Revive the RSPT

Take a photo. This blogger agrees with Ralph Norris.

The Rio Tinto result screams of the need for a resource rent tax. From The Oz:

RIO Tinto has almost tripled its full-year net profit to a record $US14.32 billion ($14.25bn) after iron ore and copper prices surged last year, enabling the big miner to commit to a massive $US5bn share buyback.

The buyback is the second biggest undertaken by an Australian-listed company — BHP Billiton earlier broke a larger $US13bn buyback into two parts — and is a stark indication of how resurgent developing world demand has changed the fortunes of Rio and other miners.

… Net profit after tax for last year rose to $US14.32bn from $US4.87bn the year before.

Underlying net profit of $US13.98bn, up from $US6.3bn in 2009, was in line with analysts’ expectations of $US14bn.

Analysts said the report was solid and clean and and they were pleasantly surprised by the extent of the buyback.

The higher earnings were largely due to booming prices last year, with average received copper prices up 47 per cent and iron ore, which made up more than 70 per cent of Rio’s earnings, up by 75 per cent to $US130 a tonne.

Jesus. We already know Q2 2011 ore contract prices are coming in at least $165 per tonne. That’s before moving to shorter term, which this blogger still expects. And ore is still rising. So is copper.

And what is Rio doing with all this dough? Back to The Oz:

…The $US5bn buyback, which was forecast by Deutsche Bank analyst Paul Young, comes on the heels of BHP Billiton’s November announcement that it would restart a $US13bn buyback, the biggest by an Australian company, that it had called off in 2007.

BHP had announced the buyback in two stages, of $US3bn and $US10bn, and still had $US4.2bn to buy back when it was called off as BHP made an ultimately failed $135bn bid for Rio.

If Rio’s record $US23bn cashflow is replicated this year there will probably be more in the way of buybacks. “In times of high cash generation, there will be opportunities to return further cash to shareholders,” Mr Albanese said. The buyback will be completed over two years.

Chief financial officer Guy Elliott said it would at first be on-market and target London-listed shares, which trade at a discount to the company’s Australian shares, but this could change if circumstances meant another method would benefit shareholders more.

Rio’s shares rose 30c to $88.68 ahead of the result, which came after the market closed yesterday.

Rio also boosted its full-year dividend and, by association, its 2011 first-half dividend.

It paid a final dividend of US63c, boosting the full-year dividend to $US1.08, up from US90c in 2009. For Australian shareholders, the dividend is fully franked and will be paid on March 31 to shareholders on the register by close of trade on March 8.

“Our confidence in the quality of our tier-one assets and our positive view of future commodity demand growth have allowed us to increase the annual dividend by 20 per cent, setting a baseline for a progressive dividend policy,” Rio chairman Jan du Plessis said.

In line with its practice of paying an interim dividend that is half the previous year’s full dividend, the interim dividend will be US54c.

By all means increase the dividend. The owners of the stock deserve it.

But, if all Rio (and BHP) can think of to do with their lazy billions is goose the stock then give us all a break.  That money should go to the owners of the resources, not the owners of the company. And it should go straight into a sovereign wealth fund.

If Rio and BHP could use the dough to make acquisitions then this blogger would consider the possibility that the money would be put to more productive use with the firm. But, they can’t. And it’s not because, as the broader media likes to say, they are too big. As this column has written before, rather it’s the way they have abused that size via interest politics in Australia and gouging in China that is the problem. It is that that has made them unwelcome in places like Canada.

Ironically, the anti-RSPT campaign is a prime example.

This sad episode is an example of how damaging vested interests and weak government can be to the national interest. Resource rent taxes are now political poison. The companies themselves are poisonous to outsiders. Australia is trapped. The companies are trapped.

And the money gets pissed up against the wall.

Comments

  1. I could not believe how easy it was for the mining industry to prevent the tax AND get rid of government. It should have been very easy for Rudd to dismiss the claims made by actors using some very simple economics 101.

    Loosing jobs? Heck, even at 40% tax this company would still have made 8+ billion dollars! The fact that they are buying back stocks shows just how much they were lying about potentially stopping projects and looking at dismissing people.

    40% tax would have meant an additional 20-ish (guesstimate based on numbers above) billion for Australia and Australians this year alone! Now consider how much this will amount to eventually if the boom continues as long as some think it will.

    Put those taxes in a fund like Norway (oil) and Holland (gas) do and you prevent part of the economy overheating and eating away at the rest of the economy (the bit that should be left over after the resource boom goes…)

    Also, think of what 20 billion could have meant for the future economy and future generations… That’s half the NBN, or a really decent start to finally put some much needed, economy supporting infrastructure in place, better schools, better government (definitely much needed!), etc etc…

    All from just one year’s profits, unbelievable… what a waste.

