Australia's plan to impose a 40 per cent 'super tax' on the profits of mining companies has sent Indian miners scouting for acquisitions into a tizzy.
The tax , proposed to be effective by July 2012, aims to raise an estimated Australian $9 billion for the government every year. This may severely dent the internal rate of return for projects already under consideration. This has prompted Indian firms to reassess their plans of entering the booming resources sector in Australia.
India's largest iron ore producer, NMDC, is part of a consortium that has pitched for a 70 per cent stake in Australian ore producer Atlas Iron's Ridley iron ore project. The firm, which happens to be the sole Indian bidder in the fray, would have a 15 per cent stake in the project, including sweat equity of 5 per cent.
"We have submitted a non-binding offer for the $2-billion Ridley iron ore project. The binding agreement will be submitted shortly. In the context of the recent development, the project will have to be reviewed before the binding agreement is submitted, as the IRR will fall drastically," NMDC chairman and managing director Rana Som said.
NMDC's concern is genuine, since it is a magnetite (low grade) iron ore project, implying that significant investment would have to be made for value addition. "Typically, the profit margin for magnetite projects is 18-20 per cent. Therefore, a 40 per cent tax will clearly make magnetite projects unviable," explained Som.
Domestic companies have been increasingly eyeing overseas assets, as securing a licence in India is an arduous task. India is thought to have 23.59 billion tonnes of iron ore reserve, of which only 6.311 billion tonnes is proven. Coking coal is mostly imported.
State-owned mining major Coal India, which has earmarked Rs 6,000 crore (Rs 60 billion) for foreign acquisitions this financial year, said the change in taxation may have an impact on the viability of proposed ventures there.
"Although there is no uncertainty over investments in Australia, viability is a factor which may affect business decisions. These issues will be dealt with when due diligence for ventures are be carried out," CIL chairman Partha S Bhattacharyya said.
Among the largest coal miners in the world, CIL is currently exploring partnerships in geographies including Australia, Indonesia and the United States that would allow it to bring coal into the country at prices lower than the global benchmarks.
With the Indian requirement for coal spiralling, especially in the power sector, CIL is finding it increasingly difficult to match this demand from supplies emerging out of its domestic assets. Therefore, overseas ventures in countries such as Australia are being seen as a means to service this growing appetite.
But, international mining groups with a large presence in Australia have opposed the new tax, arguing that it could adversely affect the country's competitiveness and curtail investments in the sector.
