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The Mule goes SURFing

A month ago I posted about “SURF”, the newly-established Sydney R user forum (R being an excellent open-source statistics tool). Shortly after publishing that post, I attended the inaugural forum meeting.

While we waited for attendees to arrive, a few people introduced themselves, explaining why they were interested in R and how much experience they had with the system. I was surprised at the diversity of backgrounds represented: there was someone from the department of immigration, a few from various areas within the health-care industry, a group from the Australian Copyright Council (I think I’ve got that right—it was certainly something to do with copyright), a few from finance, some academics and even someone from the office of state revenue.

Of the 30 or so people who came to the meeting, many classed themselves as beginners when it came to R (although most had experience with other systems, such as SAS). So if there’s anyone out there who was toying with the idea of signing up but hesitated out of concern that they know nothing about R, do not fear. You will not be alone.

The forum organizer, Eugene Dubossarsky, proceeded to give an overview of the recent growth in R’s popularity and also gave a live demo of how quickly and easily you can get R installed and running. Since there were so many beginners, Eugene suggested that a few of the more experienced users could act as mentors to those interested in learning more about R. As someone who has used R for over 10 years, I volunteered my services. So feel free to ask me any and all of your R questions!

As well as being a volunteer mentor, I will have the pleasure of being the presenter at the next forum meeting on the 18th of August. Regular readers of the Stubborn Mule will not be surprised to learn that the topic I have chosen is The Power of Graphics in R. Here’s the overview of what I will be talking about:

In addition to its statistical computing prowess, R is one of the most sophisticated and flexible tools around for visualizing quantitative data. It can produce a wide variety of chart types, including scatter plots, box plots, dot plots, mosaic plots, 3D charts and more. Tweaking chart settings and adding customized annotations is a breeze and the charts can readily be output to a range of formats including images (jpeg or png), PDF and metafile formats.

Topics covered in this talk include:

Getting started with graphing in R

The basic charting types available

Customising charts (labels, axes, colour, annotations and more)

Managing different output formats

A look at the more advanced charting packages: lattice and ggplot2

Anyone who ever has a need to visualize their data, whether simply for exploration or for producing slick graphics for reports and presentations can benefit from learning to use R’s graphics features. The material presented here will get you well on your way. If you have ever been frustrated when trying to get charts in Excel to behave themselves, you will never look back once you switch to R.

For those of you in Sydney who are interested in a glimpse of how I use R to produce the charts you see here on the blog, feel free to come along. I hope to see you there!

Emissions League Tables

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Yesterday’s Sydney Morning Herald featured an opinion piece by Rodney Tiffen on Australia’s sluggish response to climate change. Deliberately provocative, the discussion was framed from the outset in the language of competition:

An international competition in self-righteousness would be closely fought. But Australia must be a strong contender.

Tiffen went on to draw on data from the International Energy Agency (IEA), but got his statistics slightly wrong in the process:

If we restrict the analysis to the most populous 130 countries, those with a population of 3.5 million or more, Australia is the world leader. Only a handful of small countries, especially oil producers such as Bahrain, Qatar and Kuwait, have higher per person emissions.

Australians may be disappointed to learn that we do not, in fact, take home the trophy in this competition. Both the United Arab Emirates and the United States have populations over 3.5 million and have higher per capita emissions than Australia at last count (2007). Nevertheless, coming in third place in this competition, Australia certainly punches above its weight, with per capita emissions running at 4.3 times the world average. Furthermore, as the chart below shows, we have been steadily catching up to the United States over the last 40 years. In fact, to give Tiffen the benefit of the doubt, the most recent IEA data is for 2007, so we may well be ahead of the USA by now.

CO2 emissions 1971-2007 (Source: IEA)

The reason Tiffen looks at per capita emissions is to ward off one common argument for inaction on climate change, namely that China and the United States are the only countries that can make a difference. There is no doubt that these two countries dominate the overall production of emissions. Throwing Canada and Mexico in with the United States brings North American emissions to almost one quarter of the world’s total. Add China and almost half the world’s emissions are accounted for.

