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Rio Tinto and BHP Billiton reach new tax agreement with Western Australian govt

Mining giants Rio Tinto (LON:RIO, ASX:RIO, NYSE:RTP) and BHP Billiton (ASX:BHP, LON:BLT) have agreed to new mining royalties for fine and lumpy iron ore production from their operations in the state of Western Australia, subject to ratifying legislation by the Western Australian parliament.

The two companies, which are currently in the process of merging their Australian iron ore operations in the country, confirmed that from 1 July 2010 they will pay an iron ore royalty of 5.625% on all fine ore and 7.5% for lump ore.  The new agreement is the conclusion of around 12 months of negotiations with the Western Australian government.

In addition to the royalty payments, Australia’s two largest iron ore producers agreed to make a one-off AU$350 million payment into the state’s Consolidated Revenue Fund, and also agreed to "promote greater efficiency and flexibility’ for their current operations and the ‘ability to share infrastructure and blend ore across their networks".

The two companies did also emphasize that this agreement at the state level was not dependant on their proposed merger of their Australian iron ore operations, which is being scrutinised by large governmental organizations around the globe.

"This outcome is the result of long and detailed negotiations conducted in good spirit over the past year. It is important for a number of reasons: it provides the people of Western Australia with increased value from this State's resources and it creates a level playing field for all iron ore producers in Western Australia,” Colin Barnett, Western Australia’s Premier stated.

"This result has emerged from an extensive period of consultation and negotiation, and will deliver profound benefits for our iron ore business, our local Pilbara communities and the State in general. This agreement continues Rio Tinto's drive for operational efficiency, which is important in an increasingly competitive global market. It will also assist us for when we are able to launch the next phase of our Pilbara expansion plans,” said Sam Walsh, chief executive of the iron ore group.

The tone of the statement by Rio Tinto and BHP Billiton this morning was in stark contrast to open letters released by Rio Tinto, BHP Billiton, Xstrata (LON:XTA) and several junior iron ore producers in Australia in relations to the federal government’s proposed super profits tax, which is still widely disliked by the country’s mining industry.

Disclosure: The authors holds no positions on the company