2nd UPDATE: Australia Government Hails Progress In Mining Tax Talks, May Make Concessions For Specific Sectors

Australian Resources Minister Martin Ferguson signalled Wednesday the government will consider varying the way its planned new mining tax is applied to some sectors of the resources industry and said progress is now being made in talks with the industry on the proposal.

The planned resource super profits tax has been met with furious opposition from the mining sector, and the mining industry said talks with the government are still nowhere near delivering an acceptable compromise.

Rio Tinto also highlighted the gulf between the parties in a letter to shareholders Wednesday, lambasting the government for its lack of consultation and for a policy it said was damaging and divorced from commercial reality.

But Ferguson said productive talks with the industry are now underway and that the government is studying the concerns of specific types of businesses affected by the tax, which is levied at 40% on profits above a rate of return of 6%.

Ferguson ruled out altering the 40% rate for different businesses and said there will be no "special deals", but he indicated the government will consider altering the point in the production process at which the tax will be applied.

He said he has heard arguments from the petroleum sector, producers of low value resources such as sand and gravel, and the minerals sector, and they are each arguing that there is no one-size-fits-all model.

"I am conscious of the fact that in transitional arrangements there are different arrangements in petroleum as against for example some minerals products," he said.

"What are the taxing points for example? What is the potential solution to OneSteel (OST.AU)? We'll make sure...we take on board the special nature of their operations."

"The issue of taxing point is central to our considerations," he said.

OneSteel has raised concerns about the viability of its steelworks at Whyalla in South Australia state under the new tax, which the company says would apply equally to the hematite iron ore it sells and the low-grade magnetite iron ore it mines in the same town for use in the production process.

OneSteel said in May the tax would have a "major and immediate" effect on the competitiveness of its mining and steelmaking operations, and it argued the tax shouldn't apply to resources consumed internally.

The heated stand-off over the tax has seen the government and the mining industry trading insults and arguing over the tax rates currently paid by miners and the potential impact of the new tax on investment in the industry.

In his letter to shareholders, Rio Tinto Chairman Jan du Plessis said the company supported tax reform that would enhance the competitiveness of the Australian economy, but that the proposed resource super profits tax wouldn't achieve this.

"The government's proposal will penalize efficiency, discourage competitiveness, curtail investment and limit jobs growth," he said.

"It has been developed in a vacuum and is divorced from the day-to-day realities of business."

Du Plessis said the company was particularly concerned at the application of the new tax to existing projects, which he said would undermine the stable tax and regulatory environment needed for commitment to mining projects that could take decades to pay back the investment.

"The government's current proposals, arrived at without consultation, have now significantly destabilized that investment framework," he said.

"As a result, there has been a considerable increase in the perceived risk of investing in Australia, threatening to make Australia a much less attractive place in which to invest."

Morgan Stanley Says Olympic Dam At Risk

BHP Billiton Ltd. (BHP.AU) Chief Executive Marius Kloppers has said that the giant expansion of the Olympic Dam copper and uranium mine in South Australia is an example of a project that would be impacted by the tax, and Morgan Stanley analysts said Wednesday they didn't believe the project would go ahead if the tax was enacted in its current form.

"Our modelling of this project shows that the RSPT reduces the (net present value) of the project to an extent that it becomes negative, (with) return on invested capital below minimum hurdle rate of 15% used by the mining industry," Morgan Stanley analysts said in a client note.

"Under the RSPT as proposed, the project has no economic value in our view."

Morgan Stanley said base metal and thermal coal projects would struggle to make a return under the tax and that major changes were needed to the proposal, including cutting the rate of the tax to 20% and raising the threshold at which it kicked in to as high as 15%.

While ruling out any change in the rate, Ferguson said the government is getting closer to a solution to the stand off after having discussions with a range of employers across the resources and energy sector.

"Their willingness now to seriously discuss the issues with government and to inform the process, I suppose, from an overall point of view, does enable us to expedite our thinking," he said.

"And that effectively means that we are better positioned to sort these details out sooner than later. But I'm not going to put a timeline on it because there is a long way to go and I'm not going to hasten outcomes and then not get the appropriate balance right."

In a sign the government may be working on some form of compromise, Ferguson canceled plans to attend a meeting of Asia Pacific Economic Cooperation energy ministers in Japan this week to continue negotiations with industry.

Ferguson said there has been real progress made over the past week to ten days including productive talks between BG Group PLC (BG.LN) and Prime Minister Kevin Rudd on the potential impact of the tax on the emerging coal-seam gas sector.

Minerals Council of Australia Chief Executive Mitch Hooke said he understood there had been some movement in talks between the government and the coal seam gas sector but that mining companies were nowhere near agreement with the government.

"There are discussions going on, but they're not within a bull's roar of anything that I would think would be acceptable to the industry at this stage," he told reporters.

He called for the government to amend the 40% rate of the tax and said anything else would be "tinkering at the edges".

"You've got to get the tax base right, you've got to get the rate right, you've got to get the retrospective application right," he said.

"Those are three fundamental parameters that currently aren't on the agenda for discussion with the government."

-By Alex Wilson, Dow Jones Newswires: 613-9292-2094; [e-mail]

(Rachel Pannett in Canberra and Neil Sands in Melbourne contributed to this report)