Global miner Xstrata threatened to scrap $5.4 billion in Australian coal and copper projects, blaming a new mining tax and taking the value of new developments put on hold to above $20 billion in just a month.
Xstrata's move, which targets Prime Minister Kevin Rudd's home state of Queensland, will further pile pressure on the government to water down a proposed 40 percent tax on mining profits and give new ammunition to the tax's political opponents.
Xstrata, which last month halted some copper exploration in Queensland, said it was now shelving A$586 million of spending on its Wandoan thermal coal project and its expansion of its Ernest Henry copper mine.
That spending is part of a total planned capital investment of around A$6.4 billion ($5.4 billion) to complete both the Queensland developments, with the coal project accounting for the vast majority of this, the company added.
Neither would be viable if the tax is imposed, Xstrata Chief Executive Mick Davis said in a statement.
The government plans to introduce a 40 percent tax on mining profits from 2012, arguing it is not getting its fair share of a commodities export boom, but the proposal has outraged a mining industry that, with mineral fuels and metals, generated exports of over A$90 billion in the 10 months to April - 58 percent of Australia's total.
Trade Minister Simon Crean argued the new tax would benefit marginal projects by providing rebates for royalties, which must be paid before a project makes a profit. He said Xstrata had held up the project previously, before the tax proposal was announced early last month.
This is not the first time Xstrata has announced the holding up of this particular project, he told reporters, adding it was time mining companies ran an honest debate about taxes.
I just wish people would properly address all the details of this, privately, calmly, and actually work toward what seems to be a common objective, Crean said.
Australian operations contributed close to 39 percent of Xstrata's $2.77 billion 2009 net profit.
COPPER, GOLD & NICKEL TO BE HARD HIT - REPORT
Rudd said Xstrata's threat to cancel projects was part of the industry's political battle against the tax. He refused to be swayed.
There is going to be claim and counter claim, Rudd told reporters. There will be a lot of heat and there will be a lot of acrimony in this public debate. The government is determined to prosecute tax reform.
Last month, Fortescue Metals Group suspended iron ore projects in Western Australia state worth around $15 billion, though these were in an earlier stage of planning. Spending on the Xstrata projects has already been approved.
Xstrata's Davis said the tax created significant uncertainty for the future of mining investment into Australia.
The impact of the tax eliminates the net present value of the Wandoan coal project almost entirely and substantially reduces the value of the Ernest Henry underground shaft project, he said.
Xstrata had planned to extend the open-cut Ernest Henry mine by mining deeper through vertical shafts, extending its life by 11 years to at least 2024. The mine can produce annually 115,000 tonnes of copper in concentrate and 120,000 ounces of gold in concentrate, according to Xstrata's website.
The proposed tax is expected to hit copper, gold and nickel mines hard, according to a report prepared by accountancy firm KPMG for mining lobby group the Minerals Council of Australia.
KPMG studied the impact of the tax on a typical greenfield mine project with around-average costs and found that nickel, copper and gold mines would become unviable.
(Additional reporting by James Grubel in CANBERRA, Editing by Ian Geoghegan)
($1=1.188 Australian Dollar)