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BHP Joins Rio, Places Projects in Limbo on Profit Tax (Update1)
May 10,2010 15:05CST
industry news

May 10 (Bloomberg) -- BHP Billiton Ltd., the world's largest mining company, joined Rio Tinto Group in reviewing projects while it investigates the effects of the Australian government's 40 percent resource profits tax.

BHP Chief Executive Officer Marius Kloppers said expansion plans, including its Olympic Dam project, may be "very difficult" to approve. Kloppers said the new tax, to start in 2012, would stymie investment, spur companies to move offshore and threaten an industry that comprises 9 percent of the economy.

"The uncertainty is in place, it would be very difficult to approve any of those projects," Kloppers told the Australian Broadcasting Corp.'s Inside Business program yesterday. "We are not going to come out, particularly when it is very uncertain, to make blanket statements about things that affect livelihoods, communities, employees and so on."

Rio, the third-largest mining company, put some projects on hold because of the tax and Peabody Energy Corp. cited it as a reason today for cutting its offer for Macarthur Coal Ltd. Fortescue Metals Group Ltd., the nation's third-biggest iron ore exporter, last week joined Anglogold Ashanti Ltd. and Gold Fields Ltd. in opposing the tax.

"The concern is that people are looking at this now in boom times, not realizing that sooner or later, we're going to be in tough times and it's going to be very, very tough for projects," Sam Walsh, head of Rio's iron ore operations, said in comments provided by the company on May 6.

Earnings Reduction

The tax may reduce earnings by 17 percent at Melbourne- based BHP and by 21 percent at Rio in 2013, UBS AG said in a May 3 report. BHP's net income in the year ended June 30 was $5.9 billion, while Rio earned $4.9 billion in 2009.

The planned tax has also contributed to a drop in Prime Minister Kevin Rudd's popularity. Rudd's approval rating fell 14 percentage points to 45 percent, the lowest level since he took office in 2007, the Sydney Morning Herald reported, citing a Nielsen poll.

"I don't expect mining companies to be overjoyed about having to pay a fair price for the mineral resources that the Australian people own," Treasurer Wayne Swan told Nine Network television yesterday. "The government is serious about discussing its introduction and its design with the industry."

The proposal has "upset the apple cart" for the expansion of the Olympic Dam copper, gold and uranium mine in South Australia, Kloppers said. He added that the project hasn't been shelved. The mine may cost $16 billion to develop, Citigroup Inc. said in a February report.

Impact of Tax

Kloppers, who didn't identify other expansion projects that may be affected, said Melbourne-based BHP had no "imminent" projects that were subject to final investment approval.

"There will be an impact on investment, jobs and growth if the tax is implemented in an unchanged form," Kloppers said. "If you pay twice the tax in one country than you do in another country relatively speaking, that other country becomes more attractive."

Peabody, the largest U.S. coal producer, lowered its offer for Macarthur by 6.3 percent to A$3.8 billion ($3.4 billion) or A$15 a share.

"The rent resource tax is obviously impacting valuation and earnings stream potential," said Paul Xiradis, who manages $10 billion, including Macarthur, as chief executive officer of Ausbil Dexia Ltd. in Sydney.

Planned Expansion

The environmental impact statement on the Olympic Dam expansion is due by the end of 2011, Kloppers said. Expanding the mine would take 11 years and increase copper output almost fourfold to 750,000 metric tons a year, boost gold production eightfold and uranium by almost fivefold, according to BHP.

"We have been working very hard to perfect the technology to do that in a manner that is cost effective, capital effective, and we have waited for the uranium market to show demand," Kloppers said. "We are getting close to the end of that process, our EIS will be finished in about 18 months' time."

Kloppers said plans to join BHP and Rio's iron ore operations in Western Australia shouldn't be derailed by the tax.

Rio and BHP, the world's second- and third-largest iron ore exporters, plan to combine mines, rail, ports and workforces in Western Australia's Pilbara region into a 50-50 joint venture to save at least $10 billion.

"Rio and ourselves are very, very committed to the joint venture and I don't think that there is any immediate impact," Kloppers said.

BHP Billiton
mineral resources
mineral resources development
mining tax
Rio Tinto

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