Dryblower on the investor exodus ahead of the tax attack

IT SEEMS odd to compare events on the stock market with a football match but last week Dryblower did just that, watching the market mob head for the exits in the same way some spectators do when they know their team is headed for a thrashing.
Dryblower on the investor exodus ahead of the tax attack Dryblower on the investor exodus ahead of the tax attack Dryblower on the investor exodus ahead of the tax attack Dryblower on the investor exodus ahead of the tax attack Dryblower on the investor exodus ahead of the tax attack


Tim Treadgold

It wasn’t a stampede but there was a definite trend as some investors decided the pre-budget week was a good time to cut their exposure to Australian mining companies.

Who can blame them, especially the international investors, who are being fed a diet of appalling news about an appalling government which appears to have decided that mining can be taxed to death because it lacks political clout in the more populous parts of Australia.

“No votes for mining in the outer suburbs of Sydney and Melbourne” could be the chant in Canberra as the federal government layers its super tax on iron ore and coal, a carbon tax on everything, and forces up the cost of mining by removing a variety of tax deductions.

Fear about what’s to come in Tuesday’s budget can be directly linked to a sharp sell-off in a number of solid, well-run, miners such as Silver Lake Resources which shed A35c (11%) – perhaps due to lower gold output in the March quarter but also because it is undertaking a series of expansion projects and could lose the benefit of being able to immediately write-off the cost of overburden removal – one of the likely budget nasties for mining.

The same sell-down by jaded investors can be seen in another gold miner, Northern Star Resources, which dropped by a surprise 15c (17%) in a week when the Australian gold price rose by $6 an ounce thanks to the sliding value of the Australian dollar offsetting a modest fall in the US dollar gold price.

Ramelius Resources was a third miner hammered by investors ducking for cover, plunging by 23c (30%), though its sharp fall can also be explained by a decision to close the Wattle Dam mine earlier than expected.

What Dryblower saw last week was a pattern created by big investors deciding that they want to cut their exposure to Australian mining, at least until sanity returns at a political level.

If anyone doubts that assessment, cross-reference the small-stock sell-offs with the signals being emitted by two of the big boys, BHP Billiton and Rio Tinto. They too are telling the Australian government “raise the tax bar too high and we’re off to greener pastures”

Sadly, the message from the miners, large and small, will not be heard in Canberra where the government is in a death spiral entirely of its own making after squandering the best years of the boom on hare-brained social welfare schemes and investing precious little in building infrastructure for the future or encouraging investment by the private sector.

Having wasted time and money, the next step is a desperate grab for revenue from the one industry which remains profitable, mining.

Clever politics it might seem to a hopeless government, but what Canberra is about to discover is that its tax attack on an industry which lacks voter support in the near-bankrupt manufacturing corner of Australia is contributing to a slowdown in the industry it sees as its “get out of jail” card.

The problem is that the federal government has used up all of its political and financial capital. It is effectively bankrupt after wasting billions of dollars on pointless attempts to win voter support, and now it is dipping into the reserves of the only industry sustaining the economy.

But, it is doing that just as the rest of the world starts to take a pessimistic look at Australia, questioning its reliance on a Chinese economy which is showing obvious signs of growing too fast, too quickly, and on a government determined to kill the country’s golden mining-goose.

Anzac Day, arguably the most important on the Australian calendar, was a day when Australia suffered a telling blow to its international reputation with a damning assessment of the country by one of the world’s better financial analysts.

Dylan Grice, global strategist at Societe Generale, told clients that Australia was a bubble waiting to burst.

“When you scratch the surface of the Australian miracle you don’t just find an unmiraculous commodity super-cycle, you also find an equally unmiraculous credit super-cycle,” Grice wrote. “A credit bubble built on a commodity market built on an even bigger Chinese credit bubble. Australia looks like leveraged leverage.”

To which Blower adds: ouch!

It’s the combination of Canberra’s inept government and powerful critiques like that from Grice which have sent a shudder through the wallets of overseas investors – and Tuesday’s budget will not improve that view.

This stiry first appeared on ILN's sister publication MiningNews.net.