Mining shares are helping to push leading shares into positive territory, as they welcomed a compromise deal over the Australian government's supertax on the sector.
With the arrival of new Australian prime minister Julia Gillard, previous proposals for a 40% tax have been watered down. Now a new resource tax of 30% will be introduced in July 2012, and will apply only to mined iron ore and coal. Projects will be entitled to a 25% extraction allowance which will reduce profits subject to the new tax.
Mining groups had warned the original proposals could put investment of $20bn at risk, but now they appear to be happier. In a statement Rio Tinto, BHP Billiton and Xstrata said they were encouraged by the new proposals and added that they would work with the government to hammer out the details.
In a note entitled A Big Win for the Miners, big climb down by Government (but they have got a little extra) analyst Peter Davey at Ambrian said:
The fact that the Australian Resource Super Profits Tax is now to be replaced by a newly titled, and greatly watered down, Minerals Resources Rent tax is great news for the likes of Rio Tinto, Xstrata and BHP Billiton (not forgetting Fortescue and all the other junior iron ore miners coming on stream).
We continue to recommend purchase of the mentioned miners, on the basis that when we get through this economic wobble investors will find it hard to ignore the value these miners offer in terms of earnings and dividend growth over the next two years.
The debacle surrounding the RSPT has been very quickly settled with a big Government climb down and three of the biggest miners appear relatively happy. You have to say the complexity of the Australian Tax structure has increased with the need for yet another set of accounts to be kept to calculate the tax due under MRRT.
The net effect of all this is that when BHP Billiton was quoting their total tax bill rising from around effective 43% to circa 57% with RSPT, we understand with MRRT the total tax bill will rise to something closer to 45%.
The miners accept they have to pay a higher rent on the finite resources they are depleting at an ever faster rate and this marginal increase is being accepted as more appropriate. There is a hidden cost that no one has highlighted and that's the accountant's fees, you got to think the real beneficiaries here are the accounting firms - accountants and lawyers always there to take their cut.
Xstrata has added 25p to 870.8p, Rio has risen 31p to 2935.5p and BHP is 23p better at 1717.5p, giving the market a lift after its recent slump on fears of a global slowdown following a batch of dispiriting economic numbers. The FTSE 100 is now up 16.28 points at 4822.03, but the mood is still fragile. The US non-farm payrolls this afternoon could have an impact, with job losses of 110,000 predicted. Anything worse could see shares go into reverse again, but the converse is also true.
Ahead of its annual meeting Tesco has edged up 0.8p to 378.3p despite a recent downgrade from Citigroup and the expectation of a pay row.
Royal Bank of Scotland has edged up 0.58p to 40.05p as it completed the sale of its Sempra metals, oil and European energy business to JP Morgan for $1.6bn.
Maintaining a hold recommendation, Danny Clarke of Shore Capital said:
The total cash consideration was $1.6bn (RBS share is 47%), slightly lower than $1.7bn as per 16 February 2010 announcement - we expect due to forex movements. RBS confirms that active sales processes remain underway for RBS Sempra North American Power & Gas and Sempra Energy business lines.
Bruce Packard of Seymour Pierce welcomed the deal but kept his sell rating:
There should be some relief because of all the regulatory uncertainty in the US at the moment, which potentially might have caused problems with the transaction.
JP Morgan did not buy Sempra's North American assets because of US government plans to separate commercial banks from proprietary trading, we believe. RBS is still looking to sell Sempra Commodities' North America business, which focuses on gas and power trading and could reach a value of $2bn (£1.4bn), according to sources quoted by the FT last month. Morgan Stanley and Jefferies are still in the running according to the paper.We think this is the right direction of travel for RBS. The sale of Sempra was demanded by European Commission ruling that ordered RBS to sell assets in return for receiving a bail-out. We rate the bank sell, albeit the shares have now fallen 33% since the end of April, and are now approaching our target price of 36p.
