Resource Super Profit Tax Everything Correctly Explained (R.S.P.T.E.C.E.)

by zebra on 25 May 2010 · 62 comments

This guest post from Mule Stable regular Zebra (James Glover) delves into the details of the proposed Resources Super Profits Tax.

The Australian Government (hereby known as the Govt) has proposed a Resources Super Profits Tax (RSPT) for mining companies. Superficially it appears to be a 40% tax on all profits (measured by Return On Investment or ROI) in excess of the Govt Bond Rate (or GBR, the interest rate at which the Govt borrows money, over the long-term).

The key points of this article are:

1. The GBR is the correct threshold level for RSPT,

2. If the Govt increases the threshold above GBR this will represent a subsidy of miners by taxpayers,

3. The RSPT will benefit small and marginal mining projects to get finance through partial Govt backing of risks.

So for example suppose miner Mineral Wealth of Australia (MWA) invests $1bn in the Mt Koalaroo Iron-Ore mine. MWA is a wholly owned subsidiary of Silver Back Mining (SBM). In the year following they make $200m profit or a return on investment (ROI) of 20%. If the GBR = 5.5% then the 40% RSPT means a tax revenue to the Govt of Tax = 40% x (20%-5.5%) x $1000m = $58m.

This seems very straight forward. It appears that the Govt is saying that GBR represents some “fair” level of return and anything in excess of this is a “super profit” to be taxed accordingly. Not at the normal company tax rate of 30% but a “super tax” rate of 40%. This is how it has been presented by both sides in the media. Arguments against the RSPT have focused on whether the GBR as a “risk-free” rate is the appropriate benchmark for a risky profit stream. Indeed it is not but in fact this isn’t what the RSPT is about. For example normally taxes on profits have no negative impact on the Govt if the company loses money. In the case of the RSPT though the Govt has stated that 40% of any losses can either be claimed back from the Govt (as a refund) or carried over to other projects.

So what is the RSPT? A good way to consider it is if the Govt took a 40% stake in MWA as a “silent partner”,  leaving SBM with a 60% stake. In this case we would expect the Govt to contribute $400m of the investment costs (raised presumably through issuing bonds at the GBR or equivalent). In return it would get 40% of the profit. The Govt return would therefore be 40% of the profit less the cost of funding its 40% investment ie Tax = ROI x 40% x I – GBR x 40% x I = 40% x (ROI – GBR) x I.

This appears to be the formula that the Govt has presented to calculate the RSPT and in this derivation it is quite straightforward. However the Govt appears to be getting something for nothing since it isn’t actually stumping up the $400m in investment capital. So what’s going on? A clever piece of financial engineering that’s what. The Govt avoids raising the capital itself (and hence have it be counted as Govt debt) by getting the project to raise it on the Govt’s behalf.

(You can easily skip the next paragraph if you aren’t interested in the details of mine financing costs)

Whilst MWA raises 100% of the $1bn in capital the Govt appears to get the upside (and potential downside) as if it has contributed $400m without doing so. Money for old rope you say. However consider MWA not to be the stand-alone mining company SBM, but the joint venture beween the Govt and SBM. Suppose MWA borrows $1bn in capital at its Project Funding Cost (or PFC). This PFC will be lower than the SBM’s Miner’s Funding Cost (or MFC) as the Govt is now backing 40% of all liabilities. In fact in an efficient market we deduce PFC = 60% x MFC + 40% x GBR. If MWA then allocated these funding costs accordingly it would charge the Govt its share, risk-weighted, not PFC, but GBR. If the GBR = 5% and MFC = 8% then we expect PFC = 6.8% not the 8% if SBM was the sole investor. Under this arrangment SBM’s cost of funding (in % terms) its effective 60% share of the joint project is the same as its stand alone cost of funds, as it should be.

An argument against raising the threshold above GBR is that this will effectively lower the miners’ cost of funds, the difference being borne by the Govt and hence us taxpayers. No wonder miners are arguing so vehemently for the threshold to be raised. In fact it can be shown that raising the threshold to 11%, as some propose, and using a GBR of 5.5% would effectively reduce the miners’ cost of funds by a whopping 3.67%! If you want a formula for the Miners’ Taxpayer Subsidy(MTS) it is: MTS = 2/3 x (Threshold – GBR) in terms of the miners’ funding cost discount (paid for by the taxpayers remember); or MTS = 40% x I x (Threshold – GBR) in $ terms. For the Koalaroo mine this would represent $22m of funding cost transferred from the mining company SBM to the taxpayer. That’s you and me. You don’t see that in their ads.