Total CO2 emissions for 2007 (Source: IEA)

Nevertheless, if the aim is to attempt reductions in world emissions, Tiffen’s focus on per capita emissions is entirely appropriate. No-one would be convinced if the United States viewed its emissions along State lines, thereby arguing that their emissions were not so big by global standards after all (although, this defence would probably not be much use to California). While countries may be actors on the world stage through their political proxies at climate conferences, emissions are ultimately the product of people (both at home and at work) and not countries. Ranking countries by per capita emissions is thus useful as it gives some indication of where emission reductions may be more readily achieved. The chart below shows the top 25 (big and small) countries in terms of per capita emissions.

Top 25 per capita emitters for 2007 (Source: IEA)

Qatar ranks so high on this scale that it compresses the figures for all of the emitters below it, so here is the chart again with a somewhat truncated scale.

Top 25 per capita emitters for 2007 (Source: IEA)

There are certainly some small countries with high rates of carbon emissions per capita, but looking at a larger scale reveals that developed countries are the worst in per capita terms. It is worth noting, though, that Europe is doing better than the rest of the OECD and is also ahead of former members of the Soviet Union.

Per capita emissions by region for 2007 (Source: IEA)

Another useful approach is to consider emissions per dollar of economic output. This serves to highlight “inefficient” emitters, not to shame them but to identify where spending money on the problem is most likely to deliver significant results. It should come as no surprise that a league table of the highest emitters per dollar of gross domestic product (GDP) is a catalogue of troubled and/or small nations. Note that these figures are calculated based on conversion to US dollars using market exchange rates. Using purchasing power parity instead does reorder the list somewhat, but the names are largely the same.

Top 25 emitters by emissions/GDP for 2007 (Source: IEA)

This perspective suggests that when developed countries consider programs to assist developing countries to reduce their emissions, they could reasonably focus on significant but inefficient emitters. The chart below provides a possible target list, showing the 10 worst-performing countries in terms of emissions per dollar of economic output after restricting to countries with emissions of at least 150 million tons of C02 per annum.

Top 10 large emitters by emissions/GDP for 2007 (Source: IEA)

When will Julia go to the polls?

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After taking Kevin Rudd’s scalp and now having done a deal with the miners, Australia’s new prime minister, Julia Gillard, is widely expected to call an early poll. The question is, when will the election be held?

As usual, my first inclination is to dig into the historical data. Looking at all of the Federal elections since Federation, December is far and away the most popular month for a poll. Although the election does not even have to be held this year, December is sufficiently far into the future that it fails to qualify as an early election. Unless the bounce Gillard has experienced in opinion polls proves to be extraordinarily short-lived, we should be looking at a somewhat earlier date. Interestingly, both July and August have only seen one election. On the admittedly spurious grounds of historical precedent, September would be a better bet.

Australian Federal Elections by month

But what of other sources of information? At the time of writing, the shortest odds from SportingBet were on August 7. In my own rather modest poll, August is also proving the most tipped month (it’s not too late to vote in the poll…just make your selection in the form below). No-one has voted for a date in July and I am inclined to agree that that is really a bit soon. Nevertheless SportingBet is still showing odds (admittedly long ones) for 31st July.

In a bid for contrarian status, I will diverge from both the bookies and voters in my poll and will tip a September election. But which date? History is not much help there. Of the four September elections in the past, there has been one on the 1st, 3rd, 4th and 5th Saturday of the month (1914, 1934, 1940 and 1946 respectively). So, I will veer as close as possible to the people’s choice of August, while still tipping September and predict that the election will be on Saturday 4th September. In choosing that date, I have not been swayed by the fact that the fourth Saturday of the month has been the most popular historically, other than to nominate 28th August as my fall-back selection.

Since I will most likely be wrong and you probably disagree with me, make sure to vote!

RSPT RIP – Long Live the MRRT

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In the third in a series of guest posts on the subject of Australian mining tax, Zebra (James Glover) considers the changes to the proposed tax the new prime minister, Julia Gillard, has negotiated with miners.

The Govt has announced a replacement for the RSPT discussed in earlier posts to a Mineral Resources Rent Tax (MRRT). The principle differences are the tax rate – 30% and a change in the deduction. For established mines it is now based on market value depreciated over 25 years and the uplift rate is 12% not 5%. In addition there is a 25% deduction from earnings upfront which makes the base rate of tax 22.5% rather than 40%.

