UPDATE: Mining Tax Contagion Set to Spread From Australia May 20 2010,
By Madelene Pearson and Jesse Riseborough
May 20 (Bloomberg) -- Australia's planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.
" It could create what the miners are now describing at a global level as a type of tax contagion, said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa ".
BHP, the world's largest mining company, Xstrata Plc and Rio said they are reviewing projects in Australia, the No. 1 exporter of coal and iron ore, after the government unveiled the tax this month, saying a country's resources belong to the people. Citigroup Inc. Sydney-based analyst Craig Sainsbury said Canada, Peru and Chile may be next.
"Resource nationalism" is a major risk facing miners in the next few years, Evy Hambro, manager of BlackRock Investment Management Ltd's flagship $14.3 billion World Mining Fund said last month.
Chile, the biggest copper exporter, is proposing a temporary rise in mining taxes to help pay for earthquake reconstruction that may cost BHP, Xstrata and Anglo American Plc $1.2 billion in the next two years. Brazil, the second-biggest iron ore exporter, may tax shipments of the commodity or raise royalties, Energy and Mining Minister Edison Lobao has said.
Markets Suicide
" The Australian tax plan is global financial markets suicide " , according to Charlie Aitken, the executive director of Southern Cross Equities Ltd., the equal top ranked predictor of BHP's share price performance of 17 analysts, according to data compiled by Bloomberg.
Mining companies' earnings may be cut by almost a third when the tax starts in 2012, Moody's Investor Services said this week. The tax would be broadly credit negative for the sector and raise uncertainty for some companies over the short-to- medium term, Moody's said this month.
The tax may also prompt European and Scandinavian nations to seek a greater share of revenue from production, Magnus Ericsson, a senior partner at Raw Materials Group, a mining data and analysis company, said this month. The proposal will make Australian mines the highest taxed in the world, according to Minerals Council of Australia.
" Economies, particularly European economies, are going to have to deal with deficits " , said Jamie Nicol, chief investment officer at Dalton Nicol Reid in Brisbane, which manages about A$550 million ($472 million) including BHP and Rio shares. "They are going to look at some sort of innovative tax solutions to try and claw back some of that ".
Levy Wars
Fortescue Metals Group Ltd., Australia's third-largest iron ore exporter, has dropped 20 percent and BHP's Melbourne-traded stock has fallen 8.7 percent, while the Australian currency has slid 8.8 percent since the government announced the tax on May 2. Fortescue this week placed $15 billion of projects on hold, citing the tax.
BHP rose 0.9 percent to A$37.29 at 10:45 a.m. in Sydney on the Australian stock exchange, Rio added 0.1 percent and Fortescue dropped 2.1 percent.
Nations that resist may attract investment. South Africa taxes mining companies at 33 percent, Canada 23 percent and China 30 percent compared with a forecast 58 percent in Australia after the tax, according to Citigroup data. Canada's Finance Minister Jim Flaherty said this month he's opposed to raising taxes and the Australian levy makes Canadian companies more competitive.
China Demand
Australian Treasurer Wayne Swan has said he strongly disagrees with claims the tax will damage miners. China's demand for Australian metals will outweigh higher taxes, according to AMP Capital Investors Ltd., a unit of the country's largest pension plan provider, which hasn't changed its industry assessment.
The tax will result in a 6 percent to 7 percent increase in mining investment in Australia, Trade Minister Simon Crean told reporters yesterday in Shanghai, citing economic modeling.
Rio, the worlds third-largest mining company, this month said it will spend $401 million to boost iron ore output in Canada, citing the "attractiveness of investing" in the North American nation. BHP has said the tax would stymie investment.
" It doesn't matter if it's the Congo or Sudan, or it's Australia or Canada, these projects require commitments by governments that are 30 years and when they move the goal posts they will have a serious rippling effect " , said Frank Holmes, chief investment officer of U.S. Global Investors Inc., which manages about $3 billion. They could stifle the world.