From the Govts perspective the advantage to them is that the investment does not sit on their balance sheet but the project company MWA’s and in effect SBM’s balance sheet. From a financial engineering point of view all this makes perfect sense. Having said that, it was precisely this sort of clever off-balance sheet flim-flammary that got Greece (and Lehman’s et al) in trouble. We need to make absolutely sure it is properly accounted for.

Update: Several commenters have pointed out the effect on mine financing of the RSPT. Specifically with the Govt backing 40% of any losses smaller stand-alone projects will find it easier to get project finance. As discussed above the funding cost will be lower with the Govt’s partial backing. The operating profit (so called EBITDA) of the project is unchanged so this makes them more, not less, viable. This is at odds with what the miners have been saying. Even existing projects with refinancing clauses in their loans should find it easy to convince their lenders to reduce their interest payments. For large global miners such as BHP-Billiton, who issue bonds, it will be harder to disentangle the Australian RSPT benefit to their overall cost of funds and hence spreads. But the market should over time price this in with lower spreads on their bonds. With a reduced cost of funds miners will be able to leverage their existing equity across more projects and make up for the 40% the Govt now takes out of individual profits (and losses) through the RSPT.

Update: Tom Albanese, CEO of Rio Tinto was on Inside Business on ABC on Sunday May 30. It is interesting that in arguing against the RSPT he referred to the unfairness of the Govt coming in as a 40% “silent partner”, and not about the GBR threshold. He clearly understands the true nature of the RSPT. While it was self-serving he emphasised (in my terminology) the determination of Investment or “I” for existing projects. Depreciation comes into it but some of these projects are decades old and it would an accountant’s dream/nightmare to work out the correct value of I to base the Govt’s GBR deduction on. He also questioned the “principle” (his word) of the Govt forcibly coming in as a “silent partner” on projects which are clearly profitable going forward, having survived to this point. After all they are not compensating mining companies for mining projects that failed in the past. I’m afraid I have to agree with this point, though I think it is more complex than I currently comprehend. It is good to see the RSPT being debated for once without the disinformation we have seen from less eloquent opponents. After all the Govt did say at the beginning that it was these sort of aspects of the RSPT they were prepared to negotiate on, not the 40% and not the GBR threshold.

UPDATE: Zebra looks at a fair value approach to the RSPT.

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{ 47 comments… read them below or add one }

1 Stubborn Mule May 25, 2010 at 4:35 pm

the Govt is now backing 40% of all liabilities

I’m not sure a lender would see it that way. While the projects losses can be carried forward as a tax deduction, a lender would still not have their loan repaid. On that basis, while you can interpret the RSPT as effectively involving a loan from the miner to the Government at the risk free rate, I’m not convinced that the miner’s cost of funds would actually be lowered as a result.

2 zebra May 25, 2010 at 4:44 pm

Stubborn: in my understanding from reading teh papers the company can actually take the 40% of losses as a cash refund guaranteed by the Govt. This obviously then supports any liabilities they incur. Not just carrying them to another project. This is the cornerstone of their argument that the correct threshold is GBR.

3 zebra May 25, 2010 at 4:46 pm

Brian
it’s usually best to avoid any eyeball boiling paragraphs that start with the words “clever financial engineering” as it’s probably only the person who wrote it who thinks so.

4 Stubborn Mule May 25, 2010 at 4:48 pm

Zebra: that is a very interesting and significant feature of the tax. Presumably, then, lenders could take a charge over that claim in some form. As you say, this aspect of the RSPT has not really come out very clearly in the discussions from either side.

5 Stubborn Mule May 25, 2010 at 4:55 pm

I did read the following Swan’s “Economic Note”:

They mean that projects are guaranteed to be able to access the value of the deductions associated with their capital investments

but didn’t appreciate the fact that it could be taken as cash rather than rolled forward for future use. Reading the Note again, the following later comment makes it a bit clearer:

Refundability is not a new feature of the tax system. Other parts of the tax system already offer refundability, such as the R&D rebate.

