Monday, May 31, 2010

How much profit is enough?

Coal miners to make $80b despite resources rent tax
Sydney Morning Herald

May 31, 2010
COAL miners stand to rake in earnings of more than $80 billion in the first five years of the resources ''super profits'' tax, despite having their returns trimmed by 15 per cent.

As the political brawl over the planned tax heats up, the global energy consultant Wood Mackenzie also says most coal mines planned before the tax was announced will still go ahead.

The firm's modelling found coal miners' earnings between July 2012 and 2016 would slide from $97.1 billion under the current regime to $82.3 billion with the tax. This amounts to a fall of 15 per cent.
The lead coal analyst for Australasia, Ben Willacy, said the tax would only put marginal projects at risk of failure in the short term, but the lower returns would put a question mark over projects planned for further down the track. ''Because it's a profit tax, any project that was profitable before is still profitable under the new regime,'' Mr Willacy said.

''We don't think it will make any projects unprofitable, but it will definitely distort investment decisions in the future.''

The analysis, based on 140 foreign and Australian-owned mines, also found earnings in the first full year of the tax, 2013, would be cut by 17 per cent to $17.3 billion.

Mr Willacy said this was ''pretty sizeable'', and the hit to profits could end up being greater as these were preliminary forecasts only.

Coal rivals iron ore as Australia's most valuable export, and global prices of the product have jumped by up to 55 per cent this year.

The biggest players include BHP Billiton, Rio Tinto and Xstrata, who were among a group of coal miners that last week bid $4.85 billion for Queensland's rail assets.

In opposing the tax, miners have argued it will kill the goose that is laying the golden egg, because weaker investment would undermine a key export.

Mr Willacy said the likely impact of the tax on coal exports was unclear as details were still under negotiation. However, his assessment was far less alarming than that of the resource industry lobbying campaign, which says miners will ditch Australia en masse.

''Most of the projects that were profitable before RSPT are still likely to go ahead,'' Mr Willacy said. ''Australia will still remain a competitive supplier and producer of coal.

''So I don't expect those production and export volumes to tail off significantly, but I wouldn't at all be surprised if there were some impact.

''Obviously we have the companies jumping up and down at the moment, saying they're going to can a lot of projects. In the cold light of day when the dust settles, it may well be that most of these projects remain more profitable than the next best alternative.''

Australia is the world's biggest coal exporter, helpfully located near key markets in Asia. Alternative countries for coal miners to invest in include Indonesia, China, South Africa and Russia.

One of the most contentious aspects in the mining tax debate has been the rate at which it kicks in, currently the long-term government bond yield of less than 6 per cent. Mr Willacy said this was unrealistic for projects seeking bank finance, and a 12 per cent ''uplift rate'' would make more sense.

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