Data Diary

A worked example of the Resource Super Profits Tax

Posted on 04 May 2010

Of this much I am certain, Australia’s new Resource Super Profits Tax – the ‘RSPT’ (where are MacBank’s master acronym makers when you need them) – is going to be a bureaucratic nightmare to administer.  Still with the sums involved, I guess we can forgive the government for doubling the size of the ATO.

After reviewing the documentation again this morning, think we can expect the RSPT to hang heavy around the necks of the Australian miners for some time.  Apart from the administrative burden that the new tax will impose on all, the problem is not so much for new projects but for existing ones.  Specifically, the problem is the difference between the imputed value of a project in a company’s share price and the book value of that project on the company’s balance sheet. In short, the government will be ‘buying’ their 40% stake in the project for book value.

I don’t normally do specific stocks in this forum – but in order to flesh out the issues let’s make an exception (as long as it’s not viewed as a recommendation or in fact any form of advice).

Energy Resources Australia (ERA)

In order to get a sense of how the RSPT might operate, the following chart takes the 2009 financial result for ERA and maps how the RSPT would impact earnings per share.

To keep this as simple as possible, I have kept everything constant other than the uranium price – which enables us to see the impact of higher commodity prices.  Other interpretations of the RSPT embedded in the chart:

• Deductible expenses for RSPT included everything but shipping
• The RSPT allowance assumes a starting base of $470m (book value of PP&E) and depreciation at 36%
• Added back $41m Royalties to net profit for the calculation of income tax

The net result?  Assuming all else constant, EPS falls to $1.25 versus the $1.42 recorded for 2009 – ERA would have paid a tax bill around ~$190m versus actual tax of $115m.

Importantly, in relation to the government’s concept of ‘buying a 40% stake’, I’ve assumed that ERA has $470m of ‘undepreciated tangible capital expenditure’.  That’s ~$2.50 per share versus a current share price of ~$14.50. Hmm – you get the point about the difference between book value and market value.

Conclusion

This is clearly over-simplified as a model.  And it does not take into account the tax benefits that accrue if the project falls into a loss making situation – a benefit not offered under the current state based royalty system.  The objective was to get a sense of the way the RSPT works on an existing project.

As to it’s impact on ERA, it depends on your assumptions about the future uranium price.  Clearly, the higher you assume uranium prices will climb, the greater the impact.  But even then it’s not that simple:

• ERA’s Ranger mine is close to the end of its current life – which is expected to fall within the start of the RSPT regime in 2012
• Its heap leach project to extract uranium from stockpiles is yet to commence construction.  Whether it qualifies as a pre-RSPT project is unclear.
• The Ranger’s Deep expansion is also subject to feasibility studies – same question is this pre-RSPT.
• Jabiluka remains in mothballs – presumably to be classed as a new project should mining commence.
• And then there are some good reasons to doubt the strength of uranium prices notwithstanding China’s building spree.  The secondary market in dismantled nuclear weapons comes to mind given Obama’s recent wins in this area.

One final note – it’s been instructive to see the response to the RSPT being played out in the media.  Miner’s have predictably cried foul.  Most media commentators haven’t read past the headline.  And advisor’s have been ferreting around trying to make sense of the word “super” (look at this piece from Allens Arthur Robinson – not sure which documents they have been smoking). Most interesting of all – what is the government’s PR strategy on this?  I’m a Machiavellian at heart and I reckon this one would be a cracker to to get inside.