side is the main culprit.