One conclusion is that Marius Kloppers is underpaid and that shareholders owe him a big thank you. The MRRT for BHP Billiton and other large international groups is a strategic master stroke.
The implementation of the MRRT in its current form will make coal and iron ore, Australia’s largest exports, the preserve of the larger incumbents, because in separating mine from infrastructure, the tax effectively makes those that have infrastructure the key decision-makers. Why?
Several reasons immediately come to mind. The first is that the tax is about the profits of a project or group of related projects; it is about the minesite. All accelerated allowances proposed by the MRRT relate to activity at, and before, the tax point which is proposed as the mine gate.
The allowances work to give miners earlier losses but over the life of the mine, the impact will be to get projects to a taxable profit earlier.
This may have the result of putting the project into profit, and subject to tax, before the rest of the company or, putting it another way, that the profit of the company will always lag the profits of the project.
These circumstances will not be attractive to banks. Banks like their money out first.
Project financing will be tougher and more complicated. With a less enthusiastic finance sector, junior stocks will become less valuable to investors.
The second reason is that the tax heavily favours those with infrastructure in place.
With the MRRT, infrastructure will be harder to fund, partly because the tax creates uncertainty and no financier likes that, but more because the tax creates an uneven playing field that no financier likes to play on.
Financiers will want to de-risk and, more than ever, will push new projects towards cutting deals with existing infrastructure providers. As many of those providers are competitors, it is not an easy place for a newcomer to be.
The alternative for these new projects will be funding from offtakers, all foreign, and that is a tougher call for equity holders. Companies like BHP Billiton, of course, have none of these issues.
The third reason is that the tax looks to arbitrarily allocate costs and specifically is looking to exclude costs like transport, hedging, marketing and administration.
These are significant and necessary costs in a junior company. They aren’t for a large, established and profitable incumbent. That means the tax, again, creates an uneven playing field. This will make the transition from a junior to a mid-tier company that more difficult.
All these reasons, and Spotlight has more, give existing players an advantage.
More than ever they will be able to determine the viability of projects from juniors and the tax effectively puts a free option on these projects in the absence of direct investment by offtakers.
The genius of Marius Kloppers and his team at BHP Billiton is that they have used a government-sponsored initiative, in this case a tax, to lock up emerging iron ore and coal projects in Australia.
At least to the extent they want to. Further because companies like BHP Billiton own the value chain they will be in the best position to attribute value to each part of it.
That means they can better determine the profits at mine gate, and better argue it. They know the value chain and from the Issues Paper we know the government is still trying to learn it.
BHP Billiton used the tax to better position itself strategically in Australia. In the longer term it knows that has huge value.
Marius Kloppers helped create that value for shareholders. It was a clever piece of work for BHP Billiton, Rio Tinto and the other large players.
It wasn’t and isn’t for the mining sector in Australia, but for that perhaps selfish reason, Spotlight feels that Marius Kloppers is underpaid and his shareholders should be grateful.
This story was produced by Intierra for its Spotlight column in sister publication MiningNews.net.