Commodity HQ: A Deeper Look At Australia's Commodity Industry

One of the wealthiest countries in the world, and the richest in Asia in GDP per capita terms, Australia is an unusual mix of a modern market economy with a large commodities-driven export infrastructure. Despite the influx of wealth created by its natural resources, Australia has never been particularly successful in developing a large manufacturing base. What’s more, the country has run large and persistent current account deficits for over a half-century. Nevertheless, Australia has very significant and efficient mining and agricultural sectors, and ranks highly in the world in many categories.

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http://commodityhq.com/2012/a-deeper-look-at-australias-commodity-industry/

Compromise on Australian Taxing

No real surprise here - with the change in prime ministers in Australia, a compromise on the controversial mining tax was soon to come.

The deal that came out of this process is a pretty typical compromise, meaning both sides have reason to gripe. The tax was pulled back on minerals; it will now cover iron ore and coal at a 30% rate. Onshore oil and gas, though, will still carry the 40% rate. Keep in mind, this is 30/40% *after* the companies have earned a 6% return.

Certainly this is good news for BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), Xstrata and the like. It's also exceptionally good news for producers of minerals like copper (Xstrata is big there), gold, zinc, rare earth elements, and so on.

Ultimately this still knocks Australia down a few rungs in the ranks of most mining-friendly nations, but it's clearly not as bad as it could have been. For the rare earth and gold miners, it's basically a win. Too bad, then, for companies like Fortescue and Macarthur which are much more leveraged to iron and coal, respectively, but 30% is still better than the original 40%.

Good-Bye Rudd

So, Australia's PM Kevin Rudd, he who presided over the idea to launch a new mining tax, has stepped aside and Julia Gillard is now the PM of Australia (the first woman to hold that job, I believe).

Rudd learned something that I would have thought to be completely obvious to an Australian - if you take on the mining industry, you're going to get run over and run out of town. Mining is a huge chunk of the Aussie economy, and a major part of the reason that Australia has come through this global recession in much better shape than most other countries.

Now, before holders of BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), Xstrata and so on get too excited, keep in mind that Gillard is also Labor and arguably "more left wing" than Rudd. So, the idea that she is going to be a softy on mining is probably way too much to hope for right now. But, since it wasn't her idea in the first place, there may be more room for compromise without losing face or looking like she backed down from the fight.

One way or another, the mining tax is coming. That's bad news for the aforementioned companies, others like Barrick Gold (NYSE: ABX), Newmont (NYSE: NEM), Fortescue, Lynas, and so on. It's also still, arguably, good news for companies like Freeport McMoran (NYSE: FCX), Teck Resources (NYSE: TCK), Anglo American, Vedanta, and Vale (Nasdaq: VALE) who don't have big exposure to Australian assets.

Is it going to hurt Australia? Probably, but only to a point. While companies like Xstrata have certainly threatened to halt and curtail investments in Australian assets, these companies are going to face a pretty hard reality. Australia is a country with high-quality mining assets, very familiar rule-of-law, excellent stability and infrastructure, an educated homogenous workforce, and physical proximity to major markets like China and India. Compare that to a country like Congo or Mynamar and suddenly the extra tax doesn't seem so bad. After all, nobody in Australia worries about a government just seizing assets or an outbreak of bloody civil war.

Oh, and these companies that were so worried about the tax? Turns out that their stock prices are pretty much all more or less back (or better) than they were when news of this mining tax came out. So, lots of sound, lots of fury, but probably not a whole lot of long-term significance.

Australia Proves Taxing To Miners

The latest article on Investopedia:
http://stocks.investopedia.com/stock-analysis/2010/Australia-Proves-Taxing-To-Miners-RTP-BTU-FSUMY-ABX-NEM-FCX-VALE0506.aspx

I'll be very curious to see how debate in Australia shapes this issue. Mining is a major source of income for the country and Australia derives huge benefit from being a modern and mineral-rich nation relatively close to China. Here's hoping they don't strangle the golden goose. 

One of the biggest risks that go along with investing in mining stocks is the risk that sovereign governments will change the rules midstream. More than a few mining projects in Africa and South America have been canceled or curtailed by governments suddenly changing the rules, typically by tearing up contracts demanding a larger slice of the pie. Historically, Australia has been seen as a very mining-friendly country, but a recent proposal to change tax rules in that country has sent some major ripples through the sector.


The TaxAs part of a comprehensive tax policy review, the Australian government has proposed a new "resource super profit tax" of 40% that would be levied on companies with on-shore mining assets in Australia. In short, this tax would increase the effective corporate tax rate for mining in Australia to about 57%. Another way to look at it is that basically makes the government of Australia a 40% partner in all resource projects starting in the summer of 2012.   
For the full article, please go to: http://stocks.investopedia.com/stock-analysis/2010/Australia-Proves-Taxing-To-Miners-RTP-BTU-FSUMY-ABX-NEM-FCX-VALE0506.aspx