“Refund” sounds like standard tax-speak, while “rebate” sounds more like cold hard cash! Perhaps the Government should start using the word rebate more often.

6 zebra May 25, 2010 at 4:57 pm

Mule: The article I read which helped me understand the RSPT was in today’s Age/SMH by Nicholas Gruen http://bit.ly/9RXU9t

It was Swannies economic note which @magpie posted yesterday that explicitly mentioned the refund. I should have referenced it.

7 zebra May 25, 2010 at 5:23 pm

One consequence of the above analysis is that bonds issued by miners in Australia should appreciate significantly as their spreads decrease due to the Govt taking on 40% of the risk. This would have a huge impact on mining bond yields, has this been observed? Conversely this should have no impact on share price as the miners are now free to leverage up even further on their existing equity base.

Caveat: these statements may require more careful analysis.

8 OldFuzz May 25, 2010 at 5:34 pm

Surely the govt (for we the people) is stumping the raw material (ore)C (not counting State govt meagre royalties !)
A few years ago I worked on the initial engineering for a mining/smelter project in a foreign place, where the govt there took a 51% stake in the JV project and did nothing much other than provide the dirt. The mining company/actual developer was happy to make the whole investment and do the development and ongoing operations for their 49% – everyone seemed very happy about to make lots of $$$ as the project comes on line this year.

9 Marco aka Cracticus May 25, 2010 at 6:12 pm

Hey Zebra!

I think, just think, I’m getting the gist of this story (more reflections later on!).

What I would recommend is to explain (with a nice numerical example!) what SBM has to gain: assume iron-ore prices fall a lot (as it may yet happen, given that commodity prices are still falling), gross revenue falls and consequently, ROI falls bellow GBR. In that case, the Govt would be forced to take losses, but how does that situation affect SBM and MWA?

10 Stubborn Mule May 25, 2010 at 6:53 pm

Marco: as I understand it, in this situation, SBM would be able to claim 40% of the capital expenses from the Government, mitigating their losses.

11 Marco aka Cracticus May 25, 2010 at 7:07 pm

Yes, they would.

So, this means that the RSPT can be seen as a kind of insurance, as well. In other words, if I understand the thing, it works a bit like an option (which is what James said at the end), where the Govt takes some of the risk, in exchange for a fee.

Neither the CMA nor the opposition (and, even more curiously, the Rudd Govt) mention this.

12 zebra May 25, 2010 at 7:08 pm

Marco: it seems so. I also wonder about the impact on bond/cds as well as share prices. There is more to this than meets the (red) eye.

13 zebra May 25, 2010 at 7:44 pm

Marco. My reading of it is that is not an option in that the payoff to the govt is linear. Where they tax profits only (with no downside) it is indeed an option. It is this area of confusion which has resulted in claims that the threshold should be well above the GBR. The figure people quote is the petroleum resource thresholdof 11% but there is no downside in that case. It is muddied by the fact that the govt holds all the cards and can create optionality where it wants, at zero cost. But not, it would seem to me, in this case.

14 Marco aka Cracticus May 25, 2010 at 8:02 pm

Well Jimbo to be honest, I don’t know much about this subject and what you say makes sense.

Although I confess, everything seems a bit cloudy to me and makes me feel slightly uncomfortable.

But the Govt, the CMA and the opposition won’t stay awake at night because of that, anyway.

15 zebra May 25, 2010 at 8:07 pm

Marco: I always look to Modigliani-Miller for guidance on these issues.

16 Xon May 26, 2010 at 9:55 am

Financial engineering-there may be reasons to have some degree of fear

17 Gary J May 26, 2010 at 10:16 am

Hey Zebra – nice work. I think you are right that the net effect is that the industry will be prone to much higher leverage ratios, with specifically more project financing as opposed to on balance sheet financing. This then entails a market shift – in effect this off balance sheet equity contribution favors the junior minors over the blue chips (with stronger balance sheets).

I haven’t had a good look a the proposal but it suggests that more marginal/smaller scale deposits with find it easier to be funded thus whilst the majors are putting all projects “under review” it is likely that “prospector pete” will see this as a major win…

Need to think about this some more but thanks for the spark..

