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Tuesday
Jul062010

A Double Back Flip With Reverse Pike, RSPT or MRRT.

By Jason Fittler

Our view has consistently been that some form of compromise on the proposed mining tax would be reached and the market had over-reacted in quickly pricing in the worst scenario.

The revised Mineral Resource Rent Tax (MRRT) and Petroleum Resource Rent Tax (PRRT) is clearly a good outcome for the miners and QLD LNG players respectively. It brings the new tax impost to a more competitive level globally. Clear winners are BHP, RIO, FMG, ERA, STO and ORG.

New mineral tax (effectively an iron ore and coal tax) only applies to coal and iron ore, with base and precious metal operations now excluded.

The Petroleum Resource Rent Tax (PRRT) will now apply to all onshore and offshore operations (including the North West Shelf). The MRRT rate was lowered to 30%, compared to the RSPT at 40%. However once the impact of the 25% ‘extraction allowance’ is applied, the tax reduces to 22.5%. Overall, the maximum effective tax rate now drops from 57% under the RSPT to 45% under the MRRT, before allowable deductions, on our analysis.

The Winners and Losers

The biggest "valuation" beneficiaries relative to possible impacts under the now defunct RSPT are the diversified miners (BHP and RIO) and Aussie focussed iron ore, base metal and uranium producers. Primarily because these were the most impacted by the RSPT.

In the oil and gas space the QLD CSG/LNG developers will be beneficiaries, specifically Santos and Origin. As the North West Shelf is now being taxed also under the PRRT, Woodside stands to lose around 2% to its NPV.

Re-rating is likely to take longer than the de-rating, so use the time to reposition. Uncertainty is typically factored into the market very quickly, whereas the removal of uncertainty is usually met with a little more caution.

The de-rating of Australian resource companies around the RSPT announcement in May appeared to cause some fairly significant Australian market selling by international funds. It is likely that the revised resource tax will attract international investment back to the Australian market but at a slower pace than the sell down given ongoing global economic concerns.

Hence, a re-rating of value lost will typically take a little longer to return. Cash inflows will most likely be directed toward larger more liquid stocks, at least initially.

We recommend investors use this window of opportunity to reposition themselves and ‘get set’ in stocks such as BHP, RIO, FMG and ORG.