When the government unveiled its Resources Super Profit Tax (RSPT) in the week before the federal Budget was brought down – in its initial response to the release of the Henry Tax Review – it would have been prepared for some criticism, because no industry likes to be hit with a tax increase.
The government also had some handy briefing notes for its members’ media appearances, based on bringing “foreign” profits back to Australia; introducing a tax on miners that merely resembled that under which the petroleum industry had happily worked since 1987; obtaining on behalf of the nation a fairer share of profits made extracting Australia’s non-renewable resources; and raising money to help fund a cut in company tax and a rise in the compulsory Superannuation Guarantee (SG) levy from 9 per cent to 12 per cent. (At least, that last one was tried on by the Prime Minister.)
So the government would have been amazed at the level of vitriol it attracted, from a large range of sources. At the top of that list, you could place China-based research firm GaveKal Dragonomics, which described the proposed tax increase as a decision by Australia to “pull a mini-Chavez” (referring to Venezuelan President Hugo Chavez’s fondness for nationalising resource assets). That’s not the kind of company that Australian leaders usually keep.
Companies have been vocal in their objections. BHP said that it would reassess the viability of its iron ore projects in WA, Queensland and NSW, and could not rule out shelving its biggest Australian project, the $20 billion expansion of the Olympic Dam copper, uranium and gold mine in SA.
Santos said it would defer for up to six months a decision on whether to build a $15 billion liquefied natural gas (LNG) plant and export terminal at Gladstone in Queensland. Rio Tinto said it would review all of its Australian projects, including the $11 billion Pilbara expansion plan.
According to broking firm EL & C Baillieu Stockbroking, there are 270 major resource projects in Australia undergoing feasibility studies and financing, with a total capital value of $320 billion, all of which could be stopped in their tracks.
Steven Bartrop, managing director of specialist resources investment company Lime Street Capital, says the RSPT is a “ludicrous” impost – particularly as it is levied on profits made above a hurdle-rate set at the long-term bond rate. He says the petroleum resource rent tax (PRRT) cuts in at a level of 5 per cent above the long-term bond rate.
“What most worries the resources industry about the RSPT is the complete lack of sophistication it shows on the part of the government in terms of understanding what the issues are in financing resources projects. Resources is very high-risk: you’ve got the risk of proving up your ore reserves, the risk of the metallurgical performance of the project, the risk of capital costs – there’s quite enough volatility without throwing in taxation uncertainty. And to say that the risk-free rate of return is all that is an acceptable rate of return from that project is simply ridiculous.”
The government has claimed that the RSPT is no different to the PRRT, under which the Gorgon LNG project – the single largest-ever Australian resource investment yet made – was stgeloped.
For their part, resource analysts are still trying to get their heads around the proposed tax, but a couple of themes are emerging.
Analysts say anywhere between 5-19 per cent could be knocked off the average net present value (NPV) figure in the resources industry, but with varying effects on individual companies.
For example, Deutsche Bank reckons the RSPT will reduce the net present value of Australia’s mining sector by about 7 per cent, with the NPV of iron ore producers Rio Tinto and Fortescue Metals Group falling by 8.7 per cent and 8.6 per cent respectively, and BHP Billiton suffering a drop in NPV of only 5 per cent. But UBS says BHP’s NPV will fall by 17 per cent, and that of Rio Tinto by 21 per cent.
Deutsche Bank expects uranium miner Energy Resources of Australia to lose almost 25 per cent of NPV, equivalent to an earnings per share (EPS) fall of 27 per cent by 2015.
Goldman Sachs JBWere expects BHP and Rio Tinto to furnish almost 88 per cent of revenue raised by the RSPT, but it says the biggest hit will be borne by their iron ore rival Fortescue Metals, with NPV falling by 29 per cent and EPS dropping by 33 per cent by 2018. Unlike iron ore rivals BHP and Rio Tinto, Fortescue only has operations in Australia.
Bartrop says geography is now the key: he says the RSPT forces investors to focus on those companies that are least affected – those that have overseas projects.
“We’re reorienting our portfolio to ASX-listed companies that are offshore, because they’re not going to be hit. If you look at the three major copper plays, you’ve got Equinox Minerals, which has got a copper mine in Zambia; you’ve got PanAust, which has a gold mine in Laos, a copper project in Thailand and a copper project in Chile; and you’ve got Oz Minerals, which has the Prominent Hill mine in South Australia.
“If I want to invest in copper, I will now go to Equinox or PanAust – I don’t buy Oz Minerals, because of the sovereign risk. So you have the bizarre scenario of sovereign risk forcing investors to prefer an African project to an Australian one,” he says.
Bartrop says the coal seam gas-to-LNG (CSG/LNG) industry in Queensland, the new star of the resources sector, could have a very sharp handbrake applied to its formerly smooth progress. He says the nascent industry – which has eight proposed projects, worth more than $40 billion – could be one of the hardest-hit under the RSPT.
John Hirjee, director of Australian energy and utilities research at Deutsche Bank, the new tax regime might reduce the net present value of Santos’ and Origin’s planned projects in Gladstone by as much as 40 per cent. The tax might also add to the risks associated with unconventional LNG projects and dissuade international buyers.
“We believe Santos and Origin are the most at risk, as we see their Gladstone LNG and Australia Pacific LNG projects as losers from a resource super profits tax,” says Hirjee in a research note. “Arrow Energy is also highly exposed to the CSG sector but remains under a takeover bid from Shell/PetroChina. With a 14-month consultation process prior to a possible July 1, 2012, implementation date, the CSG to LNG sector will face further short-term uncertainty.”
Bartrop agrees that the CSG/LNG projects are likely to be affected. “The funders of those projects will be looking for an attractive return, and if you start to erode that return, with the RSPT, you’re not going to get the investment capital going into those projects – and the projects might not happen,” he says.
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