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How to disembowel an economy

By Alex Cowie - posted Monday, 24 May 2010

Last week the Melbourne Mining Club held its bi-monthly “Cutting Edge Event”. This showcases small-cap and mid-cap mining companies, and it's generally the good ones that get the chance to present. It's well attended, well run, and there's no danger of missing your dinner either, as a bell lets the speaker know when their brief time slot is running out. To keep it rolling along, there's only time a few questions after each speaker.

But the night's slick operation could have been streamlined even further by posing all the presenters with the one question that investors wanted answered:

How will the proposed Resource Super Profit Tax (RSPT) affect operations?


I couldn't have framed the question better than one particular audience member who asked:

"Great presentation! But what about the rape and pillage tax?"

This “rape and pillage tax”, if the resource industry is correct, is the proposed disembowelling of the resource sector for the good of the country. The 40 per cent “super-tax” to be levied sounds bad enough. But this 40 per cent figure sugar-coats the truth that the effective tax rate that the industry would be burdened with will be closer to 57 per cent.

This was summed up perfectly by US commentator Dennis Gartman who described it as being more typical of a South American autocrat such as Hugo Chavez. He said "Never did we expect such nonsense from Australia. Shame on Rudd, he really should know better".

Now don't get me wrong. I'm not Labor-bashing, I'm policy bashing.

Bad policies are bad policies, regardless of who cobbles them together. I have a federal politician for a neighbour and that's closer than I prefer to get to politics. For the record I don't reckon the opposition party is any more appealing. And quite frankly, choosing my favourite political party right now is a bit like choosing my favourite dental procedure.


At the investment level, the company with the most telling observation about the tax was Rex Minerals (ASX:RXM). It's response to the question of what the tax could mean was that it's just too early to run the numbers. Fair enough. The project is in its early stages, and the tax is still far from clear.

That is the main problem with the tax and its current status: it has introduced an enormous cloud of uncertainty and doubt over hundreds of billions of dollars in Australian resource projects both large and small.

Still, life goes on in the mining world. The discussion of the shares below should not be interpreted as a recommendation to buy or sell them. I'm just reporting to you what the companies said. I'm reserving my investment judgment on resource stocks for the pages of my newsletter Diggers and Drillers.

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First published in The Money Morning on May 20, 2010.

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About the Author

Dr Alex Cowie is the editor of Diggers & Drillers.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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