    • The mining sector did not get rid of a government!

      The Labor party simply replaced Rudd with Gillard (albiet in a rather brutal fashion, that’s Labor politics for you), believing Gillard more likely to perform well at the polls. Purely an internal power play.

      Your penultimate paragraph, whilst well intentioned, is alas naive.

      • I am well aware of the role of internal politics but I also know politicians need the right momentum to implement these kinds of things… and the mining industry provided just that.

  2. Australia is trapped.

    Never a truer word spoken.

    We are locked into a path where the miners become ever richer, the trade-exposed non-resources sector withers and dies, and ordinary Australians are burdened with high interest rates.

    And yet this future is unanimously applauded by policymakers and the economic commentariat. (Gittins!)

    We’re the lucky but dumb country.

  3. I’m going to stand up for the miners here and point out that the current profit result (and those of the last few years) come on the back of decades when commodity prices were rock bottom and miners’ profit margins stank. If you are going to have a go at miners for making hay while the sun shines, I suggest you need to take a longer term view. Rio’s total shareholder return is only 11.2% over five years and 15.9% over ten years (figures from Comsec, I assume doesn’t include latest result). BHP’s equivalent figures are 16.5% and 20.2%. For companies that take the sort of multi-billion dollar bets on projects that these companies take, these returns are not excessive. The simple reason they make big profits is that they have big capital invested. If you don’t believe me, look at their financial figures.

    And if you are feeling sour that you are not participating in these profits, you shouldn’t be. If you have superannuation, a decent slab of it is sure to be invested in these companies. As a last resort, you could always buy some of their shares!

    • FrankieFourFingers

      “For companies that take the sort of multi-billion dollar bets on projects that these companies take, these returns are not excessive.”

      Exactly the reason why they should be taxed. There are too many big companies making multi-billion dollar bets ON CREDIT, and when the boom go bust the government will be forced to indirectly inherit a massive chunk of that debt as well as pay welfare to the massive influx of permanent residents brought into the country to support the boom.

      • I don’t think so. Both Rio and BHP have very substantial reserves of shareholder’s funds, in both cases multiples of their debt. There is no chance whatever of their being bailed out by taxpayers.

  4. Steady, steady.

    An attractive profit in unprecedented global conditions. Rio has complied with all global taxation requirements and royalty obligations. The miners are on a roll! Good luck to them I say.

    What about the revised tax Rio, BHP and Xtrata negotiated with the Gillard Government – is this to form the basis of a SWF? After all, it was a substitute for the proposed RSPT. In any case, I stick with my comments yesterday in regard to the issues around a SWF.

    As you can see from the links below, Rio is confident that although there is considerable global volatility, good prices for commodities will continue to be achieved into the future ( I would say apart from a Black Swan event – perhaps appropriate given the extent of their operations in WA!).

    http://www.riotinto.com/documents/Investors/110210_Rio_Tinto_2010_full_year_results_PRESENTATION.pdf

    http://www.riotinto.com/documents/110210_Rio_Tinto_annual_results_2010.pdf

    If I have one thought, it would be that their Australian operations should source skills, technology and componentry from the Australian market, wherever possible.

    Go to the Pilbara and witness the extent of the mining operations underway, amazing and impressive, I assure you. There are billions of dollars more projects in the pipeline. This is a very real reinvestment in the Australian economy.

    As to Mr Norris’ (and now H&H?) views – mining did save this economy, banking never will.

  5. The mining profits are still invested back into the economy through shareholders. The only difference between this and the RSPT is the profits are not subject to what the government thinks they should be spent on, instead they are subject to the whims of the free market, which if history is any indicator is far more efficient.

  6. “And it should go straight into a sovereign wealth fund.”

    I think that is a terrible idea. There is any amount of useful production or infrastructure the Government could invest in, or simply improve our health or education system or even just lower other taxes. Why have the government invest in unrelated prospects, that something the private sector is perfectly capable of doing for itself. And most of these funds simply end up investing in dodgy ponzi schemes or bastions of corporate morality such as Halliburton or Monsanto.

    • These (offshore) funds are used to prevent the economy being swamped with an sudden influx of funds which can have catastrophic consequences for the economy (Dutch disease).

      Using the fund allows governments to release money into the economy at a slower pace by investing in the kind of project you suggest. This prevents inflation and wage blowout, etc.

  7. Lorax, not everyone is with Gittins! Don’t forget the RSPT was Treasury’s idea.

    Alex, nice reasoned response. I fully support the miners making hay while the sun shines. I just don’t think it should be at the expense of the nation, which should also make hay while the sun shines.

    td1k, I agree that the Labor party was to blame for pretty much all of it. The RSPT policy was flawed (as a wrote consistently at the time) and rushed, which wrecked the politics of it. Also, to my mind Rudd’s CPRS was the big shocker. Surely, however, it’s naive to think that the miners played no part in Rudd’s downfall through their PR campaign.

