Downgrades Unlikely But Australian Mine Tax 'Negative' - Moody's

The Australian government's proposed resource super profits tax would be "broadly credit negative" but unlikely to lead to credit downgrades for local resource companies, Moody's said Friday.

The effect of the proposed 40% tax would be "neutral, or would only exert a low-to-medium negative impact," Moody's said, adding that "such effects would be containable within existing ranges." But it would "introduce heightened uncertainty" for some companies over the short-to-medium term.

The Australian mining industry argues that the tax would damage investment and eat away at cash flows for local miners, which would potentially be negative for credit ratings.

Tony Sage, the executive chairman of Cape Lambert Resources Ltd. (CFE.AU), said Tuesday he was putting on hold the development of an iron ore project in Western Australia's Pilbara region as a result of the tax plans.

Clive Palmer, the chairman of iron ore company Mineralogy Pty. Ltd., told Australian Broadcasting Corp. television Thursday that he would postpone two projects expected to bring in 3,000 jobs and A$2 billion worth of exports.

However, Prime Minister Kevin Rudd has accused the industry of "crying wolf" over the changes, and pointed to Sage's purchase of 1 million shares in Cape Lambert on Wednesday, at a time when the company's shares had fallen as much as 24%.

Moody's argued that, with the final shape of the tax still to be decided, it was "too early to assess the precise financial impact" but said it could have a "material bearing on future investment decisions and lead to a re-evaluation of relative returns."

It said the credit impact would largely depend on the type of firm. Large, diversified companies such as BHP Billiton Ltd. (BHP.AU), Rio Tinto Ltd. (RIO.AU) and Xstrata PLC (XTA.LN) and upstream oil and gas companies such as Woodside Petroleum Ltd. (WPL.AU) and Santos Ltd. (STO.AU) would see little impact.

But less diversified firms such as Fortescue Metals Group Ltd. (FMG.AU) would suffer a "more pronounced" impact, although Moody's said Alcoa of Australia, which fits the category, "has headroom within the rating" to absorb any negative effects.

Coal-seam gas projects approaching their final investment decisions, such as those by Origin Energy Ltd. (ORG.AU) and Santos, may also suffer uncertainty while the implications of the tax are worked out.

However, junior mining companies, which currently pay royalties on the basis of their revenues, may actually benefit as the tax is only paid on profits after the deduction of costs, Moody's said.

It could also allow some projects to keep producing for longer, since under the revenue-tax system many projects become unprofitable earlier than they would under a profits-tax system.

The tax isn't due to be introduced until 2012, which Moody's argued would also give companies time to adjust their strategies.

 
   -By David Fickling, Dow Jones Newswires; [phone]; [e-mail] (Bill Lindsay in Sydney contributed to this article)