Goldman weighs in on MRRT melee

CRITICISM of the federal government’s accounting in its compromise deal with the big three miners is growing. A Goldman Sachs JBWere report released this week argues the Gillard government has given up far more tax take than it disclosed.
Goldman weighs in on MRRT melee Goldman weighs in on MRRT melee Goldman weighs in on MRRT melee Goldman weighs in on MRRT melee Goldman weighs in on MRRT melee


Nick Evans

Under the government’s compromise announced last week the headline tax rate dropped to an effective 22.5% and increasing the profit level the tax cuts in to the long-term bond rate plus 7% – effectively about 12% at current values.

At the time the government said those changes, with others, would only drop total tax take from the revised minerals resource rent tax by $1.5 billion over the forward estimates period.

Those figures quickly came under fire, and Treasury Secretary Ken Henry admitted this week those tax figures were based on revised estimates of the values of mineral exports. Treasury has not yet released those revised assumptions, though they are due to be presented to the senate by the end of the week.

Goldman joined the chorus of criticism of the $1.5 billion estimate with an analyst report arguing tax receipts will fall by more than double the government’s estimate – it predicts $3.1-$3.2 billion.

Based on the investment bank’s projections of the likely earnings of Australian listed mining companies, Goldman analyst Hamish Tadgell argued the government had seriously underestimated the impact on the potential tax take from its revised mining deal, particularly in the long-term.

That revised deal has won limited supported from parts of the mining industry, though there is still some way to go before all the details are thrashed out. If Tadgell is correct that gap will put pressure on the government’s bottom line over the forward estimates period.

The government plans to use the MRRT proceeds to pay for a reduction in the company tax rate and $5.6 billion worth of mining and business related infrastructure, among other things. The company tax break already has been reduced as part of the deal – 29% instead of the 28% originally planned. Other parts of the package may come under pressure if MRRT revenues do not meet expectations.

That impact is only likely to grow over time. Tadgell found the MRRT would raise $20.9 billion in revenue this decade, where the Resources Super-Profits Tax would have raised more than $56 billion over the same period – a potential gap of about $35 billion.

Tadgell was careful to note, however, that his analysis is on a “like-for-like basis assuming no change in earnings under the MRRT versus RSPT regimes”

Treasury is due to report to the senate on the basis for its estimations this week, with the most likely explanation for the gap being an expected strengthening of commodity prices over the next four years.

In the June issue of Australian commodities, the Australian Bureau of Agricultural and Resource Economics reported the value of exports for metals and other minerals were tipped to increase over the coming year, to $A98.5 billion. The forecaster tipped steel production to continue to grow next year, underpinning the iron ore and coal industry in Australia.

But while Treasury may be relying on strong forecasts for iron and coal in the longer term to back its MRRT maths, Tadgell warned in his report that this may not be a great bet.

“It is unclear what the government has assumed but Mr Henry’s comments suggest that there have been some material changes in commodity and sales assumptions from when the government announced the RSPT,” he said.

“Our analysis implies that these amount to [about] $1.6bn in total, or around 2.5% of our 2009-10 forecast export iron ore and coal sales.”

Tadgell said that when Treasury announced the RSPT it indicated that the revenue estimates were based on commodity prices remaining around spot levels.

“Since then spot thermal coal (FOB Newcastle) and hard coking coal prices have fallen 2%-3% and iron ore spot price (FOB netback Aust-China) has declined 26%, or 16% taking the average price since the RSPT was announced,” he said.

In currency adjusted terms, taking into account the recent 8% fall in the Australian dollar, coal prices are up 5-6% while iron ore is down an average 12%.

“If the government has revised its MRRT estimates for spot prices it would also seem to imply it is assuming higher volume growth in reaching its estimates,” Tadgell said.

The report pointed out the government’s revenue estimates would be very sensitive to ore and coal prices, particularly in the long-term.

“Our estimates assume a return to our long-term commodity prices in 2014-15 of US$65 per tonne for iron ore (fines free on board), US$160/t (FOB Queensland) for coking coal and US$80/t (FOB Newcastle) for thermal coal,” Tadgell said.

“Further, we have assumed the percentage split in earnings between stocks under GSJBW coverage and the broader Australian mining sector remains relatively stable, and the government company tax and exploration rebate savings grow by an average of 6.5% nominal GDP per annum.

“The senate has requested further details of the Treasury's underlying assumptions that support the government's fiscal projections under the new resource tax regime by Friday of this week. It will be interesting to see whether these will be made publicly available and shed further light on the subject.”