Richard Karn: Strange Bedfellows-Australia's Labour Party & the Big 3 Miners

Source: The Gold Report  (7/8/10)

Richard Karn The Gold Report's boots-on-the-ground correspondent in Australia, Richard Karn, updates us on the death of the Resource Super Profits Tax (RSPT) proposal and the birth of a new tax, the Mineral Resources Rent Tax (MRRT). Supposedly a "fair share" for all, but Karn is not convinced. Read on for his take on the new tax's implications for Australian mining.

The Gold Report: So what's the latest "down under" on the resource tax situation?

Richard Karn: On Friday July 2, 2010, new prime minister Julia Gillard announced that the Resource Super Profits Tax (RSPT) proposal was dead and that the Labour Party had negotiated a new Mineral Resources Rent Tax (MRRT) agreement with the "Big Three" miners—BHP Billiton Limited (NYSE:BHP; OTCPK:BHPLF), Rio Tinto Ltd. (LSE:RIO; NYSE:RTP; AUS:RIO) and Xstrata PLC (LSE:XTA)—that offered "a fair share" for all concerned. And indeed, it certainly appears as though the new government has caved in to industry demands pretty much across the board.

TGR: Can you briefly run us through the changes?

RK: The guts of the MRRT can be summarized as follows. The headline tax rate has been cut from 40% to 30%, but that rate will actually be 22.5% because it comes attached to a new 25% extraction allowance. The uplift rate, or the threshold at which the tax would kick in, has been raised from the 10-year government bond rate, which is currently just below 6%, to 7% above the 10-year bond rate, which more closely approximates a company's cost of capital. The tax will only apply on the resource value at the "mine gate," removing the potential for the tax to be applied to value-added activities subsequent to mining, such as logistics, smelting and milling. There is a provision enabling some miners to recognize significant cash flows because new capital expenditures would be immediately deductible rather than being depreciated over a number of years. And although not removing all of the retrospective aspects of the RSPT, the new tax offers miners a choice between depreciating existing projects based on either the book value or the market value of their projects.

What got the most media attention, however, is that the MRRT will only apply to iron, coal, both onshore and offshore oil and gas, and coalbed methane projects, reducing the number of companies subject to the tax from 2500 to 310; copper, nickel, bauxite and gold projects, a number of which may have been rendered uneconomic by the RSPT, are exempt from the new tax, as are all of the precious and specialty metal projects the Emerging Trends Report is in Australia to investigate.

TGR: So what's not to like? Don't the iron and coal industries account for the majority of resource boom profits, anyway?

RK: Well, that's true enough, but the MRRT is not without blemishes that will be put under the magnifying glass both in the run-up to the federal election as well as in the High Court if the tax passes because it still represents the federal government usurping what is clearly laid out in the Articles of Federation as states' Rights.

TGR: So not everyone thinks if offers "a fair share?"

RK: Not by a long stretch. Although the eastern press and media seem to have pronounced the matter 'a done deal' and have attempted to shift the general public's focus onto immigration issues, there are still a variety of niggling issues that linger. The whole RSPT debacle has aroused public suspicion regarding the Labour Party's agenda, goals and methods, and for all of the hype and backslapping the MRRT is still lacking in details. For example, the contents of the signed agreement with the Big Three that sealed the negotiations have yet to be disclosed.

Then there is the way the Labour Party alternately lionizes and vilifies the Big Three miners to suit their agenda. One minute the Labour Party was praising the Big Three for their contribution in helping Australia escape the ravages of the global financial crisis, the next they were manufacturing figures to portray the Big Three as greedy carpetbaggers that didn't pay their fair share of taxes; then the Labour Party was characterizing the Big Three as ruthless foreign conglomerates digging up 'the Australian people's resource wealth' and shipping the profits abroad, but now they are back to being model corporate citizens that have acted in the country's best interest. That's all within the last four months, mind you. Numerous Western Australian publications have pointed out that the negotiations with the Australian mining industry did not include a single Australian but were in fact conducted with foreigners—a South African, a Swiss and an American.

Further, the A$50 million profit threshold at which the MRRT kicks in has a repressive flavor that many iron miners in particular find distasteful because it will serve to limit competition and can be seen as the Big Three protecting their position and territory. Andrew Forrest of Fortescue Metals Group Ltd. (ASX:FMG), for example, believes iron's inclusion in the tax will make life all that more difficult for producers and developers outside the proposed BHP-Rio Tinto joint venture in the Pilbara region of Western Australia.

The conservative Liberal Party not only still opposes the tax but also vows to make it the fulcrum upon which the election will pivot. What upsets them most is the 'incrementalist,' i.e. leftist, approach. By singling out specific industries for increased taxation as the reward for success, the MRRT sets a dangerous precedent. Should the Labour Party gain control of Parliament, there would then be little to stop them from expanding the tax to cover the entire resource sector.

TGR: So you don't think we've heard the last of the resource tax?

RK: I think the MRRT has been a very clever political stunt the Labour Party has employed to give them a chance to remain in power, and it may prove successful in that regard, but no, I do not think we've heard the last of the resource tax. That's the bad news; the good news is that we can get back out on the road now to investigate some more precious and specialty metals projects.

TGR: Thank you for taking the time to share your insights with us.

Richard Karn, as managing editor of The Emerging Trends Report, has a broad, multi-disciplinary background and a working knowledge of precious and specialty metals, as well as considerable research, analytical and writing experience. The first nine Emerging Trends Reports, which pertained to coal, gold, nuclear energy, silver, the North American electrical grid, transportation fuels, recycling and specialty metals and natural gas were re-evaluated and updated within the context of the global financial crisis and then published in the form of an e-book, Credit & Credibility. This spring, Richard—who divides his time between Alaska and Australia—embarked on a lengthy tour circumnavigating Australia by four-wheel drive to evaluate dozens of remote projects and recommend the stocks of companies that are well-positioned to supply burgeoning market demand for these critical metals. In addition to managing The Emerging Trends Report and conducting contract research for companies, Richard has written for publications ranging from Barron's, Kitco and Fullermoney to Financial Sense Online.

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DISCLOSURE:
1) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: None
2) Richard Karn: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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