Xstrata Suspends Australian Investment

by Mary Swire, Tax-News.com, Hong Kong

04 June 2010

Xstrata plc, the global mining group, has suspended, with immediate effect, AUD586m (USD495m) in development expenditure in Australia, and is reviewing growth projects totaling AUD22bn, as a result of the proposed Australian mining tax.

The suspended expenditure was earmarked to develop the Wandoan thermal coal project and to extend the life of the Ernest Henry copper mine. Together, the company said, these two projects in Queensland would have created 3,250 new jobs which are now at risk.

The decisions represent the initial findings from Xstrata’s ongoing review of planned investment into its Australian operations and growth projects as a result of the Australian government’s proposed resource super profits tax (RSPT). The review includes growth projects comprising total investment of AUD22bn and the potential to create 14,725 new jobs.

Mick Davis, Xstrata’s Chief Executive commented:

“The RSPT has created significant uncertainty for the future of mining investment into Australia and would impair the value of previously approved projects and exploration to the point that continued investment can no longer be justified.”

“Our Australian management teams’ analysis demonstrates that the RSPT would significantly impact the value and cashflows of both of these projects,” he continued. “The impact of the tax eliminates the net present value of the Wandoan coal project almost entirely and substantially reduces the value of the Ernest Henry underground shaft project. The two projects involve significant risks and total capital investment of over AUD6.4bn. Neither will be viable if the RSPT is imposed.”

“In addition, the government’s decision to change the rules for existing investments has introduced the significant risk that any new investment in Australia may again be subject to tax regime changes without consultation. Any potential Australian mining investment now needs to show a higher rate of return to compensate for the impact of the world’s highest mining taxation on cashflows. Investors will also expect higher project returns to justify the increased risk of investing in Australia.”

He concluded that: “The suspension of investment into these key projects for the future of our business in Queensland makes them less likely to proceed, and ultimately compromises Australia’s ability to continue to benefit from future commodity price rises.”

He confirmed, however, that Xstrata will continue to seek meaningful consultation with the federal government to engage on the industry’s key concerns in respect of the RSPT. "In the meantime, we have an obligation to make business decisions in response to changing circumstances and we continue to develop business opportunities and develop growth projects in countries which promote competitive and predictable fiscal regimes,” he said.

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