August 17, 2010 / 7:41 AM / 10 years ago

SCENARIOS-Australia election to decide fate of mining tax

SYDNEY, Aug 17 (Reuters) - Australian Prime Minister Julia Gillard plans to bring in a 30 percent tax on profits at larger iron ore and coal mining firms from 2012 if she wins Saturday’s election. Her opponent, Tony Abbott, has pledged to dump the tax.

With the poll on a knife-edge, the mining sector faces huge uncertainty. Even if Gillard wins the Greens could end up as kingmakers in the senate and push for a stronger tax.

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GILLARD WINS, PARLIAMENT VOTES ON TAX

If Gillard is elected, iron ore and coal miners will brace for a 30 percent tax on profits starting in 2012.

The so-called Minerals Resource Rent Tax, which aims to raise A$10.5 billion in the first two years, is a watered-down version of an initial proposal and was fashioned with input from BHP Billiton (BLT.AX), Rio Tinto (RIO.AX)(RIO.L) and Xstrata XTA.L.

Green senators may determine the final outcome of the tax and could even call for the tax on profit to be raised to 50 percent.

Gillard’s Labor party would present legislation for the tax to parliament for ratification by mid-2011. Green Senators are on course to control the balance of power in the upper house and are demanding more financial details of the tax before backing it.

The Greens also want any tax collected placed in a sovereign wealth fund for future generations.

TONY ABBOTT WINS, TAX DROPPED

BHP Billiton, Rio Tinto, and all other miners of coal and iron ore breathe a collective sigh of relief after they avoid paying billions of dollars more in taxes.

Rio Tinto sticks to plans to lift annual iron ore production in west Australia’s Pilbara region by 100 million tonnes to 330 million tonnes in five years. Longer term, Rio Tinto holds blueprints to raise output to 600 million tonnes.

Fortescue Metals Group (FMG.AX), Australia’s third-largest iron ore producer and a strident critic of the tax, likely to immediately reinstate $9 billion of proposed investment in an mine with a capacity of 160 million tonnes a year. A further $6 billion in proposed investment would also be reconsidered by the Fortescue board.

Abbott plans to introduce a A$418 million ($375 million) exploration and development funding programme if elected.

WINNERS VS LOSERS

A Gillard defeat should give shares of mining companies directly impacted by her proposed tax a boost.

Because the proposed tax applies only to coal and iron ore mining companies earning A$50 million ore more, some 2,000 copper, silver, lead, zinc, gold, nickel and other minerals producers are unaffected either way.

If Gillard wins, small-capped miners may lose write-offs that would have assisted in offsetting exploration costs. The prime minister has hinted at a willingness for further concessions to junior miners, though none has materialised yet.

But lobbying efforts are under way to double the profit threshold to A$100 million and introduce a flow-through shares scheme based on a Canadian model that allows miners to pass on tax loss credits to investors.

Miners say flow-through shares encourage more investment in exploration and development when there is no cash flow.

Under Gillard, magnetite iron ore producers such as Atlas Iron AGO.AX, Gindalbie Metals GBG.AX, Citi Pacific Mining (0267.HK), Grange Resources (GRR.AX), Centrex Metals (CXM.AX), Royal Resources ROY.AX, Murchison MMX.AX, Onesteel OST.AX and Emergent Resources EMG.AX will pay the tax despite facing much higher production costs compared to other iron ore miners.

Similarly, producers of brown coal, which face additional costs of around $25 per tonne to extract water from the mud-like coal, will be taxed at the same rate as black coal miners Brown Coal producers include: Great Energy Alliance Corp, International Power Australia IPR.L and TRUenergy Holdings (0002.HK)

BHP Billiton, Rio Tinto, Xstrata and Fortescue fall squarely in the sights of the tax. Commodity diversification will enable most of the big miners to offset some of the heavier tax burden on its iron ore and coal divisions.

But Fortescue faces a more direct tax bill because it mines only iron ore.

UBS estimates the effective tax rate for companies affected would increase to 44 percent from 38 percent under the new tax.

Editing by Ed Davies

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