Mining tax 'contagion' set to spread globally

Mining tax 'contagion' set to spread globally
May 20, 2010 - 10:39AM

Australia’s planned 40 per cent tax on mining "super profits" has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton and Rio Tinto 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 in Sydney. “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 and Rio said they are reviewing projects in Australia, the No. 1 exporter of coal and iron ore, after the federal government unveiled the tax earlier this month, saying a country’s resources belong to the people. Citigroup 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’s flagship 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 $US1.2 billion ($1.4 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, 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.

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. 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. “They are going to look at some sort of innovative tax solutions to try and claw back some of that.”

Levy wars

Nations that resist may attract investment. South Africa taxes mining companies at 33 per cent, Canada 23 per cent and China 30 per cent compared with a forecast 58 per cent in Australia after the tax, according to Citigroup data.

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, a unit of the country’s largest pension plan provider, which hasn’t changed its industry assessment.

Rio, the world’s third-largest mining company, this month said it will spend $US401 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.

Fortescue, Australia’s third-largest iron ore exporter, this week placed $US15 billion of projects on hold, citing the tax.

“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 US Global Investors. “They could stifle the world.”

Bloomberg

CRB Index

While you can choose your own selection of commodities, it is probably easier to use an existing index. The most watched indicator index is known as the CRB index.

Future and options on the CRB index are traded on the New York Board of Trade. It is made up of different categories of commodities:

• Energy: crude oil, heating oil, natural gas
• Grains: corn, soybean, wheat
• Industrials: cotton, copper
• Livestock: cattle, hogs
• Precious metals: gold, platinum, silver
• Softs: cocoa, coffee, orange juice, sugar

Because it covers such a diverse range of materials, its movements will mask moves in the individual components, and smooth out the supply problems. Obviously, there are many other commodities which are not included int he CRB index.


Alternative methods

As an alternative to trading an index on an exchange, there are a number of different ways to trade commodities - apart from keeping silos full of corn in your backyard.

• You can also invest in companies, such as steel companies or oil companies, which you feel will benefit from higher prices of their products.
• Or you can even go a step bigger, and buy into the currencies of countries which have a lot of natural resources.

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