TAX NEWS - JUNE 2010

Australia Tax: Xstrata Halts Investment on Tax Uncertainty

by RAY BRINDAL, 03 June 2010, CANBERRA -- Swiss-based miner Xstrata PLC on Thursday said it will stop spending of 586 million Australian dollars (US$475 million) on two of its major projects in Australia's Queensland state, saying neither will be viable under the government's proposed tax on super profits.

Xstrata's decision to stop development of its A$6 billion Wandoan thermal coal project and its A$600 million Ernest Henry underground copper project is the latest move by a resources industry that is vehemently opposed to the proposed new 40% tax on "super profits," and which has reviews of many projects, including by Rio Tinto Ltd. and Fortescue Metals Group Ltd.

But Xstrata's move doesn't seem to have fazed Prime Minister Kevin Rudd.

"On the question of Xstrata, I said at the very beginning of this debate on the future of the resource super profits tax there'd be claims by mining companies…there'd be threats of project closures, there'd be projects also threatened to be frozen," Mr. Rudd told reporters.

Such threats would be "part and parcel…of a very tense debate" between parts of the mining industry and the Australian government, he said. Mining companies will fight "tooth and nail" not to pay more tax but the government is determined to prosecute tax reform.

The Australian government unveiled its proposed new levy on domestic mining and petroleum company profits for onshore projects in early May, unleashing a storm of criticism from industry and the conservative Liberal-National Coalition political opposition, who claim the tax will throttle investment.

The 40% tax will kick in when company profits exceed a level in line with the long-term government bond rate of about 6%. Consultations are under way between industry and the government over details of the tax, which the government wants to become law in about two years.

Xstrata's decisions represent the initial findings from Xstrata's ongoing review of planned investment into its Australian operations and growth prospects as a result of the proposed tax, the company said in a statement.

"The RSPT has created significant uncertainty for the future of mining investment into Australia and would impair the value of previously approved projects and exploration to the point that continued investment can no longer be justified," said Xstrata Chief Executive Mick Davis.

Analysis by Xstrata's Australian team shows the tax would impact the value and cashflow of the Wandoan and Ernest Henry underground projects. The tax would almost entirely eliminate the net present value of Wandoan and substantially reduce the value of the Ernest Henry underground project, the company said.

The two projects would have created 3,250 jobs, "which are now at risk," according to the company.

The suspension of investment spending makes the projects less likely to proceed, Xstrata said.

The proposed new tax introduces significant risk for any project in Australia and any new investment will need to show a higher rate of return to compensate for the impact of what would be "the world's highest mining taxation" on cashflows, Xstrata said.

The Ernest Henry underground project is designed to extend the life of the copper mine to 2024 from 2013, transitioning from the current open-pit operation.

Wandoan is planned as a 30 million metric tons a year operation, with early works having been scheduled to start in July.