Shares of mining giants, BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) were seen to edge low over the surprise news relating to a levy on iron ore miners. Particularly, Western Australia’s Government is intending to ask for billions of dollars from BHP and RIO with regards to a mining rent tax to cater to a budget issue post the impact from commodity prices in the past. An advice on the proposal is currently being sought and this might see the nation’s two biggest miners pay out an iron-ore levy early in a one-off lump sum payment. This is expected to raise as much as A$4 billion for the state.
However, ambiguity prevails around any such move as the proposed tax is unlikely to be imposed without the consent of the miners and a GST exemption from the federal government. The latest developments have come up as the price of iron ore has continued its recent fall. The iron ore price further slumped to $US57.91 a ton by end of last week, and had fallen 39% from its February peak of $US94.86 a ton, on account of rising stockpiles at Chinese ports and concern about the Chinese economy and the prospect of the government tightening down on credit. Moreover, weakness in iron ore prices will further squeeze the margins and cash flow of the nation’s iron ore miners.
It is important to note that the Government is expected to bring this change if it receives an assurance from the federal government that the proposal would not eat into the state’s already weak allocation of GST revenue. However, the federal Treasurer, Scott Morrison said that the treasurer had not received any proposal from WA regarding the cash-out, and noted that the government had previously exempted $1.2 billion of federal infrastructure payments from the GST distribution calculations. It would require agreement from both the state and the concerned companies, and the federal government would also have to agree to the payment being exempt from the goods and services tax distribution system. At the moment, the levy sits on top of the 7.5 per cent royalty that miners pay to the state, and only kicks in after a mine has been in production for 15 years. Currently, BHP and Rio pay 25 cents per ton levy but other companies will begin paying it once they complete their mining leases for 15 years.
As of now, BHP Billiton and Rio Tinto have sought clarification on Western Australia’s proposed up-front iron ore tax. The two miners are also expected to meet with senior members of the state government soon. At current production rates, BHP and Rio are estimated to pay ~$150 million in lease rentals for the year to June 30, based on the 25 cents per ton lease rental fee.Given the scenario, it is unclear how many years’ worth of lease rentals the WA government wants to be paid up front.
A sneak-peek into iron ore prices reveals that iron ore futures in China fell as much as 4 per cent on May 31, 2017, to the lowest since November, and were set for their biggest monthly decline in a year, amid lower steel prices and a glut of the raw material. Dalian iron ore futures have slid 3.3 per cent to 436.5 yuan ($US64).
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