Flash News: Update on Plenty

17 11 2011

I have been following mining events more closely and this week it appears that a number of topics covered in previous entries have evolved to a significant extent. I am summarizing those in the present list post.

In a rare alignment of activists and large corporations’ mindset, Fortescue is once again sharing its beliefs in the conspirationists leanings of the Australian Government and the Super Majors. Mining

Rarely said about taxation. Well done Zambia. Financial Post

Steady progress is reported on Nautilus Minerals’ Solwara 1, its marine copper and gold mining project in the Bismark Sea (Papua New Guinea). Production should begin in late 2013. Mining

The Oppenheimers swapping diamonds for property development? Botswana Guardian (listen to an interview with Nicky Oppenheimer on Mineweb)

Forces at Play in Afghanistan’s resource extraction race. AFP

On the issue of mine waste. Infomine




Industry 1. Australian Government – 7.5%

24 09 2011

Oh well. I was supposed to keep quiet while my new job reviews whether it is cool for me keep my blog active. But this is one of those “I hate to say I told you so” moments. Cue The Hives.

As you can see from the previous post, I have dedicated a lot of attention to Australia’s Mineral Resource Rent Tax and questioned whether the tax would raise revenues to the extent suggested by the Australian Treasury. Well my answer came this week in the media from Sam Welsh, executive director of Rio Tinto.  Mr. Walsh said : “The final tax rate had been reduced from 40% to an effective 22.5% rate in the minerals resource rent tax (MRRT)” and also added that it was the best that could be done with the current Government.

Industry 1. Australian Government – 7.5%

An effective rate 22.5 compares favourably to the 28% statutory rate applicable to all corporate profits. Although I am comparing effective and statutory rates, it appears fair to conclude from the large gap in those rates that in negotiating, the industry took advantage of the Government’s unwillingness to concede defeat and got itself a tax rebate.

Australia Released Draft Legislation

19 06 2011

Details are out! When first proposed in 2010, Australia’s Mineral Resource Rent Tax (MRRT) was expected to raise A$3 billion in its first year. After ruthless negotiations, the draft legislation of the MRRT was released last Friday and despite several concessions it would still raise A$7.7 billion in revenue in its first two years. This is almost unbelievable considering the much lower than anticipated applicable rate (30 instead of 40 percent) and narrower base (iron ore and coal miners (320 firms) instead of all mining firms as initially planned (2500 firms)).

The preliminary exposure draft legislation is based on the recommendations of the Policy Transition Group, released in July 2010. The main components are summarized below.

  • The 30 percent tax rate will be kept and will begin to be applied on July 1st, 2012;
  •  Small miners with assessable profits of under A$50 million a year will be exempted from the tax;
  •  Investment-wise, firms will benefit from the immediate expensing of new investments as well as a 25 per cent extraction allowance to “further shield from tax the important value add and capital that mining companies bring to mineral extraction”. Moreover, past investments will be recognized at market value and written down over a 5 year period.
  • In addition to the transferability of deductions (which allows to offset the MRRT with deductions accumulated through other projects’ construction phase), unutilised tax losses will be carried forward at the government long-term bond rate plus 7 percent;
  • Royalties paid at state level will be fully credited by the national government and unused credits for royalties paid will also be carried forward under the same terms as unutilized tax losses but will not be transferrable between projects or refundable;

Some sticky points remain regarding the following issues:

  •  Pricing arrangements will be established to ensure only the value of minerals extracted will be taxed;
  •  The tax point for underground coal mines; and
  •  The valuation of multiple tenements within an area (and the decision to consider those as part of a single or multiple projects for tax purposes) will influence tax payable

The above list shows the extent to which the MRRT is full of deductions. I’m one sceptical nerd. I cannot quite figure how a lower rate and a narrower tax base allow for more revenue to be collected. The Australian Treasury stated that the difference in revenue collected is attributable to strong iron ore and coal prices and the fact that very little revenues was expected to be raised from other minerals. The coal and iron ore prices used in the revenue estimate must have been ridiculously high and the opportunities for tax planning (increasing with the complexity of the tax design) must have been ignored.

The exposure draft released by the Government is not exhaustive and is intended to provide stakeholders with an early overview of the legislation. The Government will release a second and final draft for public consultation later in 2011. If you are bold, courageous and have a lot of time on your hands; here is the exposure draft and its explanatory companion document.

Investment Did Not Dry Up

25 11 2010

According to an entry on International Mining, it seems that Australia is experiencing an important growth in investment in major extractive projects.

Since April 2010, (remember that the Australian Government unveiled its plans to introduce a New Super Profit Tax on May 2, 2010), capital expenditures for the developments of new projects had increased by 21%. It seems this number does not take in account the capital expenditure associated with BHP Billiton and Fortescue’s iron ore expansion plans. Moreover, the Australian Bureau of Statistics survey data indicate capital expenditure in 2010-11 may be around A$54.8 billion. Other encouraging news is that exploration expenditures seem to have remained strong.

All that to say that the uncertainty caused by the announcement and the subsequent national debate, did not prevent firms from taking advantage of the commodities’ boom. Although, one must highlight that instability was perhaps the only harm caused by the projected tax. Following consultations, the mining industry has been successful in lowering the applicable tax rate and narrowing the tax base to which the super profit tax would have applied thereby preventing Armageddon.

