How Rudd will change the Resources Super Profits Tax: Gottliebsen

The mining industry is preparing for major changes in the government’s proposed mining tax and those changes have coincided with resurgence in global optimism on the back of the big boost in China exports.

Longer term, global optimism is going to be governed by how hard economic growth is hit in various nations due to their differing levels of fiscal austerity.

The question all Australian miners will be asking, if and when Rudd announces the changes, will be: “Is it enough?”

The flagship of the changes will be the switch of the coal-seam gas projects from the resource super profits tax to the petroleum resource rent tax, which requires a 15%-return trigger point. And, as we have pointed out, it will mean that a number of the Queensland LNG projects will now go ahead. It’s good news for Santos.

The other likely change is the abandonment of the mining tax loss reimbursement provisions and an increase in the trigger point at which the tax cuts in. Currently the tax cuts in at about a 6% return. It will be raised to about the level that was provided in the revenue estimates to cover mining losses – in other words, no major variation in the amount raised. Quarrying will be taken out. Quarrying was never recommended in the Henry report, but crept into the tax announcement. That’s good news for Boral. A higher trigger point will also be a boost to Rio Tinto and BHP profits, hence the rise in the share price last night in London.

Talking to miners last night about the possible changes, the general view was that a number of very attractive deposits will now be competitive against rival projects in Africa, South America and Canada. But the Australian projects will have to be very good because the lower tax rates in those countries make the returns much better.

The less attractive deposits will not be mined with such a tax. And just as the petroleum resources tax stopped all wild cat exploration for oil and gas in Australia, so if the mining tax is going to be crafted as is now expected, most mineral exploration (outside exploration near existing deposits) will stop in Australia. The long term coffin for the mining industry will have been made because the industry cannot survive in the longer term without exploration.

Rudd will go to the people on this revised tax and given the enormous amount of investment ahead in Queensland and the development of the richer deposits in WA, he clearly believes he can win. He is increasing his re-election chances by lifting the infrastructure investments in both states so the argument that WA and Queensland are being robbed by the other states is countered.

The miners have to decide whether to continue the fight and, if so, how vigorously to take up the fight. As of last night the big miners were preparing to keep up the attack, but of course they have not seen the proposal, so no one can be sure exactly what they will do.

This article first appeared on Business Spectator.