The next generation of iron ore barons has plenty to fight for following the federal government’s planned 40 per cent ‘super profits’ tax on miners.
A MONTH ago, the biggest concern for the next generation of Western Australian iron ore tycoons was finding enough people to bring their dreams of iron ore riches to fruition.
After the scare of the global financial meltdown, China’s rebound had sent demand soaring once again, putting iron ore prices and miners’ ambitions back in orbit.
But the Rudd government’s staggering plans for a 40 per cent tax on mining profits has brought the sector crashing back to earth.
The response from both investors and miners has been rapid.
In just three days, more than $16 billion was wiped from the value of Australian mining stocks and the superannuation savings of Australians.
To counter, the mining sector has rallied together to launch a united assault on the government’s tax plan with a series of press conferences, public attacks, open letters and coordinated advertisements.
No stronger sign of universal mining opposition to the tax could be seen than at last week’s joint press conference by 10 WA mining chiefs, including Fortescue Metals chief Andrew Forrest, Gindalbie Resources stalwart George Jones, and mining veteran Michael Kiernan.
The gathering was the second in a week, following an earlier joint press briefing by Fortescue executives, Murchison Metals chairman Paul Kopejtka, and BC Iron chief Mike Young.
Putting commercial rivalries aside, all pointed to what they said was the massive disincentive the tax would pose to new investment – especially for aspiring iron ore producers – the long-term loss of jobs, the irreparable damage to Australia’s reputation as a safe place to invest, and the resulting loss of investment to other nations.
Mr Jones described the tax as a “retrograde step” that threatened Australia’s ability to attract vital international investment capital and could “throttle the life” out of the current mining boom.
Mr Forrest accused the government of being untruthful about getting a better return from the boom for ordinary Australians, because blue-collar workers would actually suffer more than any other group if the industry and investment were forced offshore.
It was a point taken up by Atlas Iron chief David Flanagan in an open letter to the prime minister in newspapers across the country, in which he slammed the tax as “a flawed and ultimately highly destructive attempt to redistribute wealth from those involved directly in the resources industry to those with supposedly no link to it”.
“The problem, prime minister, is that no such person exists in Australia. Everyone, to one extent or another, relies on the resources industry to help underpin their living standards,” Mr Flanagan wrote. “Therefore, your Resource Super Tax plan is going to inflict significant and, in many cases, unaffordable damage on the very people you claim it is designed to help.”
With a federal election looming later this year, the coming battle over the tax plan is sure to test the mettle of the next generation of WA iron ore barons.
Aquila Resources executive chairman Tony Poli was not among the miners who fronted the media last week. But as Aquila’s biggest shareholder – his 26 per cent stake is currently worth around $770 million – he certainly has plenty riding on the fate of the government’s tax scheme.
After Fortescue, Aquila is arguably the most significant of the next generation of WA iron ore miners.
Its $3 billion-plus West Pilbara iron ore project, half owned by private miner AMCI Holdings, will entail development of not only a 40-million-tonnes-a-year mine, but also a dedicated railway and deepwater multi-user port at Anketell Point, east of Karratha.
But unlike its fellow WA iron ore aspirants, the $3 billion Aquila group is already a substantial miner in its own right with an extensive coal mining business in Queensland, where it controls coal resources of at least 5 billion tonnes, mostly in partnership with Brazilian giant Vale.
Aquila’s coal business currently produces around 2mt of metallurgical and steaming coal from its $100 million Isaac Plains mine in the Bowen Basin coal fields.
Apart from a planned doubling of Isaac Plains’ capacity, it is also planning three more major coal mines in the region over the next four years, including the massive $2.8 billion Belvedere underground coal mine, the $1 billion Eagle Downs mine and the $400 million Washpool mine.
Speaking to WA Business News as the government prepared to unveil its mining tax scheme this month, Mr Poli said there was little doubt such a scheme would unfairly hit miners’ profitability and their development plans.
“It certainly will have a significant impact in terms of earnings. At the end of the day, you’ll factor it in as a cost, and if a project still meets your hurdles, you’ll proceed,” he said.
“You do want a fair tax for all Australians, but there’s no point having one industry that has to do all the heavy lifting for other industries. Any tax, in particular where there is no reinvestment of those funds back into the states where they originated, is a concern.
“What are the states over east going to do when commodity prices revert back to past levels and no profits are being made? Are they going to contribute back? I don’t think so.”
The tax would also make it even tougher for companies to break the stranglehold of major producers such as BHP Billiton and Rio Tinto in key industries such as iron ore, in turn significantly reducing the flow-on benefits to the rest of the economy.
