Like an ominous thunder at the onset of Northern Territory’s wet season, the Resource Super Profit Tax (RSPT) fell from the hitherto welcoming Australian skies, hitting the mining shares in Sydney and spreading the fear to other equity markets. The so-called Henry Tax Review contains the seeds of further trouble for miners, including gold miners. For all the dismissive tone since the weekend announcement, the challenge is much more than a 2012 super profit bomb.
The vague definition included in the RSPT proposal, defines “super profit” as any earnings over the risk-free rate, currently around 4.5% in Australia. This lunacy reflects bureaucrats’ utter ignorance of mining finance where required hurdle rates are rarely below 15%. No wonder the global markets shuddered. In three days, Australian equities lost A$6bn, world mining index plunged 7.35% and London’s mining index by 7.19%. Only global gold equity indexes continued to hover near all-time highs, uncomfortably buoyed by the bloodiest sequel yet to the Greek drama.
For almost a decade, Australia’s economy has been buttressed by China’s unquenchable appetite for commodities. The country’s gold miners have so far hardly benefited from the iron ore and coal boom. If anything, gold companies have suffered the consequences of a strong Aussie dollar, recurrently bid up by the Japanese and Western carry trades. The bulk mining boom has also pushed up broader mining inflation and by early 2008 led to obvious signs of overheating, with upstream capacity, contracting fees and equipment running short and forcing projects behind schedule.
But Australia’s mining has been an oasis of stability and predictability in a mining world plagued by intermittent tax reforms (Tanzania), legal wrangles (Mongolia), legacy issues (South Africa) and community challenges (from South America to India to Philippines). After the initial hiccups, the Native Title framework turned the lucky country into a viable destination for mining investment and foreign miners spend the late 1990s and early 2000s consolidating the Australian gold industry. Not surprisingly, of the four top gold miners, three (Newmont, Barrick and AngloGold Ashanti) boast operations in Australia. Only the relative late bloomer Goldcorp has been adamant about its commitment to opportunities in the Western Hemisphere.
The new, 40% tax on profits from “non-renewable resources” is slated to generate A$9bn in revenues (a number that pales in NPV terms when compared to this week’s market damage). The levy, to be imposed by July 2012, does not affect Australian-listed operators overseas (such as the Zambia-focused copper miner Equinox), but it will bite a chunk off the foreign listed operators in Australia. Projects most affected are cash cows with most capital written off – which includes both Newmont and Barrick’s Super Pit and AngloGold Ashanti’s Sunrise Dam. Exploration will be deductible, but the economics of early stage projects will be affected (e.g. Independence and AngloGold Ashanti’s Tropicana). A web of other offsets has been put forward for a debate, but BHP has already calculated that its overall tax burden would grow by 13%.
It is unclear at this moment whether Australia is planning to reinvest the proceeds for the long term, as Norway has. What is certain is that two years after the collapse in commodity and mining values, other governments will now revisit surplus taxes, new royalty schemes and other levies. In the wake of the February earthquake, Chile has already made clear that large mining groups should not treat the highly advantageous tax scheme as their birthright. But Chile – a copper paradise – accounts for only a small fraction of global gold production. Australia, on the other hand, produces 10% of globally mined gold (some 230mtpa).
The equity market reaction was predictable. Most Sydney-listed gold miners were decimated, including Kingsgate (so far essentially a Thailand risk proxy), Avoca, Dominion, Lihir and Newcrest – whose sweetened offer for Lihir actually re-balances the asset base away from Australia. The chill has now spread to other mining equity centers as if in recognition what the “Henry Tax” proposal might mean for the global mining industry elsewhere.
Despite gold’s relentless climb towards its dollar all-time high (while it notches fresh highs in Euro and Swissie), it could be premature to punt any of the depressed gold stocks as near term “value” opportunities. The global commodity sell-off will continue to spread in cancerogenous fashion, easily swayed by ripples from yet another hike in China’s reserve requirement ratio. Mining equities and gold mining equities may be caught in the downdrift as we are inching towards the seasonally weaker summer. For value hunters, stock-picking will this year be an exciting exercise, but not before August lull sets in.
Tags: Australian gold stocks, hurdle rates, Resource Super Profit Tax, RSPT, value gold stocks
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