Just how much money will the government’s revised mining tax end up raising? It’s a more complicated question after the 2011 result from Rio Tinto and the half-year figures from BHP Billiton.
They confirm the Australian iron ore industry is probably second only to Apple in terms of the world’s richest business. If Rio Tinto and BHP aren’t making superprofits, no one is and never will. Rio is achieving gross profit margins of about 75%; BHP 65%, compared with the gross margin of 38% for Telstra in its latest half-year profit, issued yesterday.
Telstra used to be the benchmark for the corporate naysayers who resented what they saw as huge profit margins (Telstra’s are down from about 44% in the past five years).
Overall, BHP’s profitability was underlined by the fact that the near-record EBITDA of $US18.7 billion for the first half was earned on a 9.7% improvement in group revenues to more than $US37.4 billion.
That’s a profit margin on 50%. BHP’s iron ore business had profit margins of 65% in the December half year ($US7.9 billion on revenues of $US12.14 billion), up from 62.8% ($US5.8 billion on revenues of $US9.38 billion) in the December, 2010 half year.
Rio Tinto, which reported its 2011 earnings yesterday, depends far more on its iron ore business than BHP does. It doesn’t have BHP’s huge spread of resources, especially limited coking-coal assets and no oil and gas.
Rio had earnings before interest, tax, depreciation and amortisation of $US28.52 million on sales of $US65.67 billion in 2011, compared with a gross profit of $US25.97 billion on sales of $US59.21 billion in 2010. That was a gross profit margin of 43.4% in 2011, down marginally from the 43.8% margin for 2010.
Rio said its WA iron ore business had EBITDA of $US20.01 billion, up from $US15.14 billion in 2010. That’s a gross profit margin of 74.5%, in sales of $US26.8 billion, up from 2010’s very rich 71.8% in sales of $US21.07 billion.
But the results from the two giants also underline the fact that it’s not going to get this good again, as costs rise and iron ore and coal prices peak for the next year or so. And that raises more doubt about just how much money the federal government will raise from the new mining tax. Remember that the government has already overcommitted its spending on the planned revenue from the tax (and the opposition isn’t much better, having decided to keep the costly rise in compulsory superannuation even without the tax).
(Telstra said earnings before interest, tax, depreciation and amortisation (EBITDA) rose 3.75% to $4.75 billion, a profit margin of a still fabulous 38%.
Even other big mining companies are not as profitable as BHP and Rio Tinto. According to figures released in London this week, the proposed merger of Glencore and Xstrata (34% owned by Glencore) would produce a new company with (for 2011) revenues of $US209.4 billion and adjusted EBITDA of $16.2 billion.
By way of contrast, the combined Glenstrata had a margin of just 7.75%, with Xstrata’s margin of 33% by far the best of the two companies. And that factors in the genius the companies, both of which are headquartered in the Swiss tax haven of Zug.
Glencore and Xstrata have no meaningful involvement in iron ore, or in oil and gas production (as BHP does). That makes them relative also-rans, especially in Australia. Anyway, Glencore’s primary skill is in minerals marketing, often using transfer pricing to keep the tax burden of it and its subsidiaries as low as possible.
And why are these super returns to peak for the time being? Well iron ore prices are about $US140 a tonne, after falling below $US120 a tonne last September and October and peaking about $US183 a tonne in the first half of last year. Coking and thermal coal prices have also fallen sharply as well as the impact of the Queensland floods have eased and demand weakened as China and other economies in Asia slow.
Development costs also continue to rise. Rio moaned about that yesterday. Rio confirmed $US3.4 billion of expansion spending on Wednesday in the Pilbara. Four months ago the same spending plans were announced and the cost was $US3.1 billion. That’s a 10% jump in just over three months, which is a surge by any measurement.
BHP and Rio and Gina and Twiggy are expanding at a massive rate in the Pilbara. So even if the profit margin comes down, the sheer volume of revenue and profits should maintain the tax flow to the government. No?
Just Tax them more.
Why are these industries allowed to expand like there is no tomorrow?
Is this Gillard’s Pacific Solution ?
Extract from Wikipedia – Nauru briefly boasted the highest per-capita income enjoyed by any sovereign state in the world during the late 1960s and early 1970s. When the phosphate reserves were exhausted, and the environment had been seriously harmed by mining, the trust that had been established to manage the island’s wealth diminished in value. To earn income, Nauru briefly became a tax haven and illegal money laundering centre. From 2001 to 2008, it accepted aid from the Australian Government in exchange for housing a Nauru detention centre.
Even at the expanded rate of extraction that’s planned, BHP’s proven reserves will take more than 40 years to exhaust. And that doesn’t count probable and inferred resources – and those still being explored.
Would Savonrepus care to explain just how leaving the resource in the ground would benefit the nation?
These industries are allowed to expand because they are the only ones propping up the rest of the country and are the only reliable source of revenue on the horizon for a government that can’t keep its spending urges in check.
Large mining and resource companies already contribute an enormous amount to their communities, so much so they are in danger of taking over what really should be government responsibilities.
Perhaps if they did so directly it wouldn’t be such a bad thing – at least the community would benefit to the tune of the 20 cents in the dollar that government and its bureaucracies absorb between taxation and benefit delivery.
Another thing to be considered is whether this whole debate is being driven more by the politics of envy and less by what dominant industries should contribute to society.
Propping up the rest of country? Yes, they help out with keeping the balance of trade positive. But that pushes up the dollar which makes life tough for tourism, manufacturing, etc. In terms of employment mining is small fry. I’d like to see the numbers comparing jobs lost due to mining’s influence on the currency vs. the jobs they actually create.
It is totally ridiculous has Gina Rinehart has wealth of $20 billion. That’s enough to fund healthcare in this country for years. And it’s all from iron ore in the ground that belongs to all Australians. I don’t mind her getting wealthy off getting the stuff out the ground, but that’s just ridiculous. Tax her!