As Kevin Rudd and Wayne Swan continue to deny the potential adverse effects of the resources super profits tax on mining companies, it appears that share market investors are not so sure. While the share prices of mining (or mining services) companies should have no bearing on whether a new tax should be introduced, their disappointing performance cases doubt on government claims that “the RSPT will encourage greater investment and employment in the resource sector” and that “the RSPT will affect the present value of investment at risk less than royalties”.
Since the announcement of the RSPT, the All Ordinaries Index has fallen by 10% (largely on global concerns of a double-dip worldwide recession). However, the share price performance of miners with only local operations and companies that service the Australian mining industry have performed significantly worse than the benchmark.
Boart Longyear, which provides drilling services, has seen its share price slump 20% since May 2 when the RSPT was announced, respected mining services provider Monadelphous has dropped by 18% while Fleetwood (which provides temporary housing structures for remote mining companies) has fallen by 11%. Seven Group Holdings, which recently merged with Kerry Stokes’ privately owned Caterpillar franchise WesTrac, has slumped by 18%. Further, as Gresham’s David Feetham pointed out, mining companies with exclusively Australian operations have slumped by 12% since the RSPT was announced, compared to a fall of less than 1% for mining companies with predominantly overseas-based businesses.
Strangely, the government noted in documents announcing the planned lowering of company tax rates that “internationally mobile capital can be especially sensitive to tax rates. A lower company tax rate will improve incentives to invest in Australia”. Just to clarify the government’s thinking — lower taxes on companies will increase investment, unless those companies are mining companies, in which case higher taxes will increase investment.
But let us for a moment ignore the poor logic or what investors think of the super tax. What is more concerning is that the government appears to have based the RSPT tax on Owen Hegarty’s “stronger for longer” principles. In fact, the government said as much in its tax reform overview, noting that:
“Continuing growth in China and India will support global growth, and will be associated with strong demand for Australia’s abundant natural resources. This means higher commodity prices which will support the Australian economy as we rebound from the global financial crisis.”
Because of this belief, Ken Henry and the federal government have decided to effectively invest taxpayers’ funds in the mining industry. The ultimate effect of the RSPT will mean that Australian taxpayers are taking a 40% stake in mining company investments in Australia (the government described it as the community sharing “in the costs of, and returns from, realising the value in resource deposits”.)
Aside from the fact that governments tend to make poor investors, taxpayers would reasonably question why Rudd and Swan are so keen to invest tax revenues in a booming sector that is almost solely reliant in the continued economic prosperity of a secretive authoritarian state dubbed by some as the world’s greatest ever bubble.
Will the federal government admit the error of their ways and back-down on the super tax? That’s looking increasingly likely. Not because Rudd, Henry and Swan have come to the sudden realisation that the proposed tax (not necessarily the concept itself) is fundamentally flawed, or because they suddenly worked out the difference between a company’s cost of capital and the risk-free rate, but because opinion polls continue to indicate that middle Australia doesn’t believe a part-nationalisation of the mining industry is a good idea.
Recent polls indicate that if an election were held now Labor would be swept from office. And if politics is like a giant game of rock, paper, scissors, to Kevin Rudd, opinion polls will always beat paper and rock.