Xstrata Pleased with Australia's Redesigned Resources Tax

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Researched by Industrial Info Resources (Sugar Land, Texas)--Newly appointed Australian Prime Minister Julia Gillard's recently revised resources tax has already received a positive response from Anglo-Swiss mining company Xstrata plc (LSE:XTA) (Zug, Switzerland). Within a few hours of the details of the newly amended tax being released, Xstrata announced that it would resume full project activities at the company's Ernest Henry underground mine.

Xstrata previously announced that it was suspending $1.1 billion of planned investment in Queensland because of the Australian government's proposed Resource Profits Super Tax. For additional information, see June 21, 2010, article - Xstrata Halts $1.1 Billion of Australian Mining Projects Because of Proposed Resources Super Tax.

Xstrata Copper (Brisbane, Australia) Chief Executive Charlie Sartain said: "We have seen some positive outcomes from the recent constructive discussions with the federal government. The proposal to retain the existing taxation and royalty structures for our copper business has given us sufficient confidence to recommence with immediate effect these significant projects that form an important part of our business strategy in northwest Queensland."

Such an immediate reversal of tactics begs the question of whether Xstrata was actually serious about canceling the projects in the first place, or was merely using them as a negotiating tool in discussions with the government about the original tax. At the time of the original decision, then Australian Prime Minister Kevin Rudd was already very skeptical about the true motives for cancelling the projects.

Xstrata was not the only mining company to place projects on hold over the tax. BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia) also suspended projects at the time. The tough negotiating tactics of the large mining companies seem to have had the desired effect on government policy, as it did not take long for Julia Gillard to axe the original tax and replace it with a greatly reduced one.

The new tax, dubbed the Mineral Resource Rent Tax, is a mere shadow of the original Resource Super Profits Tax, which will now only apply to iron ore and coal resources from July 1, 2012. The rate of tax has been lowered from 40% to 30%, and the level of profit where the tax kicks in has been raised from approximately 6% to about 12%. Additionally, the tax will not apply to companies with profits of less than AUS$50 million per year (US$42.7 million).

The new tax still needs to be approved by the senate before it can come into effect, and this may prove difficult as the opposition Liberal Party is already refusing to support it. The Labor Party should still hold enough seats to get the tax through, but Liberal Party leader Tony Abbott has announced that if he wins the next election, his first act of government will be to repeal the tax.

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