Tales of Concensus

8 07 2010

None of those two developments can be considered happy endings, but they’re certainly good compromises. On our plate today: two things. First, with a new PM and a new attitude, Australia seemed to have agreed on the shape of its upcoming new tax on super profits. Second, Vale Inco has finally reached a deal with its workers, after roughly a year-long labour conflict.

Australia New Super Profit Tax

Australia’s new Prime Minister Julia Gillard has agreed to make concessions on the parameters of the new mining tax.  A week after taking over Kevin Rudd as Prime Minister, she agreed to cut the tax rate of the new mining tax to 30% from 40% as well as to increase the threshold at which the rate will kick in. The 10-year government bond rate (currently 5%), plus 7% will be used as threshold. Moreover the tax will apply only on profits from iron ore and coal extraction. As a result the tax will affect only 320 companies instead of 2,500 under the previous version of the tax.  The projects will also be subject to a 25 per cent extraction allowance which will reduce the miners’ taxable income.

 Following the implementation of the last tax reform proposed by the Henry Review, Australia general corporate income tax rate was to be lowered to 28% from 30%. Considering the tax rate applicable to those super profits is only 2% higher than the general rate, I’m unsure whether this change of course can be called a compromise (nor proper tax policy). It’s full on back-pedalling (for re-election’s sake).  The miners call the new version of the tax a “reasonable framework”. 

Greens in the Australian Parliament have however signalled last week that they would not compromise on the rate and that the 40% rate would have to stay no matter what.  The saga may not be over yet.

Vale Inco has an Agreement with its Workers

A tentative five-year labour contract agreement has been reached by Vale Inco and employees of multiple Canadian operations who went on strike last summer over their dissatisfaction with the company’s offer regarding pensions and bonuses tied to the price of nickel. The Union of the Sudbury workers still has to vote on the proposed contract. Agreement by the Sudbury Union would likely lead to a settlement at Vale’s Voisey’s Bay operations in Newfoundland.

Sudbury and Voisey’s Bay operations collectively account for 4 per cent of the global nickel supply. The strike has thus been a major driver in the physical market in the past months. Andy Home, columnist for Reuters’ Metals Insider, suggested that the impact of a return to production to Vale Inco operations would take some time before being felt in the markets. Once the output of operations is increased, roughly 140, 000 tonnes of annualised nickel supply will hit the market. Home expects oversupply around the fourth quarter.

Effective Tax Rates on Mining

31 05 2010

I have made you aware in a previous entry, that the mining industry’s organized response to the new Australian mining tax would be articulated through Keep Mining Strong an initiative essentially based on social media. Above is one of their You Tube videos discussing the effective tax rates on mining.

The campaign seems to attract little attention so far. The oldest video on its You Tube channel was released one week ago and has only 2,207 views. Its Twitter account is currently being followed by fewer people (246) than it is following (269). Metrics were taken at 3.45 EDT!

The rates presented in the video are a bit controversial as rates cited in the Brisbane Times suggests that effective tax rates for the mining industry are 29% in Britain, 22% in the U.S, 21% in China, 20,4% in South Africa, 17.9% in Canada and 16.4% in Australia. The worldwide average is 23%. These numbers were taken from PricewaterhouseCoopers’ Effective Rate Comparison of the Global Mining Industry, an annual study of taxes paid by 57 leading mining firms.

The Australian Government will be relying on a $38 million budget to sell its tax on mining to its constituents who, for now, are divided on the issue.

Deal Imploding?

18 05 2010

It has been rumoured that in the wake of rising iron ore prices, delays in getting regulatory approvals and uncertainties related to the Australian super-tax, the Pilbara joint venture between Rio Tinto and BHP Billiton may be called off. The two companies have however publicly reiterated their commitment to the transaction yesterday although BHP Billiton said it would likely re-evaluate the deal if no agreement is reached by year-end.

The deal may no longer represent good value.

There is growing scepticism in analyst-circles on whether this deal will materialize. In an article published on April 14th, The Age reported that Rio Tinto shareholders were tipped to ditch the deal with BHP due to rising iron ore prices. In this context, the need to share the costs is less important, even though the estimated US $10 billion of savings arising from the transaction still appears significant despite savings.

Moreover, the compensation payment of US $5.8 billion granted to Rio Tinto in consideration of the more important quantity of iron ore contributed to the venture (about 5%) was established before iron ore prices increased, which is short-changing Rio Tinto according to analysts. This compensation payment could also be reduced as delays have allowed BHP Billiton to expand its production thus reducing the amount (to US $3.6 billion some predict) that it has to pay to make the joint venture a 50-50 undertaking. However, unless the payment is increased to at least US $6.4 billion, shareholders would likely vote down the deal, it has been reported by Australian Mining.

As you remember, initial discussions of a merger took place at a time when Rio Tinto was actively seeking to reduce the debt it incurred to make its cash acquisition of Alcan and shortly after the collapse of the Chinalco deal in the spring of 2009. Subsequently to the successful rights issue, improving economic environment and the establishment of a new pricing system more favourable to iron ore miners, the merger may not longer be a necessity for Rio Tinto.

Prospects for near-term progress (or lack thereof)

The deal still awaits approval of competition authorities in Australia, Europe, Japan and Korea. If no agreement is made by year-end Rio Tinto may be allowed to walk away without penalty, whereas if either party does so now, it will incur a US $275 million fee. Negotiations will drag…