18 zebra May 26, 2010 at 12:44 pm

Good point Iceman. I don’t know anything about mine project financing but I know people who do and have asked for their views, hopefully posted here soon. Nonetheless I have leveraged what small knowledge I have and added an update above about small project financing. It seems to be a point the Govt is failing to get across that this benefits the miners, especially small ones. I suspect the miners’ real opposition is to changing the status quo rather than seeing the RSPT as detrimental.

19 Gary J May 26, 2010 at 2:36 pm

Zebra – I have just read the governments consultation document, and yes it does significantly favor small/higher extraction cost projects than the current system. The only time a cash refund is paid is when you go out of business however given the transferability within a corporate entity it is highly likely that any projects with retained RSPT credits will be snapped up by those paying RSPT.

Leverage/capital will be far more accessible to juniors, to such a degree that I think banks will actually pre-fund project capex with a charge over future RSPT credits. Very similar structure to movie productions in which the OZ governments guarantees a tax refund for a certain percentage of production costs assuming certain distribution hurdles are met for locally produced movies.

Yes the big boyz are yelling because A) they will pay more tax and b) it encourages heaps more smaller competitors…

Iceman

20 zebra May 26, 2010 at 3:40 pm

Iceman: Good summary on tax credits. I hadn’t thought about that side of things. No doubt some clever investment bankers are already working out how to run a mine at a “loss” to claim the Govt refund. There could be a lot of small unprofitable mines opening soon.

Law of unintended consequences: boutique mines to replace boutique wineries and alpaca farms as the tax dodgers’ investment of choice.

Actually what’s to stop me calling my backyard a mine and claiming 40% of the gardener’s cost back from the Govt? He’s digging holes after all.

21 Gary J May 26, 2010 at 3:57 pm

Zebra – your avatar in this discussion looks like you have been at sea too long.

22 zebra May 26, 2010 at 4:07 pm

Xon: I agree it’s scary, though strangely enough I don’t think they did this deliberately to hide the debt off balance sheet. I’m not sure they even think about it as anything other than a tax. If the opposition were clued up they could decry the RSPT as adding to Australia’s already bulging debt burden. Hopefully the truthiness will get out there.

23 zebra May 26, 2010 at 5:44 pm

Sean: this line from an ABC website gives some clarity to how the refund might work in practice:
“The credit … may not be paid immediately, but would eventually be given to a company when the Government determined its expenditure costs could not be carried onto another project. ”

http://www.abc.net.au/news/stories/2010/05/25/2908894.htm

24 Marco aka Cracticus May 26, 2010 at 7:04 pm

Zebra,

I’ve read that ABC article and, to be frank, I found it quite disappointing.

Judging by how inaccurate is their analysis of the beneficiaries of the RSPT, I would be very careful on basing any conclusion on what they say.

25 Stubborn Mule May 26, 2010 at 7:44 pm

Iceman’s comments about benefits for smaller outfits and costs for large ones make a lot of sense (and are certainly reflected in the amount of noise being made by the large miners). One thing about tax is that, ultimately, it is a form of wealth distribution. There will always be some winners and some losers and, needless to say, the losers will scream blue murder. It would be foolish for a Government to pretend that any tax benefits everyone. I don’t think they have actually done that in this case, but perhaps they could have been more explicit in saying that there will be some losers, but that overall they see the tax as good for Australia.

Seen in these terms, I would see this post as saying that while, yes, there will be losers with this new tax, it has been designed in such a way as to hurt a little less if business gets tough.

26 Marco aka Cracticus May 26, 2010 at 9:36 pm

Stubborn,

I’ve got to agree with you 101%. And this re-distribution takes place whether one considers the effects of the RSTP in isolation, or within the whole taxation system (including government transfers).

And, contrary to what the ABC article says, the beneficiaries are not the workers. Let’s remember that the Henry tax review allegedly proposed increase in the tax-free threshold to $25,000. For some reason Mr. Rudd did not include this.

27 John Edwards May 28, 2010 at 3:28 am

Mining companies in Australia aren’t too likely to be making losses, are they? So what’s the point in focusing on any theoretical insurance-like function the RSPT might have – it’s just a super tax that’s all!

28 Stubborn Mule May 28, 2010 at 7:30 am

John: one reason for focusing on the potential for losses is that is exactly what the banks do when deciding whether or not to lend money to a mining project. A tax that was more punitive in a downturn would have a far bigger impact on the ability of miners to finance their activities.

