Australia Tax: Rio, BHP to Seek Compromise on Profit Tax, UBS Says

by Elisabeth Behrmann, 20 May 2010 (Bloomberg) -- Rio Tinto Group and BHP Billiton Ltd., meeting the Australian government this week to discuss the proposed mining profits tax, will seek to exempt existing mines and raise the rate at which the levy kicks in, UBS AG said.

"There are six months of consultations planned, and taxation points, retrospectivity and the fact that capital is mobile will be the key focus," UBS analyst Glyn Lawcock said at a media briefing in Sydney.

Rio Tinto today said the 40 percent tax, due to commence from 2012, shouldn't apply to mines already in production, following a meeting with Treasury officials in Canberra. BHP Chief Executive Officer Marius Kloppers has said the tax will stymie investment, spur companies to move offshore and threaten an industry that comprises 9 percent of the economy.

"Tax reform must satisfy a few important tests," said Rio Tinto Managing Director of Australia David Peever. "The first test is you can't disadvantage investments already made."

BHP and Rio have said the tax would make investment decisions on new projects difficult, while Fortescue Metals Group Ltd. has put projects on hold because of the tax. "We want four principles to be discussed," BHP spokeswoman Amanda Buckley said. BHP wants the discussion to cover "prospectivity that is new mines only, competitiveness, treating different minerals differently, and we want the taxing point to be as close as possible to the mine gate," Buckley said.

Under the proposal, returns from operations exceeding the rate of long-term Australian government bonds, currently less than 6 percent, would be taxed as "super profits," with an increasing tax in proportion to rising earnings.


Rate of Return

"Projects wouldn't get approved at such a low projected rate of return," said Lawcock, with many projects unlikely to receive approval even at a return rate of 10 percent, UBS said in an accompanying report. "High margin projects are most affected. Thus bulk projects -- iron ore and coal -- will bear the brunt of the tax."

The tax would change the "pecking order" of projects such as BHP's uranium-copper-gold Olympic Dam project in South Australia and its Saskatchewan potash asset in Canada, said UBS.

"A project like Olympic Dam would obviously be impacted and would slip in the pecking order, and something like Saskatchewan potash would move up on BHP's bubble chart," said Lawcock. "Both projects require investments of $10 billion plus."