KGThe company said the following on 7 May 2010 (see...

KG

The company said the following on 7 May 2010 (see announcements for MD & CEO speeches):

"The Federal Government has announced a Resource Super Profits Tax. We are not clear how this may impact on Alcoa of Australia. The bauxite which we mine in Western Australia is low grade containing about 28% available alumina. As a consequence it cannot be economically exported. Very large investments in refineries and infrastructure at Kwinana, Pinjarra and Wagerup have been required to convert this bauxite to alumina. That is, your Company adds substantial value to the raw material before we have an export market product.

We would hope any new tax does not unfairly penalise your Company. In any event, AWAC has a global portfolio of assets and options to invest in many countries."

My thoughts are:

The proposed RSPT of 40% is in addition to the current company tax of 30% (proposed to be reduced to 28%). It does not increase the current tax from 30% to 40%; company income tax and RSPT are separate taxes. The RSPT will replace State royalty taxes, so the actual additional impost will be something less than 40%.

We do not know exactly how the RSPT will work, but it is said to be similar to PRRT (with additional concessions) , which is imposed on the oil & gas sector. It will tax the profit made from the resources extracted. Hence costs such as financing (i.e. interest, hedging and other borrowing costs), treasury operations, legal most other corporate costs are not included in the calculation of profit.

The main problem is that any profit over the bond rate is taxed. Would you invest your capital in a risky project for a return equal to the risk free bond rate? It is an economists tax, yet it offends basic investment principles.

Note that any RSPT paid is deductible against assessable income for the purpose of working out taxable income that is subject to the current 30% rate.

RSPT will not apply to profits earned by Australian listed companies from overseas mines. This skews future investment to spend capital overseas, not in Australia. It makes some of my stocks (i.e. MBN) more attractive, but the market doesnt seem to have figured this out or value it.

AWC might have a buffer against the RSPT because of its 40% interest in Alcoa Inc, which has operations outside Australia.

Hope this helps. ProjectX