    Daniel, nothing would give me greater pleasure than to agree with you. However, the SWF is insurance to me. That is, it’s backstop for the banks when this cycle explodes, as they all do. We spent the proceeds of this mining boom in advance – on housing. I would also charge the banks for that insurance and make it official. See my post http://macrobusiness.com.au/2010/11/the-federal-bond-insurance-corporation-fbic/

    • I suspect Gittins! actually supports the RSPT in principle, but what very few challenge is the premise that the mining boom is good for Australia.

      I know its unstoppable, and I know the RSPT + SWF is good policy to distribute the benefits and save for a rainy day, but please stop telling its good for Australia. Its not! Its good for miners, shareholders, and government coffers. Its wreaking havoc in other sectors of the economy.

  8. …..and when the holes are empty, the companies can dissapear with their wealth while this dumb-ass country ends up a basket case…… no real industry, no real future.

    Oh…. I’m still waiting for my “benefits” from this bs resource boom, as t’s been like about 7 years…..

    ahhh I forgot, I did get something, rising taxation, rising living costs, bleak future. Now I don’t feel left out anymore.

    • Romsey, as someone who:
      1. Works in a niche IT area that doesn’t benefit from mining,
      2. Would never make it past the pre voc course to be a tradie and
      3. Is renting, just missed the days of affordable housing and now faces an uncertain future because of the incredible expense involved in simply putting a roof over mine and my family’s heads
      I feel the same way.

      However I’m at a loss to see where you got the “rising taxation” from. If not for the mining boom we’d be paying more income tax. However I’d still have been better off with no boom and higher income tax because housing would almost certainly have been more affordable. But that position is just about anathema in Australia because we hate paying tax and like to see our houses skyrocket in value. Ho hum…

      • 1 & 2, you and me both.

        Re 3: I’m lucky, I’m older and I got in on the real estate racket in the early nineties, but I completely understand where you’re coming from.

        Resources Boom 1.0 funded much of Howard’s middle class welfare and tax cuts. Resources Boom 2.0 will pay off the GFC stimulus.

      • Torchwood1979,

        You’re probably thinking of taxation only in the form of your salary, taxation as a whole is spread federal and state wise across everything. It has been acknowledged by the RBA that this so called boom has led to inflation and interest rate increases beyond that we would otherwise have had.

  9. Why should Canberra or the greedy state governments receive an additional cent of revenue from these mining companies who risk their own capital in extremely expensive projects subject to massive risk ??

    If we should be taxing mining profits at an additional rate, does that mean the taxpayer should subsidise all mining companies when they operate at a loss ??

    • FrankieFourFingers

      I think you are confusing “debt” with “own capital”.

      As demonstrated during the GFC, when the boom busts the government incurs much of the debt burden as well as the burden of paying welfare to the rapid rise of unemployed workers brought into the country specifically for the boom.

      • As I noted above in reply to your other post, both BHP and Rio have very substantial shareholder funds, multiples of their debt. They are relying mainly on retained earnings to fund exploration and development costs. Your contention about debt is simply wrong.

        • FrankieFourFingers

          Fair enough. I read somewhere RIO still effectively has negative equity despite bumper profits. The boom has still damaged other areas of the economy which have been well documented in the Dutch-Disease articles on this site. When it all goes pop we can’t exactly send migrants who have become permanent residents back overseas, we can’t rollback the massive debts incurred in other areas of the economy, etc.

          I know it is technically not BHP or RIOs fault but these risks are caused by the mining boom and the govt needs to mitigate the risk by taking its cut from the cashcow. I will take the opposing view that it is unfair for the mining companies to make off with the loot and leave the govt with all the problems when the boom ends.

          • Happy to agree with you on the potential for a Dutch Disease problem. I think it is still largely a problem for government to manage, though I am not totally opposed to looking at RSPT type taxes as part of the solution. I think that Rio and BHP are going to be around in Australia for a very long time, not much risk of them pulling up the carpet and disappearing into the night.

            As for the debt in the rest of the economy, I put this down to two factors: the main one is the federal government running surpluses in the Howard years. MMT tells us (and it is obvious from basic accounting) that if the federal government runs a surplus, the private sector must run a deficit. This means dipping in to savings and ultimately, getting into more debt.

            The other issue is easy credit and the housing bubble.

            Both of these have been extensively discussed in past blogs by several of the bloggers here.

            I don’t really think you can blame the miners for excessive debt elsewhere in the economy. The only thing you can sheet home to them is the current high value for the Aussie dollar. But hey, that makes all the things Australians want from overseas cheaper, so we shouldn’t be complaining too much.