29 zebra May 28, 2010 at 7:50 am

John: Never say never! Can you really imagine no plausible circumstances in which Australian mining suffered a major downturn? What about a sustained crash in China? I’d certainly give that at least a 10% probability over the next 5 years. In this case there would be a crash in commodity prices and marginal projects that relied on currently high prices might fail. As Sean says they banks are concerned about this. Even a GFCII type situation in which bank liquidity dried up could lead to financial rather than operational failure for leveraged projects that relied on short-term funding – like any other similar business.

I wonder if in 2005 someone had said that the possibility of major banks in Europe or US failing was “purely theoretical” you’d have agreed? I might have. In Australia we are cyclically connected to commodity prices but we have very short memories.

30 Paddy May 31, 2010 at 8:19 pm

Thanks Zebra for a nice post. Ross Garnaut has also provided some nice analysis in his recent speech on the matter, although I can’t find the link on a public site.

If using the GBR as the uplift rate, the tax does appear to be neutral. The talking heads are currently talking about an alternative where a WACC is used for uplift, but no credit for losses. That seems like an entirely different kettle of fish.

I agree that the govt. is employing a look-back option on profitable projects, and therefore there has been a wealth transfer from the corporate to public sector. Further, a look-back option could be employed in the future if mining generates significant future losses. Regulatory risks abound.

31 Scarlet_Pimpernel June 1, 2010 at 10:52 pm

Free thinkers will understand that this tax challenges our profit and loss system. A system that is at the very root of our markets.

1. The appalling mantra that Swann parrots: “What we are going to get for the Australian people is a fair share of the resources they own 100 per cent, a fair share – a tax which encourages investment and growth in the industry.”

This is nonsense and a challenge to everything that our free and prosperous society stands for.

2. Ask yourself whether the Australian people own the farmers wheat, the manufacturers product or the inventors fantastic results? Does the State own all property and the means of production? This is what is being proscribed to the Mining Industry. This is a Socialist concept, yet it is terrible Fascism that comes first.

3. Please recall that Socialism, as described by Russian dissident and author, Alexander Solzhenitsyn, in his “Letter To Soviet Leaders” wrote :

“I would not consider it moral to recommend a policy of saving only ourselves when the difficulties are universal, had our people not suffered more in the Twentieth Century than any other people in the world.

“In addition to the toll of two world wars, we have lost, as a result of civil strife and tumult alone – as a result of internal political and economic “Class” extermination alone – 66 (sixty six) million people!

“That is the calculation of a former Leningrad professor of statistics, I. A. Kurganov, and you can have it brought to you when ever you wish. I am no trained statistician, I cannot undertake to verify it; and anyway all statistics are kept secret in our country, and this is an indirect calculation.

“But it’s true: A hundred million are no more (exactly a hundred just as Dostoyevsky prophesied), and with and without wars we have lost one third of the population we could have had, and almost half of the one we in fact have!”

4. If our governing body persists on imposing a tax on a mining companies of this magnitude, Australia must develop into a Fascist state, as they endeavour to manage their folly. And, as Fascism matures, it develops into full blown Socialism; remember Solzhenitsyn’s words

5. What we are witnessing is the bureaucratic takeover of the industry which has underpinned any prosperity that Australians have enjoyed in the past.

6. And it is TRUE that the proposals of the Federal government have irreparably damaged the reputation of the Country as a safe investment base. Who would invest in a country that PARROTS the same Mantra as Mugabe or Chavez or even thinks about it?

7. As was the case when the Whitlam government “took over” the oil, gas and minerals industry, investors fled and some have never ever returned. Whitlam’s belligerent Minerals and Energy Minister, Reginald Francis Xavier “Rex” Connor simply stood over mining executives as though they were errant school boys. It was an appalling time in Australia’s history and their ceiling on the copper price at that time, sent many small miners broke, and crippled the big ones which dropped exploration altogether in order to survive.

This is nonsense and a challenge to everything that our free and prosperous society stands for. The “backflip” should be the removal of the repugnant super-profits levy in its entirety, there can be no compromise, to do so puts all Australia at risk.

32 Gary J June 2, 2010 at 8:22 am

Scarlett Pimpernel – I am sure that you will understand the difference between a public good and a private good once I activate my Enormous Oxygen Capture Machine (EOCM – patent pending) and then set the price at $5bn per litre.

