-- Fortescue lodges High Court challenge to government mining tax
-- Tax is unconstitutional, claims Fortescue
-- Western Australia considers joining legal challenge
(Recasts first paragraph, adds government comment from sixth paragraph, legal opinion from 13th, Western Australia premier's remarks from 16th.)
By Robb M. Stewart
MELBOURNE--Australia's third-largest iron-ore producer has lodged a High Court challenge to an impending tax on the profits of mining companies, forcing the government once again to defend legislation critical to it restoring a budget surplus.
Fortescue Metals Group Ltd. (FMG.AU) said Friday it had lodged a challenge on constitutional grounds in Australia's High Court against the Mineral Resource Rent Tax, or MRRT, which from July 1 will impose a 30% levy on profits from the production of iron ore and coal.
The resource tax has been watered down once already after the mining industry mounted a campaign that rocked the government and toppled Prime Minister Julia Gillard's predecessor, Kevin Rudd. The levy is expected to generate 6.5 billion Australian dollars (US$6.53 billion) in revenue within two years, helping the minority government swing the budget to a surplus in time for a general election late next year.
The Labor party-led government, which is badly lagging in opinion polls, has also pledged to pass on proceeds from the tax to consumers and small companies. The current tax was negotiated between the government and two of Fortescue's rivals, BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RIO), which aren't challenging the legislation.
"We believe we have a good case for challenging the MRRT on constitutional grounds, and we look forward to the resolution of these important issues by the High Court," Fortescue Chief Executive Neville Power said in statement filed to the stock exchange.
The federal government is determined to deliver the mining tax and tax relief to millions of small businesses, a spokesman for Treasurer Wayne Swan said. Mr. Swan himself has clashed with Fortescue founder and Chairman Andrew Forrest, a vocal critic of the tax, and recently accused him and other billionaire mining magnates of seeking to impede needed economic reforms.
"Mr. Forrest has made it clear he is staunchly opposed to the government delivering the MRRT," the treasury spokesman said.
Fortescue's Mr. Power said the Perth-based company was challenging the tax on the basis that it discriminates between Australian states and curtails their sovereignty. Contrary to the constitution, the MRRT also restricts a state's ability to encourage mining, he said, justifying a move that highlights the fragile relationship between the federal government and an industry currently driving the island-nation's economy.
Australia is the world's largest exporter of iron ore and steelmaking coal, and its resources sector as a whole accounts for roughly 60% of the nation's exports.
Mining companies have generally avoided forecasting the earnings impact of the mining tax. Fortescue's director of strategy, Julian Tapp, said it is likely to be negligible for most companies in the first few years, and that the company isn't seeking an injunction against paying the new tax.
"This is about tackling a law we fundamentally believe is unconstitutional," Mr. Tapp said.
While the government says it's confident the mining tax legislation is constitutional, the resources-rich state of Western Australia has said it may join Fortescue's challenge.
Legal opinion on its chances of success, however, is divided.
"It is clear that the challenger [Fortescue] does have a solid argument," said George Williams, one of the country's leading constitutional lawyers and a professor at the University of New South Wales. "My view remains that the legislation is likely to survive challenge, and that this will be a difficult case to win."
A partner at an Australian corporate law firm, who declined to be named, said the challenge is a "bit of a long shot," and it will be hard to argue that the federal government is unfairly targeting states such as Western Australia. "But often applying pressure in different ways can get results," he added.
Colin Barnett, premier of iron ore-rich Western Australia, said the state may join the challenge in order to protect its ownership of the state's natural resources.
"We believe there are constitutional grounds for a challenge," he said.
The opposition Liberal National Coalition, which has campaigned against the tax, on Friday reaffirmed plans to repeal it if elected next year.
Prime Minister Gillard's government introduced the MRRT last year following negotiations with three of the biggest mining firms in the country--BHP, Rio Tinto and Xstrata PLC (XTA.LN). The new tax represented a sharp retreat from the earlier one proposed in 2010 by the Rudd government, where a 40% levy was planned on a wide range of mineral resources.
The Gillard administration is targeting a budget surplus of A$1.5 billion next fiscal year--reversing a deficit in the year through June of A$44.4 billion. It plans to raise the money through a combination of the mining tax, spending cuts, and a levy on carbon emissions that it expects to generate A$7.4 billion.
Write to Robb M. Stewart at robb.stewart@wsj.com
