Australian taxes, Canadian dollars and global resource stocks
Australia’s “super tax” has big resource stocks up in arms, says this advisory, which reviews its impact and hopes it won’t come to Canada.
Once April 30 has come and gone, a lot of people don’t want to hear anything about taxes for a long time.
But taxes are always with us.
This is the story of a new “super tax.” It begins Down Under, but the ripples are already being felt on many other shores.
“Australia has just proposed a massive tax reform that will have a huge, negative impact on foreign investment in its booming mining sector ... a 40% tax on mining profits!”
The quote is from Ian McAvity’s Deliberations on World Markets, an advisory published in Toronto for a largely American audience.
Mr. McAvity applies his technical analysis to international equity, commodity and currency markets. He is obviously not impressed with Australia’s new policy.
And he ponders the question, will Canada be tempted to follow the Aussies down that path?
Riled up
Ahead of an election likely to take place in October, the Labour government of Mr. Kevin Rudd announced its new policy on May 2.
Australia will impose a new 40 per cent tax on resource projects starting in July 2012. In turn, the government says it will use the revenue from the tax to create an infrastructure fund, cut general company tax from 30 per cent to 28 per cent by July 2014, and put more money into worker pension funds.
To say the mining industry is riled up would be understating the case.
The first to be heard from were the giants of the industry, led by Australia’s own BHP Billiton (NYSE-BHP), the world’s largest mining firm, and British-Australian multinational Rio Tinto Group (NYSE-RTP).
Joining them is Swiss giant Xstrata (LSE-XTA) (the owner of Falconbrige, you may recall). The world’s largest exporter of thermal coal, Xstrata announced it was putting all of its Australian projects under review.
The share prices of these firms have duly been pulled down. BHP, which was as high as $83.20 just over a month ago, is now $68.06 and yielding 2.4 per cent on its $1.68 dividend.
Rio Tinto, $62.24 a month ago, is now at $47.93 and yielding 1.8 per cent on its $0.90 dividend. Xstrata has taken a similar slide on the London exchange, trading today at 1,024 pounds.
The biggest gold miners
Mr. McAvity points out that the tax also affects the world’s two biggest gold miners, Canada’s Barrick Gold (TSX-ABX) and America’s Newmont Mining (NYSE-NEM). Both have extensive interests in Australia.
And while their shares prices took a tumble, they have quickly recovered. Barrick is up by more than $2.00 today, to $46.99, and it is yielding 0.9 per cent on its $0.41 dividend.
Newmont is up even more, more than $2.60, which puts it at $58.11, a new 52-week high. It yields 0.7 per cent on the 40-cent dividend. The price of gold has also been rising today.
Those are the immediate effects. What more can we look for?
Absurd to the extreme
This Australian tax puts Mr. McAvity in mind of the NDP government of Mr. Dave Barrett in British Columbia. In the 1970s, it put a 100 per cent tax on excess profits from copper mining and for ten years “complained that no one was exploring for new deposits in the province!”
Look for the same in Australia, he says. “Having previously blocked major Chinese investments in Aussie mining, this tax proposal will very likely drive foreign investment flows away from Australia, toward South America and Africa.”
At the same time, Australian Treasurer Mr. Wayne Swan has argued that a super commodity boom is on the way and could push a strong Australian dollar even higher. This would hurt other sectors of the economy (much as a higher loonie affects Canadian exporters).
So the new tax would help keep the dollar restrained. This reasoning, says Mr. McAvity “is absurd to the extreme.”
He sends a sarcastic message to the Treasurer. “Relax, Mr. Minister, those inflows will dry up pretty quickly and your tourist business will have a lower Australian dollar to work with, and the option to hire a lot of people who might otherwise have been employed by new mining projects.”
But the big question many of his subscribers ask him is: “What about Canada?” Will the same fate befall Canada’s mining firms?
A spike in the loonie
“I doubt that a comparable move is such a risk,” this analyst says, “but given what the Finance Minister did to the energy trust investors a few years ago, it would be unwise to assume that logic might be a consideration in such a call.”
It is true that a Canadian dollar shooting up to US$1.10 or $1.25 or even higher would make many people nervous.
But Mr. McAvity just doesn’t see the government taking the same path as the Aussies “given the aggressive effort to build relationships with the 800-pound gorilla across the Pacific, and reduce dependence on the sick one we’re attached to.”
Still, if money fleeing one commodity-backed dollar — Australia’s — goes looking for its equivalent — our dollar — it could cause a spike in the loonie.
The analyst concludes his look at Canada by noting that he is nervous about the sideways action of the TSX Composite vs. the S&P 500 Index. He adds that while the TSX has been strong, only Metals and Mining are at new highs.
The world will not stop needing resources just because somebody slapped a tax on them. The question now is which countries, which stocks — and which investors — will profit as this story unfolds.
|
E-mail this article
Printer-Friendly