33 zebra June 2, 2010 at 9:38 am

Scarlett Pimpernel. I would like to think that there stands more between the Australian people and our loss of freedom than the profitability of corporations. Deutsche Bank, BMW and various chemical companies all supported the Nazi regime in Germany.

The point GaryJ also answers yours about whether the Govt has a moral right to tax minerals is valid. Miners don’t create the minerals, nor are they renewable. Australia doesn’t operate under a system of “finders keepers” when it comes to mineral wealth.

Thanks for your contribution. I too have read Solzhenitsyn and I have to admit I had failed to make to connection between the builders of the Gulags and the current Labor government. Thanks for bringing it to my attention.

34 Jimbo Jones June 2, 2010 at 3:04 pm

From a macroeconomic viewpoint im all for the RSPT. Even if you get lost in the detail this is being used to fund a reduction in the corporate income tax rate to 28%-25%, boost super to 12% and provide accelerated write offs to small business. Quite clearly we need to ensure that the productivity of non-mining sectors of the economy are encouraged, have the benefits of these measures been lost in the debate?
We clearly need to think about the growth path and composition of the Australian economy going into the future and to tackle the issue of the two speed economy. For example, how much of the terms of trade increase is caused by increasing commodity prices, creating upwards impact on interest rates that hurts the non-mining sector (seen the sales figures of retailers recently?)and a further increase in the AUD that hurts our exporters?

However, I really think the Government needs to step back and assess the real world commercial impacts of the tax as designed. They have done a poor job of consultation in order to get a Budget night boost. They had the Henry review for god knows long. Some project financiers are saying that the effective underwrite of 40% of a projects losses will not reduce the cost of financing, given the effective underwrite is subject to sovereign risk. Eg imagine the perfect storm of a double dip developed recession led by a china housing bubble collapse and soveriegn defaults within the EU. Will the Government stump up massive losses or even have the ability to in this instance? Is this a concrete bankable security? Does a financier accept in effect a deferred tax asset as security for large often multi-billion dollar projects? Overlaying this is a real world bankable reduction in cash flow from the RSPT which results in miners having to stump up more expensive equity financing because their capacity to pay interest is reduced. i think that outside of the halls of the econonics faculty there is much to be said for a real world analysis of how much a government guarantee is worth and therefore whether a project specifc WACC without the guarantee is in effect a more equitable definition of a super profit, or to allow financing costs to be deductible from the RSPT base. this makes sense to me because the miner may still need to raise 100% of the project cost at their WACC, which the government then appropriates at the GBR. Clearly the RSPT design feature of investment neutrality is something that needs to be tested, and I think the miners do have a legtimate design concern in this regard. Of course it may be legitimate for the Goverment to say slowing mining investment is exactly what they are intending but they have argued that the RSPT will increase mining investment.

35 Zebra June 2, 2010 at 5:36 pm

Jumbo I agree with a lot of what you say but I think an Auustralian govt guarantee is still pretty good. Noone brought This up when the govt guaranteed bank deposits.

36 Jimbo Jones June 2, 2010 at 7:13 pm

Zebra

Agree that an Australian govt guarantee, despite living in a world where the term sovereign default is in the common vernacular, must be worth something.

Nevertheless I think there are legitimate arguments that suggest that it is a stretch in the real world to use the government guarantee to justify the GBR. Especially where bankers have as their first priorty to keep assets going as going concerns, and minimise a loss on the loan, a fire sale often being the worst scenario for recovering value from an asset. Does the 40% rebate/refund kick in at this point in time when a banker writes down his loan on a non-abandoned project? If not then why should a banker then reduce his interest rate by a material margin? It just points to the fact that I hope these real world concerns are dealt with, that the Government listens to bankers/financiers and miners, and we end up with a workable compromise that balances the needs of the mining and non-mining industries appropriately.

37 Nick Allan June 3, 2010 at 1:57 pm

Anyone who really believes that the RSPT (and specifically the 40% rebate on failed ventures) will be of benefit to a company seeking debt finance needs to get their head out of their economics textbook. Clearly such a person hasn’t ever either (a) gone out and tried to raise project finance for a minerals project or (b) worked as a banker trying to get a financing proposal approved by credit.

