Citi has revised its calculation of the cost to the mining community of the Resource Rental Tax and the table is below. There are a few offsets that their original calculations left out, so they’ve run a 10 year model after consultation with the tax department.
The summary statistics that you need to know from this and the rest of their document is:
- Under the royalty system the mine would have paid $32.50 per $100 invested over the life of the mine, and under the new system $77 – a 137% uplift
- Taking offsets into account total tax paid under the new will be $119.70 per $100 invested versus $87 under the old system, a 37% increase.
- The NPV of the project becomes $8 rather than the $24 it would have been under the existing regime.
It still puts Australia at the top of the cost curve and provides a return that is insufficient to justify further development.
There’s an attempt to justify 6% as the threshold for the definition of a super profit because the system allows offsets against loss making mines, thus the Commonwealth is said to be “sharing the risk”, therefore the risk free premium is justified. But that’s the way income tax normally works and I’ve never heard anyone suggest that the government is sharing the risk with you when they take income tax from you. Sharing the risk means that you might actually lose something you have, not something you might have.
The document also reveals that any mine earning more than about 11% return will be worse off.
There’s a legion of questions the document doesn’t answer.
- How does making Australia the highest-cost producer from a tax point of view help new mining prospects?
- If you’re concerned about profits going overseas to multi-nationals, why didn’t you just implement a withholding tax?
- How does it make sense to fund on-going costs via income leveraged to volatile commodity prices? What are you going to do when the price comes down?
- What are your price assumptions for commodities going forward?
- Why didn’t you grandfather the change from existing mines?
- How is increasing political risk going to lead to higher investment in Australia?
Feel free to add your own questions below.
Note: the table above is taken from a report by Citi dated 5th May, 2010