Canberra's mining project hit list

The premiers of Queensland, South Australia and Western Australia will be on the edge of their seats when the federal budget comes out on May 8. If the premiers do their homework they will know that significant projects in their states are at considerable risk if Treasurer Wayne Swan decides to impose another substantial change in the taxation of Australian mining ventures.

Among the measures being proposed by Treasury are fiddles with the diesel tax rebate, changes to the exploration deduction rules and making mining companies write off overburden removal over the life of the mine rather than an immediate deduction.

Any one of these measures would probably cause a cancellation of one or two significant projects in Australia. All three would see many mothballed. The most vulnerable projects are BHP Billiton's $10 billion Queensland coal expansion, which is already in jeopardy because of union action. Then comes the iron ore expansion plans in the Pilbara and finally BHP's giant Olympic Dam project, which is a massive over burden removal exercise, very vulnerable to tax changes in diesel and over burden removal.

In his KGB Interview, Minerals Council of Australia chief Mitch Hooke was careful not to nominate any projects but was adamant that if the government substantially increased the tax in any one of the areas being canvassed then a number of Australian mining projects will be jeopardised. Clearly the three I mentioned are among the more vulnerable.

Wayne Swan will reply that Mitch Hooke is talking his book and bluffing – that BHP Billiton and the other miners will not walk away from their big Australian projects. But I have spoken to a number of the companies and they are becoming extremely disenchanted with Australia. There is no doubt that mining investment is a global business and all the major companies that looking to invest in Australia will compares the returns and costs of their Australian projects against their proposed projects offshore.

Wayne Swan's problem is that when he and Resources Minster Martin Ferguson negotiated the current mining tax to replace the botched Rudd/Swan first attempt (which cost Rudd his job), Swan was able to tell the Australian people that there would not be a significant reduction in revenue. And of course that was complete and utter rubbish because the first mining tax would have been a crippling blow to mining and a huge fundraiser even if mining revenue turned down.

The second mining tax could only extract large amounts of money if the iron ore and coal mining boom kept going and prices rose further, which is what Treasury and Swan assumed in their politically motivated optimistic revenue projections. Unfortunately, as Hooke explains, mining costs have risen substantially, the Australian dollar has skyrocketed and commodity prices have weakened. Unfortunately although there is prosperity, the boom has not continued as Treasury and Swan had forecast, so the Treasury/Swan predictions are simply wrong as things now stand.

The inflated mining tax II predictions will have to be scaled down substantially in the May 8 budget. Yet Swan needs extra mining money to cover the shortfall and Hooke believes that is why he is looking for extra mining taxes to fill the gap.

In Canberra the political temperature is very high and Mitch Hooke will be accused of scaremongering and being heavy handed with the government – particularly as the Minerals Council has resumed advertising again against the government. Nevertheless any significant upward movement in tax at a time of lower prices and higher costs is going to hit mining projects and Julia Gillard is going to find herself in a remarkably similar situation to Kevin Rudd, who fell victim to the inability of Treasury to understand the mining business. If Wayne Swan takes to the miners with the axe in his budget this will be his third attempt at mining taxation and, I suspect, it will be just as disastrous as the first one.