This post replaces an earlier one I put up about the MRRT in which I erroneously assumed that the opt-in about using the market value of assets applied in the way I proposed in my second post. The key statement here is:

“Miners may elect to use the book or market value as the starting base for project assets, with depreciation accelerated over 5 years when book value, excluding mining rights, is used; or effective life (up to 25 years) when market value at 1 May 2010, including mining rights, is used. All post 1 May 2010 capital expenditure will be added to the starting base.”

In the case where the mining company opts to use a market value approach I take it to mean the depreciation takes place before the MRRT is calculated. This means the formula is:

MRRT = 30% x (75% x Earnings – Price(2010)/25)

Currently the mining industry average for P/E (price to earnings ratio) is 14, though in the case of BHP-Billiton it is 19. For an average miner then Price(2010)/25 = Earnings x 14/25 = 56% Earnings so the actual MRRT is based on 19% of Earnings. However the Price is fixed at the May 1 2010 value so this will not increase over time even though earnings will. Should earnings continue to rise at the dramatic rate we have seen in the past decade then the MRRT will eventually look more like the 22.5% base rate.

It appears that the Govt and the mining industry’s compromise is to push the revenue from the tax windfall out from today to later years. In a sense the mining industry has also removed the contentious “retrospectivity” of the tax by using the current high price and choice of 25 years depreciation to ensure the current value of the MRRT is minimised but will rise at 22.5% of increased earnings going forward.

Thanks to an observant reader who pointed out my error. Mea culpa.

Surf

RSPT – A Fair Valuation Based on True Value of New and Existing Mines

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Following on from the interest generated by his last post, Mule Stable regular Zebra (James Glover) returns to the subject of the Resources Super Profits Tax in another guest post.

In a previous post I explained how the formula for the RSPT (Resource Super Profits Tax) was derived by considering the Government to be a 40% silent investor in any mining project. I showed that the correct deduction from the return on investments is indeed GBR (Government Bond Rate), as proposed, not a higher rate that includes a “price of risk”. One important thing I missed in this analysis, however, was whether the investment amount (I) was the correct basis for valuing the Government’s new 40% “investment”. I aim to show that the correct variable should actually be the Market Value of Assets (MVA) and as such the appropriate deduction from profits is several times (maybe as much as 4 times) higher for established mines.In the example given based on the mining industry “price to earnings ratio” of 14 the RSPT would only be 9% of earnings. I should emphasise this is not about having separate formulas for new and existing mines but correctly taking into account the fair, market based, price the Govt should pay for it’s 40% share of the earnings.

For new mines MVA = I (where all “=” signs should be taken to mean “approximately equal” to head off the pedants) so the proposed tax is correct in this case.

The Government says that in return for this tax take they are taking downside risk as well as upside benefit. One of the criticisms of the RSPT is that the Government is effectively nationalising 40% of ongoing mines and the GBR deduction is irrelevant as there is no serious downside risk. In the framework I propose the Government is not currently proposing to pay a fair price for this “nationalisation”. If the fair price of the Government’s stake is taken into account then the tax from existing mines is considerably lower than proposed. It may be as low as 9% of earnings. This does not require a backdown by either the miners or the Government, although the Government’s tax take might be less than forecast

If the Government is going to nationalise 40% of a mine – at a fair price – then it needs to effectively pay 40% of the Market Value of Assets (or MVA) for the mine. For new mines the Investment = Equity + Debt is pretty much set at this value. The Government RSPT tax is then:

Tax = 40% x (Earnings – GBR x MVA)

The first term is the Government’s 40% share of the earnings (here taken as Earnings before Tax). The second term is the deduction for the interest that recognizes that the funding of the Government’s share is undertaken by the mine at the Government Bond Rate or GBR. There is no good reason for the Government to pay less than the market value of this asset or MVA. For a new mine just starting up MVA = I, the investment amount, so

Tax = 40% x (Earnings – GBR x I)

If ROI = Return on Investment = Earnings/I then we can write this as:

