What Would a New Mining Tax Mean for Australia as an Investment Destination?

by: Roger Nusbaum

There was loud news out of Australia, one of my favorite investment destinations, early Monday with a proposed new tax on mining companies that would essentially spread the wealth coming from the mining boom. For now it is just a proposal, and as it stands it would phase in over many years (as far out as 2020). There are a lot of moving parts.

The big macro is that it would change the taxation on bigger companies to paying a tax based on value as opposed to the current royalty which is based on volume. Sort of. For some reason the proposal has the companies still paying the royalty and getting it refunded back. One amusing little nugget (thankyouverymuch) from the immediate reaction is that Australian mining companies lost a combined AUD 9 billion in Monday trade, which is the same amount that proponents of the plan expect to add in tax receipts.

More specifically, this would be an excess profits tax (uh-oh) that would be applied after a normal rate of return on invested capital at a rate of 40%, again after a normal return. One blogger I read said that he could not find what this meant but I heard on the Monday episode of Squawk Australia that this could be based on a ten year government bond yield but I cannot vouch for that as being accurate.

The plan offers a new benefit that is aimed at helping smaller mining companies. Essentially small, unprofitable mining companies would get tax incentives via tax rebates for exploration that have previously only been available to profitable companies.

I've read seven articles so far (all linked below) and the following quote is by far the best I found:

"It cannot discourage investment because RRT is really an excess profits tax. It only fires up when profits are over and above what would be required to invest in the first place. It cannot discourage investment."

This makes sense, of course, as companies and investors are typically not interested in excess profits. Wait, what did he say? A little humor is OK.

There are complaints and concerns popping up all over Australia as you can well imagine. Everyone is in agreement that that the country has benefited mightily from being so resource rich. People speaking out against the new scheme are worried about killing the golden goose. They say the tax will hurt the resources boom. One quote on this as follows: "Macarthur Coal chairman Keith De Lacy said the planned new tax would lead to a decline in investment in Australia because other mineral-rich countries had lower taxes." Another article I read had quotes from the management at Royal Dutch Shell (NYSE:RDS.A) expressing concern over where their involvement in the Gorgon Gas Project (export LNG) goes from here.

This will not alter demand for resources but seems like it could negatively impact profitability--again, they are looking to increase tax revenue by $9 billion. I suppose some of the concern over making certain projects not worth operating is valid but then that would reduce supply which, with constant demand, should lift prices making a project previously not worth operating because of the new tax worthwhile again.

One anecdotal story that hurts the argument against the tax is the fact that on Tuesday Newcrest Mining (OTCPK:NCMGY) increased its offer for Lihir Gold (LIHR).

There is a long way to go between here and this happening, and of course it may not happen at all. A couple of investment implication that occur to me would be to look at other Australian sectors (the financials are very accessible and relatively healthy), the new IndexIQ Australia Small Cap ETF (NYSEARCA:KROO) should benefit based on what proponents of the new tax have in mind for smaller miners and, if anyone at iShares is paying attention, they should get the New Zealand ETF that they filed for to the market this week. If the new tax plan becomes a big deal then I believe New Zealand stands to benefit by attracting investment demand that would normally go to Australia. Even if Australia is only marginally affected in this way, New Zealand is small enough that this could matter.

The links I have read so far are here, here, here, here, here, here and here. Nothing as of last night from John Hempton at Bronte Capital but you will want to read anything he says about it if you care about Australia as an investment destination. Big thanks to Wildebeests for most of the links.