KPMG study for MCA - summary

A new KPMG report demonstrates the disastrous consequences of the Government’s resource super profits tax on new greenfield mining projects in Australia.

The report states that new projects will suffer significant destruction of value which is “likely to result in mining companies deferring or cancelling Australian projects in the short to medium term” (p. 5).

Under realistic scenarios modelled by KPMG, and relative to the “status quo”, the project modelling shows:

• A 46% fall in Net Present Value (NPV) calculated on financial models for iron ore projects

• A 57% fall in NPV on modelled black coal projects

• A 15% fall NPV on modelled bauxite projects

• Negative NPVs for nickel, copper and gold mines (such that they become economically unviable)

The KPMG report cites a number of reasons for this massive loss of value that will slow mining investment in Australia. First, the RSPT will sharply increase effective tax rates (ETRs) on Australian mining projects. Under the RSPT, modelled ETRs over the life of projects are:

• 54.7% for iron ore (up from 43.6% – an increase of 25.5%)

• 55.0% for black coal (up from 41.1% - an increase of 33.8%)

• 55.1% for nickel (up from 34.3% - an increase of 60.7%)

• 55.0% for copper (up from 34.4% - an increase of 60.4%)

• 54% for bauxite (up from 50.1% - an increase of 7.8%)

• 54.1% for gold (up from 34.6% - an increase of 56.4%)

International comparisons show the degree to which Australian tax rates will be uncompetitive under the RSPT. The result is that Australia will have the highest ETRs of all comparable investment destinations benchmarked by KPMG.

Second, KPMG identifies deep flaws in the assumptions used by the Government which underpin the design of the RSPT:

• the “theory” is based on “unlimited capital with 40% funding being available at the Long Term Bond Rate (LTBR), which in turn will require mining companies to “fundamentally change their approach to funding mining projects” (p. 5);

• the “theory” assumes no change in behaviour – that is, the RSPT is a perfect tax which will not change investment behaviour.

This in turn highlights the real-world flaws in the assumptions underpinning the Government’s own modelling by EconTECH.

KPMG concludes that, for a range of reasons including risk and pricing issues, this is impractical over the short- to medium-term. The capital markets, and in particular debt markets, “would be unable to price funding at the LTBR”. As a result, “the Government would need to actively intervene and become the purchaser of the debt at the LTBR” (p. 5).

KPMG concludes that the reduction in returns to Australian mining projects under the RSPT will likely result in Australian mining projects moving “down the list” of international projects. And that it is “unlikely in the short to medium term that new entrants will fill all of the void left by large project deferrals or reallocations to projects offshore” (p. 15). KPMG conclude that the “impact on the mining sector from the introduction of the RSPT at 40% means that it will take a long time for the sector to recover” (p. 15).