London, 2 July 2010

A Big Win for the Miners, big climb down by Government (but they have got a little extra): It was announced in Australia this morning that the 40% Resource Super Profits Tax (RSPT) is dead and replaced with a 22.5% (headline 30% before 25% allowance) Mineral Resources Rent Tax (MRRT). BHP Billiton, Rio Tinto and Xstrata, as a group, appear delighted. The tax is expected to come into effect sometime during 2012 (BHP’s FY13).

Comment: Ambrian Commodities

The debacle surrounding the RSPT has been very quickly settled with a big Government climb down and three of the biggest miners appear relatively happy. You have to say the complexity of the Australian Tax structure has increased with the need for yet another set of accounts to be kept to calculate the tax due under MRRT, which will have a different depreciation and capital allowances and levelled on profit as at ‘mine-gate’, after being allowed to make a 12% return (RSPT return was to be only 6%) before the tax is levied, and not along the whole ‘supply-chain’.

The key points of this new tax (calculated independently from unchanged 29% corporation tax) are:

• Only to be applied to extraction of iron ore and coal (thermal and coking).

• Effective MRRT rate is 22.5% - ‘headline’ of 30% less 25% allowance (Australian accountant I spoke to this morning was not sure why this was given) vs RSPT of 40%

• Allowable return on investment before tax levied on the ‘excess’ will be 12% - vs RSPT of 6%.

• Only levied on ‘excess’ profits made on the extraction process of the resource ie at mine-gate (any profits made further downstream, on logistics etc exempt).

• Depreciation allowance will be effectively raised for all the older operations -  all operations asset based will be re-valued from ‘book’ to current market value and then depreciated over 25 years.

• Capital allowance is generous – full capital write off in year spent, and any unused allowance can be rolled forward with ‘interest’ applied (useful for new projects)

• Federal government will collect the sum of the MRRT and corporation tax after deducting any State royalties paid, if this is negative they will be allowed to roll the ‘credit’ forward – under the RSPT any ‘credit’ would have been refunded immediately by the government.

• This last point has a hidden ‘sting-in-the-tail’ since it will likely cause mines to close earlier because when the royalty payment (paid to relevant state) exceeds any corporation/MRRT owed there is no refund that might have extended the mine life for a little longer.

The net effect of all this is that when BHP Billiton was quoting their total tax bill rising from around effective 43% to circa 57% with RSPT, we understand with MRRT the total tax bill will rise to something closer to 45%.

The miners accept they have to pay a higher ‘rent’ on the finite resources they are depleting at an ever faster rate and this marginal increase is being accepted as more appropriate. There is a hidden ‘cost’ that no one has highlighted and that’s the accountant’s fees, you got to think the real beneficiaries here are the accounting firms - accountants and lawyers always there to take their cut.

The fact that the Australian Resource Super Profits Tax  is now to be replaced by a newly titled, and greatly watered down, Minerals Resources Rent tax is great news for the likes of Rio Tinto, Xstrata and BHP Billiton (not forgetting Fortescue and all the other junior iron ore miners coming on stream).

Ambrian Commodities continue to recommend the purchase of the mentioned miners, on the basis that when we get through this ‘economic wobble’ investors will find it hard to ignore the value these miners offer in terms of earnings and dividend growth over the next two years.

Ends --