Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. ~Ernest Benn
As your regular editor Kris Sayce mentioned, I recently went to Africa ‘to kick some rocks’. I ‘kicked some rocks’ in a number of mining projects in South Africa and Botswana, and got a good feel for their futures, as well the logistical environment that the companies are working in.
My original return was delayed as I missed my flight. There had been a cops n’ robbers style shoot-out on the freeway to the airport, so the traffic was grid-locked for twenty kilometres. When I finally did step back onto Australian land, it was to the news that that land was now being managed by Prime Minister Gillard (PMG)!
This brought to mind another quote: ‘A week is a long time in politics’, which I’m sure is what Kevin Rudd is thinking right now. Either that or wondering at what time in the afternoon it is ok to pour the first scotch of the day when you are no longer running the country.
As editor of Diggers and Drillers, The first thing I thought was:
‘What does this mean for the future of the RSPT?’
So far we have had little to go on from Gillard, other than an ambiguous pledge to open the doors to negotiations on the RSPT.
The industry will need much more than that from Gillard before it takes any heat off the government. Seeing as the tax in its current form was the death-blow sending Rudd to the back benches with a face like vinegar, it would serve Gillard’s popularity polls well to clarify what the plan is, and pronto.
Would these negotiations take place pre-election? A kind smile and vague commitments beforehand are not going to cut the mustard. The mining industry has given her a moment’s reprieve, but will be as ruthless as they were with Rudd unless given a good reason to back off.
Is the Prime Minister even considering starting again from scratch on a foundation of extensive consultations, as per the shaping and introduction of the Petroleum Resource Rent Tax?
This would be the best possible outcome for all involved, but with the tax’s mad architect Wayne Swan now sitting in the co-pilot’s seat, it is probably just a tenuous dream.
If it came down to negotiating terms and conditions in an attempt to remodel this garden-shed-DIY-grade mess into something workable, there are three main points to haggle over.
Does it apply to projects already operating? If so, then it is effectively moving the goal posts on investment decisions made years or even decades ago. Imagine how you would feel if ten years into your mortgage, the bank completely rewrote its terms?
As for the scale of the tax, the threshold rate of 6% has to change. The weighted average cost of capital (the rate miners pay for money) is more like double that. So as long as there is such a gap between the two rates, miners would be bleeding money.
Then the 40% rate of the RSPT clearly needs to be dialled back to something less ridiculous as well.
I went to the Melbourne Mining Club’s Tax Forum last week, and Chris Richardson, the Director of Access Economics, pointed out that the net effect of all of this for shareholders is an effective tax rate on mining stocks as high as 67.9%.
At the same event, The CEO of the Minerals Council of Australia, Mitch Hooke, said that he was optimistic in regards to Gillard’s more consultative tone.
I will need something more tangible than optimism before I start recommending any of the many great mining projects based in Australia for my Diggers and Drillers readers again. For now, nearly everything is currently offshore and doing well for it.
Last night I watched Swan speak on the excellent ABC news after the G20 summit. He re-affirmed my offshore strategy for me. He said:
“Advanced economies have committed to at least halve deficits by 2013. Now of course, Australia will be returning to surplus by 2013,”
What gave me the chills is that following the government’s calculations, without some other tax or spending cuts, the only way in which this return to surplus is possible at the moment is if the RSPT goes ahead in its current form, adding $3 billion in revenue in 2012-2013. Gillard has also stated she is committed to this budget target.
So whilst Gillard is waving an olive branch in the air with one hand, it looks like her other hand is pointing at the miners, and flipping them the bird.
Make no mistake. Nothing is resolved at the moment. We are just moving into the second act of this RSPT saga.
Dr. Alex Cowie
For Money Morning Australia
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Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service.
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