21/04/2011 - 00:00

Ill wind blows for flag of convenience

21/04/2011 - 00:00

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The CME should be careful what it wishes for as the good times roll.

IT is stretching credibility to the limit, and potentially damaging to Western Australia’s resources sector, to suggest a company that only mines copper in Zambia and Saudi Arabia, or a company that only mines gold in the Philippines, is Western Australian.

That, however, is what the Chamber of Minerals and Energy WA appears to be claiming in an effort to talk up the strength of the local resources sector.

‘Appears’ is the important word in that observation, because a veil of secrecy has been thrown over a list used by the CME to claim that ‘WA Resource Stocks Lead Way’, the heading on the organisation’s April 7 statement that the state’s mining and oil sector is booming.

Using data compiled by the accounting firm KPMG, the chamber claimed that the market capitalisation (collective share market value) of WA resource companies had risen by 40 per cent in the six months to February.

“The WA resources story is sparking significant investor interest, driven by strong overall commodity demand,” CME chief executive Reg Howard-Smith said.

In time, those words and the secret list will come back to haunt Mr Howard-Smith because this is not a good time to be crowing about the success of mining, given that the federal government wants to whack it with a series of new taxes.

The Minerals Resource Rent Tax should be first cab off the tax rank, aimed initially at iron ore and coal. But with industry leaders saying how good things are it will be even easier for the pro-tax lobby to think about adding other commodities such as gold, copper and alumina.

The carbon tax, next cab off the rank, will also have an easier passage if the mining industry continues making claims along the lines that it has never had it so good.

What Mr Howard-Smith and his staff have done is fall for the domicile trick. They have commissioned KPMG to measure the market capitalisation of companies listed on the ASX, with a registered office in WA.

Equinox Minerals, the Zambia/Saudi example mentioned earlier, certainly has its registered office here, as does Medusa Mining, the Philippines goldminer.

But to claim they are Western Australian when all of the mining operations are overseas, and they have Canadian stock exchange listings as well as ASX, and when most of their shareholders have overseas addresses, is foolish.

Companies such as Equinox, Medusa, Extract, Sundance, Coalspur and the rather obviously named Coal of Africa, are foreign companies in all but name and the convenience of a Perth address, because that’s where they started before they migrated to develop mines elsewhere.

The CME’s secret list is as relevant to measuring the performance of the WA mining industry as it would be to use a list of oil tankers registered in Panama and say the Panamanian oil industry is booming when all you’re looking at is a list of ships carrying a ‘flag of convenience’.

It would be far more useful if the CME stuck to measuring the health of mining in WA rather than laying false claim to mining operations in other countries. In time, especially in the next downturn, that will become a much more important point than in today’s boom.

Embarrassment at being caught out with a phoney list is probably why the CME clammed up when Bystander asked (repeatedly) for a copy of the raw data. The initial inquiry was made late on Friday April 8, so a non-appearance of the list on that day was understandable.

But, then followed an increasingly acrimonious exchange of emails in which the CME spokesman Rob Newton said (a) it was KPMG data, (b) it was compiled from publicly available information, and (c) it covered all companies classified as a miner.

Calls to KPMG for the names also drew a blank with the accounting firm saying it was client-confidential work and only the CME could say which companies made the list.

That might have been a dead-end, except for the fact that KPMG’s friendly accounting rival across St George’s Terrace, Deloitte, has routinely compiled a similar list that it makes available. This prompts two questions: why did the CME pay KPMG when a list existed; and why keep it under lock and key?

Perhaps the answer is that, of the top 50 companies on the Deloitte list, 35 are in the resources business but 18 do all or most of their mining overseas (Resolute, Northern Iron, Bathurst, Allied Gold, CGA and Mantra are a few more names to add to those mentioned earlier), and 17 have strong WA operations – such as Woodside, Fortescue, Iluka, Aquila and Mt Gibson.

Catching out the CME is amusing, but the more serious aspect of this mini-expose is that the organisation which represents some of WA’s biggest miners might soon find its own, misleading list, thrown back in its face by the pro-tax crowd who can use the KPMG/CME statement to say ‘you’ve never had it so good, so why not pay more tax’.

Zug, resources hub

WESTERN Australia is not alone in portraying a misleading image of its resources sector; Switzerland is being used for a similar, but potentially far more interesting game of ‘domicile convenience’.

The float of the big commodities trader, Glencore, means that the tiny Canton of Zug will have a new stock exchange champion, following in the heels of Glencore’s tame mining associate, Xstrata, and other big resource names such as the offshore oil driller, Transocean.

The Zug office of Transocean, the firm that drilled the Macondo oilwell which polluted the Gulf of Mexico last year, has a staff of 12 who administer 1,300 employees elsewhere.

The appeal of Zug is tax. Transocean is said to have saved about $2 billion in taxes over the years thanks to Zug’s 16 per cent corporate tax rate and 24 per cent personal tax rate. Glencore and Xstrata, theoretically, get the same tax benefit.

As with the CME’s secret list there is something amusing about Zug being a resources centre, and something far more significant given that Glencore plans to use its freshly raised $US10 billion in capital to expand its direct ownership of resources – perhaps starting with a few more acquisitions in WA.

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“An economy breathes through its tax loopholes.”

Barry Bracewell-Milnes

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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