Quashing Thoughts of an Australian Exodus

Just as risk aversion has vaulted back into vogue in global financial markets, a different sort of uncertainty has cast a pall on the thriving resource sector Down Under.

Australia's unwavering proposal to slap a 40% windfall tax on the profits of resource-producing operations has sent shockwaves through the mining industry. Titans BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RTP  ) face tremendous exposure to such a move, and their shares have been trampled since the tax was announced in early May.

While investors work out the appropriate revaluation of share prices, miners behind the scenes are no doubt working to reassess project economics for both existing operations and proposed developments. Although the deal fell through for other reasons, Peabody Energy (NYSE: BTU  ) 's final offer, reduced by $500 million, in its failed bid for Macarthur Coal speaks to the scale of these ongoing recalculations.

Barrick Gold (NYSE: ABX  ) quietly disposed of its Osborne copper and gold mine in Queensland over the weekend. On the receiving end is Ivanhoe Australia, a subsidiary of Ivanhoe Mines (NYSE: IVN  ) , which will use the existing facilities and remaining resources to reduce costs and fast-track development of a nearby rhenium and molybdenum project.

Fools are encouraged not to interpret such a transaction as anything more than what it is. Since this gold mine retains only 19,000 ounces of proved and probable gold reserves, it's clear that Barrick is merely monetizing the remnants of a tapped-out mine site. There is simply no reason to believe that Barrick disposed of this asset as a result of the tax.

It's important to note that the proposed tax is a tax on profits. As such, it is unlikely to hurt mine development decisions for any but the most marginal of proposed projects. Over time, the higher effective tax rate may very well encourage multinational operators to increase their focus on less punitive mining jurisdictions, but I do not foresee this tax triggering any appreciable exodus from Australian operations. If you imagine Newmont Mining (NYSE: NEM  ) shuttering the new Boddington gold mine just because there's a bigger hand in the cookie jar, I am here to assure you that no such exodus will result. I encourage Fools, likewise, to stop short of exiting the Australian mining sector altogether.

As for me, I am split between two opposing reactions to the proposed windfall tax. As an investor with heavy allocation in the mining sector, I am disappointed by the prospect of reduced margins from Australian operations. Taking off my investor's hat, however, I see logic in the notion that the non-renewable resources of any nation are held in trust for the common good of the citizenry. Whatever your reactions to this landmark proposal, I hope you will take a moment to sound off in the comments section below.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 52 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of BHP Billiton and Peabody Energy. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (6) | Recommend This Article (3)

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  • Report this Comment On May 25, 2010, at 7:58 PM, investmentcafes wrote:

    Hey I Agree with your synopsis of the "TAX"...why else would China be going globally to Invest for their future needs in the minerals area .If you didn't know it,see article on minormetals site...the Chinese have imposed a VAt TAX on moly...making the breakeven point for it's smaller operators @..roughly $17.00.the article you posted of IVAN buying the assets can be seen,to me, as their seeking moly assets.As the global slowdown is for now taking Moly prices a bit lower countries that keep an eye/TAX. on their own minerals should indeed be acting in a rationale manner as there is a limited supply of such things...see recent Chrome news.I myself belive in the TC,GMO, adanac moly stories as players whom overtime,if invested in for long-term,such as other Miners mentioned in this article should return a good profit for years to come.

    Happy trails

  • Report this Comment On May 27, 2010, at 1:40 PM, rfaramir wrote:

    This is looting, plain and simple.

    Even a dim-witted statist should realize that you get more of what you subsidize and less of what you tax. So these companies will soon be showing little or no profits. They will be motivated to let their costs rise, paying themselves bonuses to make sure they show no profit. The best new cost will be increased lobbying against this tax and support for opponents of the incumbents who voted for it.

    The result of increased lobbying is effectively to show that this is extortion: bullying the industry until it starts paying protection money.

    Who is John Galt?

  • Report this Comment On May 27, 2010, at 4:30 PM, Ruleoflaw wrote:

    Sovereign mineral OWNERS, like the Dept. of Interior as agent for US citizens, must honor their existing leasing contracts, including royalty provisions. If sovereign regulators raise taxes on existing projects they likewise are changing the rules mid-game, AFTER miners/drillers have sunk investment. NEW projects can ethically be subject to negotiation -- if the US offshore or Australian deposits are not competetive, the development goes elsewhere.

  • Report this Comment On June 06, 2011, at 7:28 PM, rfaramir wrote:

    "I see logic in the notion that the non-renewable resources of any nation are held in trust for the common good of the citizenry."

    That's the logic of socialism. A sovereign person may own land, but I see no justification of a state owning it. Government can never efficiently allocate a resource, only the free market can. Giving in to the raw naked force of the conquering tyrant (how one becomes a sovereign state) leaves the path of Liberty and abrogates all respect for the homesteading land owner.

    And yes, this means the newly arriving Australians should have paid the aboriginal inhabitants for land use, where they were in conflict. (Not where there was no conflict, of course, that's homesteading.)

  • Report this Comment On June 12, 2011, at 9:45 AM, mhonarvar wrote:

    - "thats homesteading"....no homesteading is just a poor justification for stealing land under a FOREIGN STATES RULES. see "conquering tyrant"

    - Government isn't allocating the resource...it's just making sure some of the profits from it benefit it's people.

    - You expect a company to move in...take all the resources and profits...then close up shop and move somewhere else....AS LONG AS YOU GET YOUR DIVIDENDS>>>WHO CARES

  • Report this Comment On June 12, 2011, at 2:13 PM, hondamikesd wrote:

    "Even a dim-witted statist should realize that you get more of what you subsidize and less of what you tax. So these companies will soon be showing little or no profits. They will be motivated to let their costs rise, paying themselves bonuses to make sure they show no profit. The best new cost will be increased lobbying against this tax and support for opponents of the incumbents who voted for it."

    Wow, that already happens in my home state where the mining industry pays an effective tax rate of between .5%-2%. Thankfully 15% YoY increases in public college tuition prices are helping to make sure that we keep mining taxes here as safe as can be!

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