In the end, the RSPT will make successful projects less profitable and will make failed projects somewhat less miserable.

Banks will not fund a project where there is a reasonable expectation that it will fail at the time of the credit assessment. In that sense, banks presuppose the success of a project, with this assumption being based on geological and engineering feasibility studies and commodity price forecasts (and, often, commodity price hedges).

In my experience, banks do not perform scenario analysis on the basis of assessing their losses in the event the project fails – they simply won’t grant credit if they think project failure is a realistic prospect. As such, the 40% rebate is likely to be of negligible benefit for the majority of companies seeking project finance – and the 40% on ‘super’ profits will be of substantial detriment.

To think, as Ken Henry seems to, that the market will step in and develop financial products that enable the potential value associated with the 40% rebate to be realised by companies is optimistic in the extreme. Australia hasn’t even really managed to develop a corporate debt market – there is insufficient breadth and depth in the local financial sector to expect complex products like this to get any traction, particularly in the washup of the GFC.

38 zebra June 3, 2010 at 4:16 pm

Nick – there is no evidence for what you are saying. Banks implicitly take into account default situations by looking at guarantees and collateral. It may be new for mine project financing (where there is currently no guarantee) but is pretty standard in the business loan market. Since the AFR article on Monday I have yet to see a single named bank make a detailed statement to this effect. Certainly none of the big 4 in Australia. We only have (erroneous as it turns out) allusions to analysts reports and unattributed sources. It all smacks of desperation to me but good to see the miners finally understand how the RSPT works.

39 zebra June 3, 2010 at 4:21 pm

Jimbo – Selling a failing mine as a “going concern” will still result in losses to the original company and hence potentially its bankers. Even if the bankers also become the bankers to the new company they will still write-down any of the original losses.

It doesn’t require a great stretch to see this built into the way in which refunds or tax credits are claimed for the RSPT. I think it is on this type of detail that the Govt has expressed a desire to negotiate.

40 Scarlet_Pimpernel June 3, 2010 at 11:43 pm

Scarce Resources, Human Utility and Human Action.

All resources are scarce at all times everywhere.

The reason free internal and external markets produce the best possible use of all resources, is that the market impartially co-ordinates all economic activity. Individual human utility is a market component.

The particular human utility that market independents have, varies tremendously.

But at all times everywhere, all independents in the market strive to improve their relative positions, and the market impartially delivers the results.

The ability of Intel’s Otellini to predict the future state of the computer market has made Intel one of the world’s biggest technology firm in terms of market value.

In the field of open cut mining, Kennecott Copper’s Bingham Canyon mine has mined more than six billion tons of rock to produce more than 16 million tons of copper metal, since surface mining operations began in Utah. Vast quantities of by-product gold, silver and molybdenum have also been produced from this mine.

The enormous scale on which the deposit is operated, was devised by an entrepreneurial Mining Engineer. That is what makes it profitable.

Until the advent of open cut mining with all of its attendant constantly improving capital intensive equipment, such low grade material was impossible to mine economically.

All taxation restricts the mining of low grade ore bodies and abolishes jobs. That is the reason so called “royalties” and income taxation should again be abolished, as they were, until reintroduced 1914.

41 C&J June 12, 2010 at 10:49 pm

Scarlet_Pimpernel – Your reference to human utility suggest an adherance to, or at least a fellow traveller of, objectivism. If so you would recognise the inherant evil of theft as a fundamental concept.
The RSPT is not in fact a tax, it is more correctly a resource rent levy charged for the raw material that the resource mining companies dig up to generate their revenues and hence profits. Expecting mining companies to be able to obtain this component of production for free is nothing more than condoning theft.
It is spurious to claim an analogy with farmers producing wheat or manufacturers producing goods. In both instances the means of production need to be paid for by the producer as part of the costs of generating a product for sale. It’s just that in the case of mining there is no, or very little, value adding activity apart from the extraction of the raw material for sale, which is still a component of production that needs to be paid for. Note Zebra’s response to your earlier contribution.
If you feel so passionate about it, should the RSPT come into existence please feel free to return what you consider to be your share to the mining companies. I for one will, instead, be expecting the Government to use it wisely for our ongoing future benefit. While this may be a debateable expectation it is nevertheless a debate for another day.