Tax = 40% x (ROI – GBR) x I

which is the proposed RSPT formula.
For an ongoing mining operation with established operations and contracts, the market value will exceed the book value several times over. I am going to take the very simple assumption that MVA = Price ie the market value of the assets is the market value of the equity. This ignores leverage and is probably too simplistic. Price is based on share price and the number of outstanding shares. In terms of PE-ratio (the ratio of Price to Earnings as determined by the share price) we can write

Tax = 40% x Earnings x (1 – GBR x PE-ratio)

Compared to the original formula the deduction is 40% x GBR x PE-ratio x Earnings. Alternatively we can write this as 40% x GBR x I x MBR where MBR is the Market to Book ratio = MVA/I. So the original Govt funding deduction is just multiplied by MBR. The current formula assumes implicitly that MBR = 1. For existing businesses eg. banks MVA/BVA can be as high as 4 (which is BHPs current value). This gives a very simple deduction in terms of % of earnings, rather than Investment/I, of 40% x GBR x PE-ratio. Note that this is really the same formula for new and existing mines; it just makes proper allowance for the true value of established mines.

So what is the fair deduction for existing mines? It obviously varies with share price and hence market conditions. For mines which are privately held we need a proxy based on publicly traded stocks. The PE-ratio for traded mining stocks is currently about 14. So now, using GBR=5.5%, the fair deduction for the Govt’s nationalised share for existing mines is not 5.5% (as many erroneously claim) or 22% (allowing for a 25% ROI) but 31%! Note this deduction is off the 40% so the total RSPT tax on earnings would be 9%.

So under a scheme based on a fair deduction for existing mining assets the tax should be:

RSPT = 40% x Earnings x (1 – 5.5% x 14) = 9% x Earnings.

After 30% company tax this represent a total tax of 38%. Even if we don’t know what the PE-ratio would be for mines which aren’t publicly traded we can use an industry based proxy for the mines whose stocks are publicly traded. Currently this is in the range 13-14. If I was the miners I’d be pretty happy with that. Maybe they should have taken a closer look at the RSPT before opposing it. All the miners have to do is get the Govt to accept it should pay a fair value for its stake and the framework I propose makes that transparent.

No move expected by the Reserve Bank

Following one link too few…a mea culpa

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My last post, Are Australia’s banks about to collapse?, took Steve Keen to task for a presentation on the dire outlook for Australia’s property market and its banks. However, a commenter has pointed out that it was not Steve’s presentation! Moreover, the final slide of the presentation, which is in very poor taste, appears to have been added by Business Insider.

How did I get that wrong? By following one link too few. Here is a quote from the Business Insider article where I found the presentation:

according to this presentation from economist Steve Keen, courtesy of Mish’s Global Economic Analysis

Following the link to Mish’s Global Economic Analysis gets a bit closer to the truth (“on his blog” not “by him”):

Australian economist Steve Keen addresses that question and more in a presentation on his blog How to Profit From the Coming Aussie Property Crash (and Banking Crisis)

At that point I made the mistake of not following the final link to Steve’s blog and instead read the presentation. Slide 3 was a familiar one I had seen in various forms and by then the notion that Steve had written the presentation was firmly implanted. The style should have given me pause for thought as it is extraordinarily hyperbolic.

If I had followed the final link, as indeed I should have done, I would have found a post entitled “Excellent presentation on Scribd on Australian housing” the following on Steve’s blog:

This presentation was noted by a blog member today. Take particular note of slides 21-20 which compare the balance sheets of US and UK banks to that of one Australian bank, the Commonwealth.

How to Profit From the Coming Aussie Property Crash (and Banking Crisis)

So who did write the presentation? Who knows, but it was uploaded to Scribd by someone called Karenina Fay.

In any event, while Steve may think it is an excellent presentation and I clearly do not, he did not write it and hence this a mea culpa. I apologise for following others in incorrectly attributing this presentation to Steve and I have edited the original post. I will also be endeavouring to click that last link in future!

Are Australia’s banks about to collapse?

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UPDATE: In this post I repeated Business Insider’s mistake of attributing the presentation I criticise to Steve Keen. While Steve considers it an excellent presentation, he did not write it and I apologise for not confirming the source before publishing this post. I have now struck out the incorrect attributions. My criticisms of the presentation itself still hold, which is why I am leaving the post up in its edited form.

