Recommended NZ | Guide to Money | Gimme: Competitions - Giveaways

Fitch: No Downgrades From Australian Natural Resources 'Super Profits Tax'

Contributor:
Fuseworks Media
Fuseworks Media
Fitch: No Downgrades From Australian Natural Resources 'Super Profits Tax'

Fitch Ratings says today that the Australian Federal Government's proposed tax on natural resource 'Super Profits' will not impact the ratings of companies operating in this sector, namely BHP Billiton plc ('BHP','A+'/Stable) and Rio Tinto plc ('Rio Tinto','A-'/Stable).

"This certainly isn't good news for the Australian miners. However, we have re-run our forecasts and credit metrics remain within parameters commensurate with existing rating levels. Fitch doesn't anticipate any downgrades solely as a result of the potential implementation of this new tax'" says Julian Crush, Senior Director in Fitch's Sydney-based Corporate Ratings team. "There could be some re-thinking on investment for new natural resources projects resulting in a negative cash tax impact on miners, but this news does not mark the beginning of the end for the Australian mining industry. Demand for their product is simply too strong," he added.

Full details on how the new tax will be implemented are sketchy, but Fitch estimates that should the tax become a reality, the combined additional annual tax burden across both Rio Tinto and BHP could be upwards of AUD3bn (based on the last historic year of taxable profits from both issuers' Australian operations). Whilst this additional tax burden may seem significant, it needs to be put into context. In aggregate, Rio Tinto and BHP generated a total of around AUD125bn of Operating EBITDAR in the past 3 years, and the outlook for commodity demand and prices remains strong. An additional tax cost of the magnitude proposed would not jeopardise the ability of Rio Tinto or BHP to service and repay their debt. However, returns to shareholders could be affected (as reflected in recent falls in the share prices of both issuers).

Under proposals made in the recent Henry tax review, the definition of 'Super Profits' is not entirely clear, but Fitch understands that these profits will approximate those over and above what is deemed by the government to be a 'reasonable' rate of return on investment in the Australian mining industry. BHP estimates that what the proposal could result in the total effective tax rate on the group's profits earned from its Australian operations increasing to 57% from 43%. The implementation of the new tax is planned for 2013, and could be passed into legislation in 2011. However, the mining industry is currently locked in negotiation with the Rudd administration in an attempt to mitigate the impact of the new proposals. In Fitch's view the new tax will be implemented, but the industry may achieve success in obtaining some marginal concessions such as centralised rebates of state originated royalty payments or government-sponsored natural resource infrastructure investment.

The impact on future investment in Australian natural resources is still open to speculation, but some initial reaction is already emerging on this front. Iron Ore exploration company Cape Lambert Resources has said that it will stop its search for new minerals in Australia as a result of the proposed new tax. Fitch will be watching for any potential impact on the proposed Pilbara iron ore production joint-venture between Rio Tinto and BHP. Under the original terms of the deal, BHP was required to pay Rio Tinto an 'equalisation payment' of approximately USD5.8bn to reflect the superiority of the latter's Pilbara operations. It now appears there is a possibility that the terms of the agreement between the two parties could allow for a material change clause to be invoked, which may allow for a re-negotiation of the size of the equalisation payment. Whilst Fitch regards this possibility as event risk at the current time, any future rating impact would depend upon the quantum of any change in the equalisation payment and the impact this may have on projected credit metrics. The focus would concentrate on BHP's credit metrics as the paying party. Rio Tinto's rating would likely remain unaffected by any potential change in the equalisation payment.

>> Fitch has made major improvements to its credit research on EMEA and AsiaPac corporates. To view these improvements, visit our 'Clear Thinking' web page at http://clearthinking.fitchratings.co.uk/Index.html

All articles and comments on Voxy.co.nz have been submitted by our community of users. Please notify us if you believe an item on this site breaches our community guidelines.