The impact of a proposed tax on mining firms in Australia hit home on Monday as Peabody Energy cut its takeover bid for Macarthur Coal and Xstrata suspended copper exploration work in Queensland, both citing the tax.

U.S. miner Peabody trimmed its bid for Macarthur -- its fourth attempt to gain control of the company's cheaper, cleaner pulverized coal that steelmakers want -- by 6 percent to $3.4 billion after Canberra last week unveiled a planned 40 percent tax on mining profits, and Peabody's review of Macarthur's books.

The tax has led several miners to put Australian projects on hold until they have a clearer picture of how it would be applied.

The final shape of the tax is under negotiation and the impact could be less harsh than the market has factored in, so investors doubted Macarthur would consider the reduced bid as fair, sending Macarthur's shares down 1.8 percent in a firmer market <.AXJO>.

Of course, it's likely Macarthur will turn down the offer. The management would feel they lose face because the offer was cut, said Duncan Chang, who manages a $125 million global resources fund for Prudential Financial in Taiwan, which owns Macarthur shares.

Also, Macarthur can bet the big hike in mining tax will not become law and won't get implemented in 2012, he said.

Macarthur urged shareholders to take no action on the new offer at A$15 a share, A$1 less than Peabody's sweetened bid last month, but still above a spurned cash and shares offer from rival bidder New Hope Corp , worth $3.3 billion.

Macarthur shares initially opened higher but then fell 2 percent to A$13.42, trading 11 percent below Peabody's offer, suggesting investors don't expect a deal to go through.

The definitive proposal delivers a clear, compelling and significant premium for Macarthur shareholders, and follows Peabody's due diligence as well as the introduction of the Australian resources profit tax proposal, Peabody said.

Citing confidentiality, Peabody spokeswoman Jennifer Morgans declined to comment on what came up in due diligence that led it to cut its bid or whether the resources super profits tax had been a bigger factor.

STILL ATTRACTIVE

Prudential Financial's Chang said even with uncertainty over the mining tax, A$15 a share was an attractive offer.

It is not yet clear when Macarthur's board will meet to discuss the reduced offer, Macarthur spokeswoman Genevieve Fraser said. The company has not had any shareholder feedback yet on the new offer, she said.

Peabody reiterated it would allow Macarthur's top three shareholders -- China's CITIC Resources <1205.HK> and steel giants ArcelorMittal and South Korea's POSCO <005490.KS> -- to retain their interests in Macarthur if they wanted to.

CITIC Resources, with 22.4 percent, needs to back the bid for it to succeed as the deal, called a scheme of arrangement, needs 75 percent support from votes cast.

CITIC Resources declined to comment on the latest offer.

There's still some doubt as to whether the offer's going to be successful, said Neil Boyd-Clark, portfolio manager at Fortis Investment Partners.

POSCO said on Monday it still plans to retain its stake.

ArcelorMittal said last month it would be willing to consider Peabody's offer.

Macarthur's shares tumbled 12 percent last week after the Australian government unveiled plans to slap a resources super profits tax on mining firms.

(Additional reporting by Faith Hung in TAIPEI, Kim Yeon-hee in SEOUL and Sui-Lee Wee in HONG KONG; Editing by Balazs Koranyi and Ian Geoghegan))

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