Global miner Rio Tinto said it is reviewing all investments in Australia due to a proposed new tax, describing the country as its No.1 sovereign risk concern and sending a weak Australian dollar even lower.
Australia, which accounts for the bulk of Rio's revenue from iron ore, coal and other commodities, had been considered a top safe-haven investment destination for miners hunting the raw materials to fuel Asia's growth.
But plans by Prime Minister Kevin Rudd to introduce a 40 percent tax on miners' so-called super profits has sparked high-stakes political battle ahead of a general election later this year.
This is my number one sovereign risk issue on a global basis, Chief Executive Tom Albanese told reporters on Monday, noting that the tax had set up the prospect of a long period of uncertainty which was corrosive to new investment.
Albanese's remarks were seen as adding pressure on Canberra to scrap or alter the plan as government representatives enter a second week of industry consultations. Separate meetings late last week with Rio and BHP Billiton yielded no modifications.
Rio Tinto's most immediate investment plans will require about $10 billion to increase iron ore production by 50 million tonnes in the Pilbara region of the state of Western Australian.
The issue is the potential magnitude of the change this tax will bring about and that has heightened concerns of sovereign risk here in Australia, said Wilson HTM analyst John Young.
Albanese's comments helped drive the Australian currency down against the greenback and the yen by more than 1 percent, on mounting concerns that Rio, BHP, Fortescue Metals Group and other miners could deliver on their threats to pull billions of dollars of investments.
Rudd unveiled the tax this month, arguing the government was not receiving its fair share of the resources boom, which helped the economy avoid recession during the global financial crisis.
There will be many many many statements, by many, many companies, all of whom may have this in common. They don't want to pay more tax, Rudd said in parliament on Monday.
This government believes the time has come for tax reform, which delivers a fair return for all Australians.
Rudd's treasurer, Wayne Swan, in a television interview on Sunday said Australians were being short-changed by the miners under the existing tax regime.
An online opinion indicated tentative public support for the mining tax. The Essential Media poll found 43 percent of 1,044 respondents supported the tax and 36 percent were opposed.
Sovereign risk is typically assessed through surveys of mining executives such as Tom Albanese, so you may see this reflected in Australia becoming higher risk, said Stephen Bartrop, portfolio manager for LimeStreet Capital Australian Resources' Hi-Alpha Fund.
Albanese said he was bracing for a worst-case scenario if the tax is introduced as planned in 2012.
We'd be asking our managers to evaluate it on a worst-case basis, he said, adding that capital would shift in the meantime to other exploration hot-spots such as Canada.
Rio Tinto is conducting exploration work in 30 countries, including Guinea, Madagascar, parts of South America and North America, Russia and Mongolia as well as Australia for everything from copper, diamonds and gold to bauxite, iron ore and coal. The proposed resources super profit tax has in a short time created a significant amount of angst for all Australians, Simon Bennison, chief executive of the Association of Mining and Exploration Companies in Australia said.
Daniel Manley, a stocks dealer at broker Burrell & Co, said the mining tax was undermining market sentiment.
That sort of sovereign risk that is now associated with Australia is weighing heavily, said Manley.
Shares in Rio rallied along with the rest of the Australian stock market, rising 3.5 percent.
Rudd has put the tax at the center of his campaign to win re-election at polls expected around October. It is the cornerstone of his promise to return the fiscal budget to surplus by 2012-13, to cut the company tax rate and to indirectly fund another pledge to raise national retirement incomes.
Rudd's Labor Party has seen its popularity plunge, with the mining scheme failing to win over voters after back-downs on some troubled policies including curbing carbon emissions and a scheme to deliver free insulation to Australian homes.
But his tax won the support of the head of the Organization for Economic Cooperation and Development (OECD), Angel Gurria, who said on Australian radio on the weekend the 40 percent tax on mining companies is justified.
Albanese dismissed government claims that Australia held limited resources for mining and that now was the time for the country to reap as much revenue as it could from the sector.
I've heard arguments over the past two weeks that say the resources are ultimately finite in Australia and there needs to be as much of a slice of that pie grabbed as possible while you can. I don't think this is true, he said.
(Writing by James Regan and Mark Bendeich; Additional reporting by Sonali Paul in MELBOURNE and James Grubel in CANBERRA; Editing by Ed Davies and Lincoln Feast)