No risk and so much to gain

When both macro and micro factors are able undo millions of dollars worth of exploration, construction and planning at any moment, why would anyone in their right mind choose to invest in such an uncertain undertaking? Could it be the promise of considerable reward? The prospect of - dare we say it - “better than average profits” at the end of a nerve-racking venture that involves economic fortitude and technical ingenuity?

This has traditionally been the case. Many have made their fortunes on a technically sound vision made good.

But with the new super profits tax cutting in at only 6 per cent rate of return on capital (I think a Dollarmite kiddies’ savings account earns more) and taking 40 per cent of the profits away from investors, there is little incentive to invest in these high risk stocks. This is particularly so for explorers and small, undiversified miners which have little in the way of fallback options, should their projects go pear-shaped.

Will the new tax adversely affect the attractiveness of Australia as a destination for exploration and mining investment by miners?

There are several design elements of the government’s RSPT which will make Australia an unattractive prospect for future investment in Australia. For one, the point for return on investment at which the tax cuts in is very low, meaning a sizeable chunk of profits will be taken away from mining companies. Many will make the decision to direct new investment to jurisdictions where they can get a better bang for their buck.

For another, companies that have already expended considerable capital in getting their projects up and running will also be hit with the tax, indicating that our government is not above imposing retrospective, opportunistic taxes and raising our sovereign risk.

In its pure form, the kind of tax envisaged by the Henry review is meant to apply from the outset of projects, or at least to allow all costs incurred to be brought to account.
The tax proposed by the government will have an immediate effect on all projects from the start date, making it retrospective. Existing projects will only get a one-off credit for the cost of their project when they are dragged into the system. That credit, though, is based on the book value not the market value of the project, which means that past investment that has been written down for accounting purpose is appropriated for nothing.

These existing projects are not a random selection of all Australian mining projects over recent decades. As stated by one commentator, “They are the lucky survivors: the projects profitable enough to start and remain in production. Many others were terminated and have been written off the books, even by current producers. Those projects costs will apparently be ignored in calculating the tax liability.”

Thus, the new tax strips reward without fully taking into account risk. Those companies that have their key assets overseas may see the new imposition as a benefit, increasing the relative attractiveness of their stocks. Those with asset bases in Australia may now be regretting their decision. To assume that this will not influence future behaviour is foolhardy at best and negligent at worst. In this new risk sharing arrangement, the industry has gained a not-so-silent partner who wants to be handsomely rewarded without having been exposed to the risk.