Sent: 22-06-2010 10:03:04
In this issue:
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin
Resources Tax to Deliver New Investment Opportunity
Some exciting new investment products could result from the resources super profits tax.
The mining industry has never settled on a single satisfactory model for providing the social and economic infrastructure which is needed to complement a successful mining operation.
There has always been tension between governments and miners over the best way to proceed. Company owned transport and logistics had typified iron ore developments in Western Australia since the1960s. This was thought better than the government supplied facilities in eastern Australia which, to this day, have been criticized as inefficient and lagging behind the needs of the industry.
More recently, in Western Australia, competition regulators have been insisting on multiple parties having access to transport and loading facilities. Infrastructure, by law, would no longer succumb to monopoly control.
While there is a vigorous debate underway about the resources super profits tax, there was also a bitter political fight in Queensland in the 1980s over rail freight rates. Queensland was at the centre of that resource boom. Some of the largest miners in the country accused the state government of using transport pricing as a de facto resources tax after the companies had already funded the cost of the new rolling stock. Mine operators in Queensland are now bidding to buy the rail network servicing the coal industry to protect their interests.
The Australian government's proposed new tax on resource sector profits takes the evolution in how infrastructure is provided one step further. The government proposes using a part of the new tax proceeds to set up a $6 billion infrastructure fund. About two-thirds of the fund would be used for infrastructure projects in the resource-rich states of Western Australia and Queensland.
Explicit government participation in infrastructure investment is now part of the model, at least from the perspective of the current government.
The way the new tax has been structured, if implemented, is also likely to provide incentives for industry to change the way infrastructure is delivered.
Where mining finishes and transport begins is one of the questions being dealt with in the consultations currently underway between the government and mining industry representatives.
Sometimes, a mine and its associated logistics are self-contained. Irvine Island, off the coast of Western Australia, where Pluton Resources is aiming to develop a new iron ore mine is relatively straightforward. One company is developing a single project in a place in which it is the only participant. The boundaries of the project are well defined.
In this case, the economics of the mine will be fully integrated with the economics of the logistics. There will be no attempt to differentiate the transport and shipping functions from the digging and loading functions.
In the midwest of Western Australia, things are different. Several new iron ore projects at different stages of approval are supposed to use common transport and loading facilities.
Financiers and companies alike, under these circumstances, will be reluctant to fund infrastructure until they understand whether it will be deductible for purposes of the tax on super profits. The government will be trying hard to have the project stop at the gate of the mine to maximize the tax base.
Companies could concede that their projects stop at the gate of the mine. They could set up specialist logistics operators. The logistics operators could be partly funded by the companies (but not necessarily). The new government infrastructure fund to accompany the super profits tax could also participate but the broader superannuation and institutional investor base could be tapped for most of the funding. This might prove easier than persuading them to fund major mining developments.
Such a logistics operator would charge the companies a price that reflected a full return on its cost of capital. This would be a fully deductible cost for any mining company.
From the perspective of an investor, a clear differentiation between mining and infrastructure would open up a new investment opportunity.
While infrastructure is not new as an investment category, mining infrastructure could be construed as less risky than many of the other infrastructure alternatives available to investors. Unlike a suburban motorway, for example, there would be little uncertainty about whether the iron ore rail link would be used.
Rates of return could be struck that fully compensated investors. Potential distributions to unitholders or shareholders would, arguably, be more secure than for other equity investments.
The logistics operators would not be affected directly by commodity price fluctuations. Volume risks would also be low. Once projects are up and running, they usually target full capacity utilization, cutting prices to support volumes, if necessary. Lower prices would be an ongoing risk for the mine investor but not for the infrastructure provider.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.