Australia’s ‘super’ mining tax

For many investors in international precious metals companies, the Australian government’s recent bomb shell of a super profits tax on mining companies may seem somewhat irrelevant. This will especially be the case if you do not invest in companies with mining assets in Australia. However, the implications of this tax if passed may be broader. Especially given Australia’s standing in the international mining community. If lesser developed countries see Australia, a seemingly advanced economy, employing such an opportunistic tax regime, they may see this as an acceptable precedent to follow suit. Australian treasurer Wayne Swan on the announcement of the tax came out and brazenly dismissed speculation that this new tax would negatively impact investment in Australian mining projects.

I want to demonstrate the impact of this proposed tax. I will compare the proposed taxation of a project here in Australia with that of one of the highest taxed provinces in Canada, Nova Scotia. I personally invest in mining companies listed both here in Australia and on the North American exchanges. Believe me when I say the tax rate a government imposes on a mining company’s projects matters a great deal when it comes to making investment decisions. I will demonstrate this as well as giving some insight as to why Australia’s mining sector has been hit so hard since the announcement of this tax, recent market jitters aside.

Case study

Let’s take a simple gold mining company called Gold Miner Ltd which is highly profitable. Gold Miner in its first year of production from its sole project generated $300 million from the sale of gold at an operating cost of just $130 million (excluding state royalties of 5 per cent of gross sales). The company has Property Plant and Equipment which consists of $200 million in pre-production capital expenditure. Gold Miner also has borrowings of $100 million with interest payable at 12 per cent per annum. The life of the mine is 10 years.  The company’s details are summarised below:

Gold Miner Ltd Details

Project:

Mine Life: 10 years
State Royalty: 5% of gross sales
Pre-Production Capital: $200m
Borrowings: $100m

Sales Revenue: $300m
Operating Costs: $130m
Interest Expense: $12m (12% of $100m in borrowings)
Royalty: $15m  (5% of $300m in sales)
Depreciation: $20m (10% of $200m pre-production capital)

Example 1: Australia’s Existing Tax Structure:

Example 2: Same project based in Nova Scotia, Canada:

In Canada, the company will pay a provincial tax instead of a state royalty. For simplicity we will exclude any native title related royalties (paid in both Australia and Canada). We will also assume the application of similar depreciation rates for tax purposes even though Canadian companies typically enjoy more flexibility with accelerated depreciation options.

Example 3: Australia’s new proposed tax structure:

Part 1 Super Tax Calculation: