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XMFSinchiruna (26.98)

Have you thought two steps ahead?

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May 03, 2010 – Comments (11) | RELATED TICKERS: BHP , RTP.DL , TCK

No doubt everyone with shares in uber-miners like BHP and RTP is mourning the serious threat of a new 40% tax on profits from resource mining companies in Australia ... but have you thought two steps ahead?

The miners have just gained a massive bargaining chip that thyey will bring to the table with them to the next round of price negotiations on items like iron ore and met coal. Whatever political heat they were feeling for demanding excessive prices after the April 1 prices were set (amid the abandonment of the traditional annual benchmark pricing system altogether), has juet been wiped clean. Expect met coal and iron ore prices to rise even faster than they were already poised to do if this proposal sustains political will in Australia.

Also, if you're  non-Australian miner with easy trade access to the same markets in China and india, say, for example, TCK ... then this could be your lucky day. They'd enjoy all the benefits of a pricing increase without the corresponding tax.

Of course, in the long run Australia will not be the last nation to seek to tap the enormous wealth that will be created by miners through the remainder of this secular bull market in commodities, but for the time being it's certainly advantage to the non-Aussie exporters.

Happy mulling...

Sinch

11 Comments – Post Your Own

#1) On May 03, 2010 at 3:21 PM, 100ozRound (29.41) wrote:

Wow - very good points!

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#2) On May 03, 2010 at 5:39 PM, SockMarket (37.04) wrote:

sinch,

I would agree on the TCK part and I am sure price increases will help but I would wonder whether they can really keep after tax margins in tact after such an increase. Do you have any figures or estimates?

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#3) On May 03, 2010 at 7:57 PM, XMFSinchiruna (26.98) wrote:

danielthebear

If I understand your comment correctly:

TCK, which exports coking coal principally from British Columbia, would not be impacted by Australia's tax ... I was using it as an example of companies that may benefit from the measure by producing seaborne coking coal and iron ore for Chinese and Indian markets from operations outside of Australia.

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#4) On May 03, 2010 at 8:09 PM, SockMarket (37.04) wrote:

sinch,

I should be more clear: Do you think that BHP & RTP etc. who export from Australia can really keep their margins in tact with this tax?

Sure they may be able to raise prices but it seems to be a given to me that their margins must be crimped to some extent. As I see it TCK and others not in Australia will attempt undercut Australian producers price wise and to stay competitive Australian producers must take it out of their margins.

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#5) On May 03, 2010 at 8:54 PM, XMFSinchiruna (26.98) wrote:

danielthebear

They will pass on most of the cost of that tax via their incredible pricing power collectively. If Australia were not such a monster producer of all things desired by China and India, and were the two primary conpanies affected any other but BHP and RTP, I would be issuing some prompt sell alerts. No matter how you slice it, this certainly is disturbing news for all Australian miners. I will not be adding any BHP shares anytime soon, but nor am I running for the exits. As I suggested, I would be looking for non-Australian producers in friendly jurisdictions (like TCK) who stand to benefit from the measure in the medium term.

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#6) On May 03, 2010 at 10:58 PM, workfor (< 20) wrote:

Allow me to plant a 3rd and much more serious step into your heads. China in good faith with and approval of the Australian government, has been investing heavilly into resource and resource companies inside Australia. Trust me, China will not be impressed by Australia's recent actions at all. My fear for Austrailia is the outrage China will have. I'm going out on a limb here and say that China will not take this slap in the face while sitting down. I would not rule out  potential military posturing by China or even a military showdown between China and Austrailia in our not too distant future!

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#7) On May 04, 2010 at 7:03 AM, XMFSinchiruna (26.98) wrote:

workfor

Interesting angle, workfor. A Very valid point! Kudos for thinking three steps ahead.

We have Yanzhou Coal's acquisition of Feliz Resources, the $60 billion supply deal for steam coal from a pending development in Queensland's Galilee Basin, CITIC Resource Holdings owning a large stake in Macarthur Coal, 

http://www.fool.com/investing/general/2010/04/01/everybody-wants-a-piece-of-macarthur.aspx

http://www.fool.com/investing/international/2010/02/08/the-60-billion-man-australian-coal-magnate-puts-ch.aspx

http://www.fool.com/investing/international/2009/08/14/profit-from-chinas-exploding-resource-blitz.aspx

You're right ... this is bound to drive a stake into Sino-Australian relations in a way that the prosecution of RTP employees did not.

 

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#8) On May 04, 2010 at 8:52 AM, XMFSinchiruna (26.98) wrote:

Here are a few observations on the matter by David Forest, who writes for the free daily e-letter at piercepoints.com:

One of the few "saving graces" of the new rules is that the tax is on profits. A company has to be making money in order to pay, and producers will pay in accordance with how much cash they're making.

This is better than a royalty scheme, of the kind other governments have tried. Royalties come off the top, whether a company is making a little money or a lot. This can kill marginal projects quickly.

But even under the proposed profits tax, marginal projects will suffer. Extra tax could push a borderline project into negative NPV territory. Low-grade, deep or engineering-challenged projects will likely see less investment.

One interesting aspect of the new rules is a tax break for exploration.

The government opted not to go with a flow-through tax program, which many in the mining community had been calling for.

Instead, they will grant a "resource exploration rebate". Whereby companies can write off approximately 30% of their exploration expenses against future revenue.

This will help major miners a little. The big guys have both exploration expenses and cash flow to write credits off against.

For smaller companies, the arrangement is more challenging. Most junior exploration companies have no cash flow. Essentially making the tax credit useless.

Some sub-groups of explorers could benefit. Geothermal explorers, for example, may be able to use the credits if they discover and develop a viable project through to production.

One outcome could be that juniors will become prized for their tax pools. We saw this in the Canadian oil and gas sector. Junior companies with tens of millions in tax losses are often acquired by larger producers largely for the tax benefit.

Bottom line: the new laws will be a test of the "world-class-ness" of Australia's resource assets. Projects that are stellar will still be worthwhile even with increased tax.

But any projects on the bubble could get the axe. Developers may simply have more profitable places to sink their money.

Time to separate the wheat from the chaff.

 

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#9) On May 04, 2010 at 10:48 AM, workfor (< 20) wrote:

China has used it's investment in Fortescue metals (FSUMF) in the past year to try to break RTP's and BHP's ability to control their near monopolistic price of iron ore coming out of Australia. Because China is a volume customer, China believed it deserved a lower price than iron ore contracts previously signed by other countries, and therefore could use leverage through FSUMF to undercut RTP and BHP and force them to agree to a cheaper price. I believe Australia's actions negate any leverage in pricing China may have believed it had, and in China's eyes has dramatically lowered the value of their recent investments in Australia.

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#10) On May 05, 2010 at 11:54 AM, fockewulf (< 20) wrote:

I wonder just how much additional risk gold and silver miners worldwide are going to be exposed too once other governments starts seeing the Australian goverment´s coffers filling up with this new tax.   I wouldn´t put it past any government distressed by economic conditions to heavily tax miners reaping huge profits.

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#11) On May 07, 2010 at 8:35 PM, caterpillar10 wrote:

This pushes opportunity into emerging countries, like Turkey for example, that are still in the 'let's attract new investment & industries' phase and will probably hold off on onerous levies.

I like BHP back in the $60s - they're global and can ship from other locations to off-set the margin hit.  

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