“For a company that is looking to break into the industry and spend billions of dollars on infrastructure ... it may make it that much harder to get into the industry,” Mr Poli said.
It is worth noting that despite its heavy local focus, Aquila also holds significant alternative investment opportunities outside Australia, notably its big Avontuur manganese project and Thabazimbi iron ore project, both in South Africa.
Both projects are already high on Aquila’s list of development priorities, with Aquila this week announcing a big rise in manganese resources at Avontuur, where it is planning a 30-year mine producing 1mt a year.
Another WA iron ore boss who has so far kept a low profile in the debate is Gindalbie managing director Garrett Dixon, who has left most of the company’s campaigning to elder statesman George Jones.
But fresh from talking with Gindalbie’s Chinese partners in the $2 billion Karara magnetite project near Geraldton, Mr Dixon said the tax would not stop “robust” projects such as Karara from proceeding, but did leave a cloud hanging over future investments.
“Karara is very robust, and will still be going ahead, but obviously investments in the future, we’ll have to wait until the dust settles down and remodel,” he said.
Mr Dixon warned the tax would also turn good projects into average ones and average ventures into marginal ones.
“That could mean neither project (good or average) getting up,” he said.
Mr Dixon said another grey area was the scheme’s failure to recognise the broad spectrum of the mining sector, which includes contractors and a whole range of other businesses, which are directly involved but may not be similarly burdened.
“The mining industry is not just miners – it encompasses a whole range of people. But you are taxing just one part of it,” he said.
Another unintended consequence of the tax, according to Mr Dixon, could also be that it will result in even more projects relying on finance from foreign interests, particularly state-backed end users such as steel mills, because conventional debt finance would become even harder to secure.
Ironically, the government has used the outflow of dividends to overseas investors in big miners such as BHP and Rio Tinto as another reason for imposing the tax.
That point is certainly not lost on Brockman Resources chief Wayne Richards, who aims to arrange funding for the company’s $1.3 billion Marillana iron ore project in the Pilbara later this year.
Mr Richards said the new tax scheme would certainly be seen by foreign state-backed iron ore customers as an opportunity to secure assets that previously might not have been within their reach.
“They want to vertically integrate (their businesses), they want what we’ve got and we’ve just given them a free kick on the basis that we’ve created a system where market values have dropped, making it an opportune time to buy,” he said.
Mr Richards said high-quality long-life projects such as Marillana would always be able to attract funding, but news of the tax was already having a subtle impact on funding alternatives.
“On the joint venture-equity side, things are probably moving quicker, but on the side of raising your own debt and equity, it has probably slowed down,” he said.
As a precursor to funding Marillana, Brockman this year struck an offtake deal to supply up to half of the project’s planned 18mtpa output to China’s Sinosteel. The deal does not currently include any equity investment by Sinosteel.
Mr Richards said the government’s tax system would inevitably mean that investment would increasingly be limited only to bigger, long-life projects able to generate a big enough margin to survive the tax, such as Marillana.
The flipside was that smaller projects, which until now were looking attractive due to the strong market conditions, would be shelved.
“So it is unfair and unjust to penalise the juniors who are trying to bring more opportunities to the community in the sense of jobs and royalties,” Mr Richards said.
The government faces a rude awakening if it believes up-and-coming miners will be a soft touch compared to the sector heavyweights.
Aquila, for example, has forged a reputation doggedly defending its rights no matter the odds stacked against it.
After listing in 2000, Aquila set the industry abuzz the following year with a $150 million deal to buy half of the rich Ernest Henry copper-gold mine in Queensland from Pasminco.
But at the 11th hour, Pasminco gave partner MIM Holdings extra time to exercise its pre-emptive rights over the stake, leaving Aquila out in the cold.
Despite having just $3 million in the bank, Aquila launched unprecedented legal action against its multi-billion foe over deal. After a five-year battle, Aquila finally prevailed to win $14 million in damages and costs.
Aquila has also locked legal horns in the courts with AMCI over joint venture issues in Queensland and WA, and with Vale in Queensland over the Brazilian’s refusal to use existing port capacity for the Eagle Downs mine.
Mr Poli said sometimes there was no choice but to fight.
“It’s interesting that no-one is suing us, which says something,” he said. “I like to think that we’re fair but firm.
“What do you do when you’ve got a situation where you think something is so wrong? Do you go with it, or do you stand up for your rights and the rights of your shareholders?”
It is the question now facing the entire sector.