  10. Niall Ferguson, Sept 09, listing factors that protected Australia from the full brunt of the GFC including the impact of the mining industry – and the reasons an RSPT would be wrong:

    “The RBA’s key role has in fact been the management — through benign neglect — of the exchange rate. That sharp depreciation relative to the dollar (down from 98 to 62 cents) probably did as much as anything to generate an Australian recovery. The trade statistics tell the story. Net exports surged from 2.4 per cent of GDP in the firstquarter of 2009 — the nadir of the GFC — to 5.4 per cent in the first quarter of this year.And that brings us to a further reason for Australia’s buoyant performance: the role of China, now the country’sbiggest customer. If there was one place where stimulus really worked, it was China, though notice that it took theform of government-induced expansion of bank lending, rather than deficit finance along classic Keynesian lines.That Chinese stimulus sucked in a ton of imports from all China’s Asian trading partners, including Australia.Finally, let’s raise our hats to Aussies who did the most to meet China’s booming demand: the diggers. Yes, theAustralian mining industry, which accounts for nearly 10 per cent of GDP and circa 40 per cent of total exports,moved heaven and earth — well, certainly earth — to satisfy China’s needs. We see the fruits of this effort everyday, most recently in the record $3.6 billion trade surplus in June, the biggest in history. Unfortunately, the government is doing the very reverse of tipping its hat. On the contrary: it’s dipping its handinto the mining companies’ pockets. Even the watered-down proposal cobbled together by Gillard with three mining giants will still tax iron and coal companies’ so-called “super profits” at a rate of 30 per cent.”Super” currently means anything above 12 per cent returns on investment.There are so many things wrong with this proposal that it’s hard to know where to begin. First, it’s a classic bit of arbitrary, inconsistent government action, moving the goalposts when the game is going in one direction — rather as if Bill Clinton’s administration had suddenly decided to tax dot.com companies on their market valuations in1998. Second, it’s the kind of thing that alienates foreign investors — and Australia’s vast mineral wealth cannot befully tapped without their involvement.Third, it capriciously penalises smaller firms in just two sectors. Fourth, it arguably infringes the traditional rightsof the states to the mining industry’s revenues. Finally, taxes of this sort are justified only when the revenuesraised are devoted to accumulating alternative assets, to compensate future generations for the depletion ofnon-renewable assets by today’s Australians. But that is not what Labor proposes to do with the $10.5 billion the tax will raise over the next two years.”

    Full article:
    http://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=232

    Alex Heyworth – he does indeed note the healthy fiscal position the Howard Government bequeathed to Labor.

  11. FrankieFourFingers

    Alex,

    I will agree with you on those points.

    Pretty clear the Howard govt did very little except shift public debt to a much greater private debt off the back of tax revenue from asset inflation.

    It amazes me the criticism Keating received for the “banana republic” comments when foreign debt reached 40% of a small GDP figure during a recession. Yet the Howard govt have this amazing cashcow and leave office with foreign debt of 60% of a much greater GDP and nothing else to show for it…infrastructure, education, health care, etc.

  12. The governments original super profits tax was a dog and deserved to be put down! However a properly implemented resource rent tax is needed as it seems to be the only option for controlling the two speed economy. One thing that should be included in the tax is a 100% deduction for spending on community infrastructure. I’m sure mining companies would be much more efficient at building stuff than sending the money to the government coffers and having the pollies award contracts to the mates!
    Then there is obvious changes such as having variable tax bands and not making the tax retrospective.

  13. Exactly how much mining “re-investment” finds it’s back into the broader economy is a good question.

    I don’t think it’s accurate to say that Australia gets a great price for it’s resource exports. With a very large portion of the most lucrative mining shareholdings belonging to foreigners, I think it’s probably more accurate to say that well-heeled shareholders in places like New York, London and Zurich get a great price for exploiting Australia’s mineral wealth.

    Mining is a tiny employer – less than 2% of the total labour force – and contributes only around 6% to GDP. Not insignificant, but hardly a gigantic “golden goose” as the meme insists it is. Further, the GDP contribution is likely overstated due the fact that a significant percentage of it is quickly whisked away out of the country.

    Mining in Australia – which, far from being our saviour, went backward during the GFC, and I personally witnessed large numbers of workers in the sector lose their jobs here – is now roaring full throttle again, yet the economy is really only just idling. If mining is such a huge driver, why aren’t we booming overall?

    I think the confusion arose because the pre-GFC mining boom coincided with the biggest boom in private debt in our history. I think that might have been the big driver, one which is now winding up.

    Mind you, such astounding profits from exploiting Australia’s sovereign wealth should be taxed more heavily but I agree that this is now political poison.