By KRIS MAHER Peabody Energy Corp. said it is continuing with its $3.8 billion takeover of Australian coal miner Macarthur Coal Ltd. despite a proposed Australian mining-profits tax that has prompted several other mining companies to review expansion projects there.
"The tax proposal gives us one more consideration, but I wouldn't say it's affecting the time frame," said Peabody Senior Vice President Vic Svec. He declined to comment on whether Peabody may alter terms of its all-cash bid submitted to Macarthur on April 15. Peabody has never said when it hopes to complete the deal.
He dismissed the immediate impact of the tax proposal. "It lacks a number of details and is more than a year away from even being written in bill form for consideration as legislation," Mr. Svec said. The mining profits tax "will be hotly contested and likely undergo major changes before any final bill would be passed," he added.
On Sunday, the Australian government said it plans to introduce a "resource super profits tax" on mining profits, above a certain threshold, and use some of the revenue to build new infrastructure. The news prompted a sharp sell-off in Australian mining shares, with the two big diversified miners Rio Tinto and BHP Billiton among the hardest hit.
Amid debate over the tax, the head of Rio Tinto's iron ore business, Sam Walsh, said his company has put new Australian iron ore projects on hold because of uncertainty created by the proposed tax changes.
"In our own case, we've got our projects on hold while we try to understand the ramifications of a 40% increase in taxes," he said. There is a "lack of clarity as to the rules" for the proposed tax, he said.
Separately, Australian mining group Cape Lambert Resources Ltd. said it cancelled a planned exploration program at its Cape Lambert South iron ore project in Western Australia as a result of the uncertainty created by proposed tax changes.
Elements of the proposed tax, which would take effect July 1, 2012, are likely to change in the legislative process. But miners operating from Australia say preliminary calculations could increase their total tax rate to a range of between low 40% of profits to the upper 50% range.
The stiff increase would undercut miners' expected profits, especially in iron ore as Chinese demand rises and the industry begins adopting a more lucrative spot-market price and abandons its decades-old benchmark price system that set yearly contract prices.
On Tuesday, Peabody Energy Chief Executive Gregory H. Boyce suggested he wasn't having second thoughts on proceeding with its bid. "We have a proposal to acquire Macarthur Coal in Australia and look forward to advancing it to a successful conclusion," Mr. Boyce told stockholders at the company's annual meeting in St. Louis.
Fears that Peabody would seek to renegotiate its bid as a result of the tax proposal contributed to a sharp fall in Macarthur's stock price this week. Its shares closed Wednesday at 13.67 Australian dollars a share, well below the A$16 price Peabody offered last month.
"The company will now shift its exploration activities to its projects outside of Australia," it said in a statement. Peabody and other mining companies are discussing whether they can work together to exert pressure on Australian Prime Minister Kevin Rudd to reverse the proposal, according to a person familiar with the matter. The business requires decades to explore, build and ultimately sell their ore, and needs stable, predictable policies and governments, this person said.
At the same time, they must work where raw materials are naturally found. Miners in Australia say that, if enacted, the tax would be unavoidable on their existing operations.
But they argue future investment in Australia would be narrowed, or even eliminated, if the tax makes digging for iron ore, coal or others resource too expensive when compared to competitors in Brazil or elsewhere.
Indeed, mining companies with operations in Canada, Brazil, Africa, India would be able to better compete, on a cost-comparative basis, with companies operating out of Australia with the higher proposed tax, according to one mining company.
Under the tax proposal, Australia's corporate income tax would drop to 28% from 30%, according to Paul Forward, an analyst at Stifel, Nicolaus. Further complicating the impact of the tax is that under the proposal the federal government in Australia would refund state royalties paid by mining firms, which vary by region, he said.
In Queensland, where Macarthur has its operations, the state currently collects a royalty of 7% of the value of coal up to A$100 a ton, and a 10% royalty on the value of coal priced over A$100 a ton, according to Mr. Forward.
Mr. Forward said he believes companies that produce metallurgical coal in Australia, such as Peabody and Macarthur Coal, will have a better chance to pass the effective cost of the proposed tax through to customers than companies that mine other commodities. Australia accounts for 64% of the global export market for metallurgical coal used in steelmaking, giving those companies more pricing power. By contrast, Australia accounts for about 6% of global copper production, Mr. Forward said.
"What firms like Peabody can't quantify is their ability to pass that increased cost on to customers," he said.
Robert Guy Matthews and Stephen Bell contributed to this article. Write to Kris Maher at [email protected]
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