Hogsback on the time for money to speak now words have failed

WORDS have failed. Now it’s a money game. That’s the verdict of Hogsback after the passing of laws which will give the Australian coal mining industry the double whammy it dreaded — a carbon tax and a mining tax.

Tim Treadgold

The first sign that money will be the next battleground after the failure to convince the Australian Government the new taxes are bad for the country, as well as the mining industry, can be seen in the plunging value of the Australian dollar.

While global factors are at work, such as the slow financial meltdown of Europe, there is also no doubt that money is being withdrawn from Australia because it has become a less attractive investment destination.

From well above parity with its US cousin, the Australian dollar has retreated to around US97c. Given the dollar was valued at around $US1.06 at the end of October, the speed and size of the fall can be judged, and any asset that drops by around 8.5% in 25 days is obviously an asset under pressure.

International investors withdrawing money from Australia can also be measured in sharp share price falls, but they’re largely a reflection of Europe’s woes and concern that China is being harmed in the slowdown.

A more reliable indicator is the currency itself because it is a financial market’s reflection of the entire country – and that means Australia has slipped a notch or two as a favoured place in which to invest.

After the dollar comes the investment decisions of major mine developers. This is the acid test on the words of warning issued by everyone in the mining game, warnings that had a common theme, along the lines of: “You double tax me and I’ll invest elsewhere”

What’s happened in Canberra is the pro-tax lobby, consisting of Labor, Green and independent politicians, has said to the mining industry, “We don’t believe you”

In passing the new tax laws, the government has effectively dared the mining industry, especially coal miners, to deliver on the threats of reduced investment in Australia and the export of dollars to other countries.

We have reached a “put up or shut up” moment in the tax debate and in the history of Australian mining which, for the first time, has been made to feel unwelcome in a country in which it played a major role developing.

All that’s required now the dollar has set a lead with its 8.5% plunge is for one of the big companies to vote with its cheque book and demonstrate it has choices when it comes to investing.

Words have failed. Now it’s a money game.

BHP Billiton, for example, has more options than most when it comes to investing in coal and other commodities, and it could be the first serious test of Australian in its new, high-taxing mode versus somewhere else.

As a best guess, The Hog reckons the test will come when the BHP Billiton board has to make a choice between its Illawarra Coal Expansion project and its IndoMet Coal project.

Both have the potential to supply metallurgical coal to the global market and both appear as items on the company’s “future options” list.

The question for the board is which project will deliver the best long term return to the owners (shareholders) of BHP Billiton – a mine in high-taxing but minimal sovereign risk Australia, or a mine in low-taxing, high sovereign-risk Indonesia?

It is, of course, never that simple. But it is an example of the sort of decisions the managers of mining companies must now make. Having exhausted their armoury of words, it’s time to speak with dollars.

Xstrata is another case study, and one where a great opportunity was missed during the past few days.

Oh, how The Hog would have loved to have been at the official opening of the company’s $1 billion Mangoola mine in New South Wales and to have asked Xstrata boss, Mick Davis, this question: “Would you have made this investment if you had known the carbon and mining taxes would become law in the form we now have them?”

The moment to pop that question to Mick has passed. The investment is sunk. Xstrata now has to do its best with the tax regime as it stands.

But, it’s a fair bet that if the hard-nosed board of Xstrata had been presented with all the facts relating to Australia’s new taxes, and the additional layers of government approval and monitoring to which mining will be subjected, then Mangoola would still be on the drawing board.

No one will ever know whether that observation is correct or not.

The money test of what miners will do now they know the rules will be next year’s headlines as they judge Australia against other opportunities.