42 Alan Ramsey June 13, 2010 at 4:59 pm

Good site ! Could someone do some analysis on:
1) the interaction between the RSPT and normal company tax? Is the RSPT a pre-tax deduction for company tax purposes or is is separately calculated and then added to the normal company tax bill? I presume the latter.
2) I also assume that there is no imputation credit for the RSPT?

Thanks

Rambo

43 zebra June 14, 2010 at 9:39 am

Rambo – the answer to the first question is that the RSPT is deducted as a cost and then the 30% (or 28%) company tax rate applied. I don’t know about imputation credits in this case.

44 Bastiat June 14, 2010 at 11:17 pm

Who owns the scarce ore deposits that cost large amounts of capital to discover and vast amounts of capital to develop?

A resource rent tax, justified by the chant, “The people of this nation own the resources of this country,” is a Mugabe/Zimbabwe type declaration.

It is a Marxist slogan. Repeated innumerable times many of the population come to believe it.

This attitude does not augur well for our future.

Once Marxist principles are implemented a nation becomes subject to Bureaucratic control; the profit and loss system which maximises efficient resource use is destroyed.

Interested Australians who believe in consumer sovereignty and personal liberty, and who want to defend Classical Liberal principles, should closely study Ludwig von Mises’ essay titled “Profit and Loss”.

In “Profit and Loss,” Mises explains how cost accounting is the critical institution that ferrets out social waste, ensures that resources are directed to their most highly valued ends, and how entrepreneurs respond to price signals. His presentation is systematic, relentless, logical, and ultimately devastating to the opponents of profit and loss.

He explains what it is that entrepreneurs confront in a market economy and how no bureaucratic institution can replicate the trial-and-error process that is at the heart of the market system. He weaves into his analysis the role of the consumer as the final arbiter of what is produced and distributed.

Personal and economic liberty and the most efficient use of resources are the winners. Ultimately the consumer wins.

45 Bastiat June 14, 2010 at 11:21 pm

Our Resources means Our Land And Our Rain.

The Federal Government has declared that all minerals are owned by the people of the Nation. And the people should get a “fair share” of the profits.

Profit oriented farmers are like profit oriented miners. They do not produce for use, they produce for profit. Profits they make should be shared by all of us, as they are, after all, farming “our land”, using “our” rain.

Josef Stalin knew how to handle their farmers. No violence; he rounded them up, packed them on barges, they were ferried north until they hit the ice. They disappeared for ever into the arctic wastes of the tundra.

And the State took over agriculture under the wording of reform, so that production could be evenly distributed to the people. From being the world’s biggest grain exporter, the Russian people endured permanent famine.

Millions died from starvation in the world’s largest area of watered fertile land.

The Kremlin in Canberra is now embarking upon a $40 million advertising campaign to expose the nation’s selfish miners. The farmers will be next.

46 zebra June 15, 2010 at 8:27 am

Bastiat – the obvious difference between a mine and a farm is that once the resources of a mine are gone they are not renewable. Farms are renewable resources (though I would argue that we don’t properly price in the environmental damage they can cause and pass this onto the final consumer). Similarly with fishing which should, if properly managed, be a renewable resource. We, and every other country in the world, already levy some sort of tax on mineral resources, usually via royalties so it’s hardly Stalinist to do so. None of them operate a “finders keepers” policy for minerals. Why would they?

There is a saying in politics that you have lost the argument when you accuse your opponent of being a Nazi. In the case of RSPT we can replace Nazi with Stalinist.

47 Scarlet_Pimpernel June 15, 2010 at 9:07 am

It would appear that the Marxist Slogans are working.

People are getting confused as to what resources are.

It is worthwhile considering the words of the late great Julian Simon on mineral resources:

“Incredible as it may seem at first, the term “finite” is not only inappropriate but is downright misleading when applied to natural resources, from both the practical and philosophical points of view. As with many important arguments, the finiteness issue is “just semantic.” Yet the semantics of resource scarcity muddle public discussion and bring about wrongheaded policy decisions.”

Interested readers can review his writings gratis here:
http://www.juliansimon.com/writings/Ultimate_Resource/

Simon was a world authority on population matters.

Remember People are the ultimate resource.

It takes the human attributes of innovation and competition and the application of scarce Capital to produce mines. The are for all intents and purposes renewable and infinite.

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