Australian Prime Minister Julia Gillard listens to question during a press conference after the day after Australia's general election in Melbourne on August 22, 2010.WILLIAM WEST
Billions of dollars worth of future projects and profits are in limbo for some of the world's major miners after no clear winner emerged from the weekend's Australian election, which was to decide the fate of a controversial new tax on its robust resource sector.
Australia, the world's largest exporter of coal and iron ore, faces several days of uncertainty as the two main parties scramble to win over independents to help form the country's first minority government in 70 years.
That leaves big-name miners such as Australian-based BHP Billiton Ltd., Anglo-Australian firm Rio Tinto Group and Canada's Barrick Gold Corp., all with significant operations in the country, waiting to see whether or not they will be forced to pay billions in new taxes.
For BHP, the world's largest mining company, the lack of clarity comes at a time when it is fighting an uphill battle to take over Potash Corp. of Saskatchewan Ltd. Analysts believe BHP will almost certainly need to increase its hostile $38.6-billion (U.S.) bid to win control over the world's largest potash producer.
The indecision around the tax issue is also likely to cast a shadow over BHP's full-year profit and production figures, set to be released on Wednesday, and may temper the company's outlook on commodities, which it described last month as "cautious on the short term." BHP has said it expects volatility to persist in China, which has been driving demand for metals, as the country looks to cool its red-hot economy.
Australia has become a key stronghold for the world's largest mining firms as they try to satisfy the strong demand for resources in China, as well as India. Miners have been pouring billions into Australia as a result of its seemingly stable tax and investment regime. The rebound in commodities coming out of the global economic downturn even helped Australia shake off a recession, posting a national jobless rate which now sits at about 5.3 per cent, almost half that of the United States.
Arguing mining companies weren't sharing the wealth from the resource boom, the incumbent centre-left Labor party proposed a new 40-per-cent tax on producers in late April, to take effect in 2012. That caused a huge uproar among the powerful mining firms, whose backlash led in part to a party coup that put Julia Gillard in the prime minister's chair in June.
Within days, she negotiated a new proposal with BHP, Rio and London-based Xstrata PLC, agreeing to water down the tax to 30-per-cent. Weeks later, she called an election.
Opposition Liberal leader Tony Abbott campaigned to axe the tax, which is estimated to generate about $10.5-billion Australian ($9.8-billion Canadian) in its first two years.
Now that neither leader has won enough seats to form a government, each will need to broker deals with independents to pass any proposed legislation. That makes the fate of the mining tax more uncertain, given that the third-place Greens leader Bob Brown wants to see the levy renegotiated to raise another $2-billion (Australian).
"The mining tax will either be scrapped altogether, or may go back to some form of the original tax, possibly with an even higher tax rate to placate the Greens," said BMO Nesbitt Burns analyst Tony Robson.
The political upheaval was also set to drive down the value of the Australian dollar, while mining stocks are expected to be volatile in the days ahead.
"It creates uncertainty, and the markets hate uncertainty," Mr. Robson said.
To form a minority government, and in turn push through its proposed mining tax, the Labor party is said to need support from three independents. Meanwhile, the Greens are more interested in passing a carbon tax and could back down on the mining levy as part of a compromise, analysts say.
That could eliminate the possibility that the tax will go higher than 30 per cent. Still, given that the independents appear to be split on the mining tax, it's unclear which way a vote will go.
"There is a small probability that the [tax]could be lowered," Barclays Capital said in a note.
In the campaign leading up to Saturday's election, some mining companies continued to lash out against the proposed tax.
The tax "has the potential to be a severe handicap on our company and the whole Australian mining industry," Fortescue Metals said in a letter to shareholders days before the vote. "The possible negative impact on the national economy will be substantial."
Fortescue has said it won't be able to finance debt for expansion projects if the tax is passed.
For BHP, because of its market heft, the new mining tax is expected to have a limited impact on its business, according to Glyn Lawcock, head of the Australian mining and energy team at UBS Securities.
"The ability to write assets up to market value provides a shield to the tax and while the early years may see an increased amount of tax paid ... the impact to valuation is not as harsh as it would have been under the initial" higher tax proposal, Mr. Lawcock said in an e-mail to The Globe and Mail.
Of course, it all depends on the future direction of commodity prices.
On Wednesday, BHP is expected to report a 17.5 per cent rise in annual profit to about $12.6-billion (U.S) on rising coal and iron ore prices, according to estimates. That compares to $10.7-billion for the year ended June 30, 2009, and $15.4-billion from the year ended June 30, 2008, when prices of many commodities were at their peak.