According to the Metals Economics Group, global spending on exploration in 2009 totalled $US8.4 billion. Australia enjoyed 13 per cent of this spending, just below Canada (16 per cent). Peru, the US, Russia, Mexico, Chile. China, Brazil and South Africa filled outthe top 10.
Australian mineral production comprises some 8 per cent of GDP and over half of our exports. But, as evidenced by the proposed resources super profits tax (RSPT), success can invite the greed of governments. According to the government, a 40 per cent RSPT would pick up $9 billion more a year from miners and motivate them to produce more.But Canadian Finance Minister Jim Flaherty quickly recognised the new policy as offering "another competitive advantage for Canada".
Among countries with major prospective mineral developments, only Australia is contempla ting a resource rent tax outside the oil and gas sectors. Nevada and some Canadian provinces have profits based royalties, but their rates are 2 to 10 per cent depending on the mineral being mined -- a fraction of those proposed for Australia.
A profits-based approach can have advantages in certain circumstances, when a mine is nearing exhaustion or was marginal in the first place. But the RSPT is really about collecting more money from existing mines. Increasing ta xes after investments have been locked in is really expro priation of corporate income.
Australia's proposed taxation arrangements confuse super profits with high profits based on normal business activities. Some mining businesses do earn high profits as a result of two factors.
The first is termed quasi-rents. These differ from economic rent in that the high profits for successful firms are matched by losses for the un successful. Exploration activity is the start point for a successful mine and few searches -- at best one in 10 -- lead to a successful find. Moreover, each search is undertaken only after expensive research has been conducted in identifying the most prospective areas.
If there were general economic rents being earned in mining we would see, contrary to the evidence, that mining profits are on average greater than those of other industries. Such systematically earned high profits are due to resource scarcity driving up prices are not happening.
Raw material prices fluctuate but, over the long term, they are falling relative to other goods and services because although the most accessible resources may have been previously mined, technology advances are more than compensating for this.
The second factor responsible for higb profits being earned by many Australian mining companies is much enhanced efficiency. Australian mining firms have implemented labour reforms, built dedicated transport infrastructure and invested in mine-site equipment and in ensuring product quality and grades meet customers' needs. Such business improvements do not warrant a special tax rate.
Though economic rents do not generally exist for most minerals, this is not the case with oil and gas, where higher prices are evidence of resource scarcity. Separate (profit based) taxation regimes are in place already in Australia to reflect this.
Similarly, special regimes are necessary in areas where existing exploration bas revealed highly prospective possibilities nearby. As part of the exploration bargain, firms spend money to seek out value, and they must surrender areas of the exploration lease at known time intervals and report the results of their activities. So if a major resource is discovered, rights to nearby areas should be allocated through some auctioning system or by subjecting them to a higher tax rate.
The government miscalculated the level of opposition from miners who cannot recoup this tax grab by passing the costs on. Ministers had anticipated a lengthy dialogue with business to gauge the strength of the opposition and, perhaps, a watering down of the proposals. Meanwhile, it would have a fiscal trophy worth $9 billion a year to demonstrate its credentials for economic conservativism. But business leaders say they cannot risk tbe RSPT and are gearing up to oppose it. The prospect of the tax knocked $15 billion off mining shares. No CEO can acquiesce in such destruction of shareholder wealth.
If the government backs down, as it has on carbon trading and other policies, it will be ridiculed. If it maintains the RSPT, it may go to the election confronting $1 billion worth of hostile advertising.
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