Possible Mining Tax Smacks Gold Miner, Australia ETFs

Includes: EWA, GDX, GDXJ, LIHR
by: Tom Lydon

A hefty tax could be in the offing for Australia’s miners and other natural resource companies. Although it’s not official yet, it has many pondering what the impact would be for related exchange traded funds (ETFs) as well as one of the world’s largest mining sectors.

Canberra’s plan for a tax of up to 40% on profits generated by resource companies would cut deeply into earnings and dividends. Not only would this put future projects at risk, but the mining sector at large would suffer as well. Peter Smith for The Financial Times reports that mergers and acquisitions in Australia’s mining sector could also be curtailed if the tax is approved by the country’s parliament.

The tax, which could come down as early as 2012, would threaten the competitive side of Australia’s mining sector.

Meanwhile, a new deal could create the world’s largest gold producer. Bettina Wassener for The New York Times reports that the board of Lihir Gold (LIHR) of Papua New Guinea recommended Tuesday that its shareholders agree to a sweetened $8.8 billion takeover offer from Newcrest Mining of Australia.

This move would exemplify another merger within the mining sector and would create the world’s largest gold producer. But now that a 40% tax is being discussed, could it make this deal less sweet?

  • iShares MSCI Australia (NYSEARCA:EWA), a proxy for basic materials and mining, if there ever was one, has shot up last month.

  • Market Vectors Gold Miners (NYSEARCA:GDX)

  • Market Vectors Junior Gold Miners (NYSEARCA:GDXJ)

Disclosure: No positions