Steve Keen and his forecasts of a property market collapse have received plenty of local media coverage over the years. Now he has come to the attention of the international press as well.

In April, Keen hiked to the top of Mount Kosciuszko after losing a bet about the direction of property prices with Macquarie Bank strategist Rory Robertson. This event was enough to prompt an extensive review of Keen’s concerns in the New York Times. Curiously, Robertson himself did not receive a mention, despite winning the bet.

Now the US business site Business Insider, which has a penchant for drama, has published one of Keen’s presentations a presentation, incorrectly attributed to Keen, under the headline “Here’s What You Need To Know About The Major Property, Debt, And Banking Crisis Brewing In Australia”.

One of Keen’s central concerns is the size of private sector debt in Australia. This is a legitimate concern and should receive more focus than misguided fears about Australian government debt. However, I am far less pessimistic than Keen about the outlook for Australian property prices.

As for the Business Insider presentation, Keen takes his concerns it goes too far, to the point of unsupportable alarmism. The final slide of the presentation is evidence enough of this, not to mention being in extremely poor taste. This slide appears to have been added by Business Insider! If that is not enough to convince you, I will consider just one of the arguments offered by the anonymous author Keen.

On slide 22 of the presentation, he writes:¹

Look at CBA 2009 annual report—Leverage ratio is almost 20 times (total assets of $620.4 billion against $31.4 billion of equity). Of $620.4 billion of assets, $473.7 billion are loan assets. If around 6.6% of CBA’s loans go bad (any loans not just mortgages), 100% of its shareholder equity will be wiped out!!

(the bold italics are not mine, they appear in the presentation). Here the implication is something like “6.6% is not very much. Wow! CBA could easily collapse!”. But, that line of thinking does not stand up to even moderate reflection.

Crucially, we must understand what “going bad” means for a loan. It does not mean losing everything, which is in fact very rare for most types of bank loans.

Over half of CBA’s are home loans and these are secured by the property that has been mortgaged. According to their half-year presentation², based on current market valuations, the average loan-to-value ratio (LVR) for CBA’s portfolio is 42%. This means that, on average, the value of the property is more than twice the loan amount. This gives the bank an enormous buffer against falls in property prices. Of course, this average conceals a mix of high and very-low LVR loans. Even assuming that loan defaults occurred on a higher LVR section of the portfolio, say with an average LVR of 70%, and allowing for Keen’s oft-quoted figure of a 40% decline in house prices, CBA would still only lose 14% on their defaulting loans³. Even then, this does not take into account the fact that, like other lenders, CBA takes out mortgage insurance on loans with an LVR of more than 80%.

But we can be more conservative still. In their prudential standards, the banking regulator APRA considers a severely stressed loss rate on defaulting home loans to be 20%. To suffer actual losses of 6.6% in their mortgage portfolio, CBA would have to suffer a default rate of at least 33%! This would be astonishingly unprecedented. Currently, the number of CBA borrowers late on their mortgage payments by 90 days or more is running at around 1%. Most of these borrowers will end up getting their finances back in order, so for actual defaults to reach 33% is inconceivable. A default rate of a “mere” 2% would be extraordinary enough for CBA.

As for the rest of the $473.7 billion, it includes personal loans, credit card loans, business loans and corporate loans. The loss rates on some of these loans can be higher than for mortgage portfolios, but losing everything on every defaulting loan is still highly unlikely. So to suffer 6.6% in actual losses on these loans, defaults would have to run at a far higher rate. Furthermore, since the dire prognosis for the banks is rooted in the view that the property “bubble” is about to burst, presumably the argument would not simply be based on everything other than the home loan portfolio collapsing.

If property prices do fall sharply and our economy has another downturn, will bank earnings be affected? Of course. Are they teetering on the brink of collapse? Of course not.

¹ While there is a footnote on the slide referencing this post, what is not made clear is that the whole paragraph is a direct quote rather than Keen’s own words. Presumably he agrees with it though!

² Page 84.

³ If property prices fall to 60% of the original value, the loss on a 70% LVR loan would be (70% – 60%)/70% = 14.3%.

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

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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.