TAX NEWS - JUNE 2010

Australia Tax: Local mining stock values plunge 12pc

by Jennifer Hewett, 05 June 2010 -- The market value of local mining companies that operate solely in Australia has plunged 12 per cent since the Rudd government announced its controversial resources tax plan on May 2, as international fund managers reassess their Australian investments.

However, the market value of miners that operate mostly overseas only dropped 0.9 per cent over the same period.

In an analysis of the top 150 ASX-listed resource companies excluding oil and gas companies, Gresham Advisory Partners found the results were consistent with industry views that the new tax would increase the cost of capital for domestically focused miners relative to those with offshore projects.

The research also found that for globally diversified companies such as BHP Billiton and Rio Tinto with projects in Australia and overseas, the average decline in market value was 10 per cent. Gresham chief executive David Feetham said the research results were dramatic and could be even worse if the tax was implemented as announced.

"The market has reacted with shock to the increased risk and priced in that the tax will be implemented but not in its current form," he said. "If the tax were to be implemented without changes, the implications would be even more severe."

The monthly report coincided with the announcement of the tax on May 2 and compares 150 companies in one currency and one geographic base with no other distorting factors.

The report said the new tax would inevitably impose a handicap on one of the most profitable and competitive sectors in Australia. "We expect that global suppliers of capital will reassess their priorities in light of the new tax (and indeed are already doing so), potentially directing risk capital to more favourable jurisdictions," the report's author, Darren Martin, wrote.

The appetite of international investors to buy into Australia has soured, as the uncertainty surrounding the government's contentious resource super-profits tax grows.

On Thursday one of the world's biggest resource fund managers, JPMorgan Chase's Ian Henderson, revealed he had sold down a quarter of his BHP Billiton and Rio Tinto holdings because of the resources tax.

"I had not thought that the changes in Australia would be quite as drastic as they are proposed to be," he said.

Yesterday a Chicago hedge fund manager who did not want to be named said there was little incentive to invest in Australian resource companies and assets.

"Why would you be in Australia right now -- that's the clear message around," he said. "Why would you be in Australian metals and mining and oil and gas?

"We can see what's happening in Australia, we just don't want to touch it. The rhetoric is showing that there's just a different political culture there.

"We're watching it and we're just like, whoa, you've got the government taking on industry, and the industry trying to take on government. We're watching parliament trying to work out what's going on. It's clear there's a lot of ammunition on both sides."

Fidelity portfolio manager Kate Howitt said concern about the Resource Super Profits Tax (RSPT) dominated discussions at a Merrill Lynch global metals and mining conference in Miami three weeks ago.

"Their disdain for the proposal and the way it had been dropped on the industry was pretty forceful to the point where you almost felt embarrassed to be an Australian walking around," Ms Howitt said.

"I think this government, my guess would be that it doesn't have close ties to business so when it has a great idea of something to do, it can't have quiet chats in the back room to kind of bounce around ideas and come up with something that is going to be workable.

"They instead are relying on theoretical assessments of things and then launching it into the public debate."

Global Mining Investment chairman John Robinson said his firm had not adjusted its holdings of mining stocks since the Resource Super Profits Tax was announced.

He remained bullish about the bulk commodities sector, which was dominated by BHP Billiton, Rio Tinto and Vale of Brazil.

"When we look at a company like BHP and Rio as an investment opportunity, we look at it from a global perspective rather than just their Australian-based operation," he said.

"So although it will certainly make a dent in their Australian-based returns, we would expect in the longer term they will adjust their investment outlook to reflect that tax.

"In the case of Rio we may see the Simandou investment in Guinea getting a push along rather than something in Australia as a consequence."

Mr Robinson said the listed GMI -- which has a total portfolio of about $300 million -- believed it was premature to react until it became clear whether the tax would be introduced in its present form.

He was surprised that some fund managers had sold large holdings of Rio and BHP.

"I suspect in some cases it's a bit of a knee-jerk reaction. These things take time to fully develop," he said.

Gresham's Mr Martin also acknowledged concerns that the proposed tax would work in favour of foreign investors exploiting marginal resources in Australia to add value offshore. Mr Martin described this as a "potentially unintended consequence".