16/07/2013 - 09:48

Tax revenue boost as ore, dollars flow

16/07/2013 - 09:48


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Tax revenue boost as ore, dollars flow

Western Australia's role as a cash cow funding Canberra's pre-election spending spree was highlighted today when the first of the big iron ore miners filed its June quarter production report, confirming strong profits and the potential for increased payments of the controversial mining tax.

Rio Tinto's report showed that iron ore output, mainly from the company's Pilbara mines, is running at a near-record 51.8 million tonnes, up seven per cent.

The iron ore price last night hit a two-month high of $US126 a tonne and the Australian dollar slipped below US91c, implying a local iron ore price of about $A138/t. On those figures and even after impurity and ore-quality discounts, Rio Tinto's profits from iron ore are moving back into boom-time territory.

For the Australian government, rising iron ore profits should mean higher payments of its Minerals Resource Rent Tax on iron ore, which could not come at a better time given its decision to water down its other controversial new fund raiser, the carbon emissions tax, and the collapse of coal prices (which means coal miners are unlikely to pay much tax this year).

BHP Billiton will follow Rio Tinto with its June quarter production report, which is scheduled for release tomorrow. Investment bank analysts are tipping a record 43.5mt of iron ore production for the quarter.

Fortescue Metals Group will round out the June quarter reporting season of the big iron ore miners when it reports next Tuesday, with production expected to be around 23mt.

Smaller iron ore miners, including Atlas and BC Iron, have already indicated in pre-quarterly filings at the stock exchange that their production in the three months to June 30 was running at around 2.2mt (Atlas) and 1.6mt (BC).

Important as the small company production numbers are for shareholders, the big game for institutional investors and government tax revenue is in the production data of Rio Tinto, BHP Billiton and FMG.

Collectively, WA's iron ore producers are expected to have shipped out 130mt of WA iron ore in the June quarter which, on current prices, is worth a notional $19 billion, though fluctuating prices during the quarter and ore-quality discounts will cut that number back to around $16 billion.

The WA government, which is as hungry as Canberra for tax revenue, should be able to peel more than $800 million off the big miners thanks to its 5 per cent royalty on most types of iron ore, while the federal government stands to receive several billion dollars in conventional taxes and the new super tax.

What the June quarter reports will also show is that, while the capital investment phase of WA's iron ore boom has peaked, the production phase is expanding as the money sunk into new mines, railways and ports is making more material than ever available for export.

The financial effect of those extra tonnes is being boosted by the fall in the value of the Australian dollar, which analysts are just starting to factor into their corporate profitability models.

Profits at Rio Tinto, according to the investment bank JP Morgan, should be boosted by 16 per cent this year thanks to the falling dollar.

The consensus view of analysts is that investors are underestimating the four-fold financial benefits being enjoyed by the iron ore miners of cost-cutting programs, increased shipments, a return to higher prices (however temporary) and the lower value of the dollar.

Swiss-based investment bank UBS this week refreshed its 'buy' tip on Rio Tinto with a 12-month price target of $83, a whopping 51.5 per cent more than the company's opening price this morning of $54.79.

Other investment banks are more cautious but most have stocks in the iron ore sector as 'buy' tips thanks to the beneficial effects of price, tonnage and currency.


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