Australia’s ‘super’ mining tax

Example 2: $810m

Example 3: $531m

Note under Australia’s existing taxation system and an example of Canada’s highest taxed Nova Scotia province, the valuation results are very similar give or take less than 5 per cent. Under the third scenario of Australia’s proposed taxation system we see the valuation is substantially less. Under Example 3, the company is worth close to 31 per cent less than under Australia’s existing taxation system (Example 1). This is a substantial difference. Make no mistake, if this proposed tax is passed in its present form, there will be serious implications for the valuation of mining companies with primarily Australian based projects. Something we have already seen reflected in the markets on just the announcement of the tax a few weeks ago.

As an investor who wants to maximise my profit making ability from investing in gold mining companies, it is times like these I am relieved to have an international trading account set up in Canada. This gives me the flexibility to focus my attention overseas in the event the tax is passed. Even the threat of Labor’s super tax muddies the waters for companies with development stage projects as well as producing projects. “No impact on investment in Australian mining assets” our treasurer Wayne Swan predicts. I think you would agree looking at the above demonstration that this is the typical unsubstantiated rubbish our politicians feed us on a regular basis.

The investment market is no different from any other market. There are competitors (a concept government doesn’t understand). Although Australia is blessed with natural resources, it is not the only country with commodities on offer. Unlike the public sector, mining companies live in the real world and have a mandate to maximise shareholder wealth when choosing projects to pursue and develop. Their cost of capital is also at real world rates, substantially higher than the risk free rate of return on long term bonds!

Like the mining companies we invest in, our goal as investors is to maximise the rate of return on our investments. If you, like many Australians, are limiting yourself to investing in just Australian precious metals companies, I urge you to start considering alternative options. While there are still many great companies listed in Australia with international projects which won’t be affected by the new tax, you are limiting your opportunities by not considering the North American exchanges. North America offers a much wider selection of established gold and silver mining companies to invest in. Canada, unlike Australia, are reducing their corporate tax rate for mining companies with the combined rate expected to average just 25 per cent by 2012.

Canada’s finance minister Jim Flaherty was recently quoted as saying: “The easiest thing for a politician to do is raise taxes, which immediately increases revenues, but limits growth.” The fundamental difference between the two governments is that Canada’s government understands the big picture.

Jim Flaherty goes on to say that the continued decline in corporate taxes in Canada was a “great attraction for investment” and that Australia’s proposed new tax on its resources industry could be a huge competitive advantage for Canada. I hope this article has effectively demonstrated that the proposed mining tax on super profits is material enough to significantly influence the investment decisions companies and investors will make going forward.