The support of the former prime minister, Paul Rudd, was not enough. Julia Gillard has failed to win the Australian election outright. The Australian dollar stabilised towards the end of the week, having reacted badly to the political uncertainty.
In her two months in office, Gillard did her level best to appease voters by unwinding many of Rudd’s policies. However, it is the economy, and in particular the mining tax. that was the biggest thorn in her side. Although the proposed super tax was watered down, that was not enough. Conservative Tony Abbott and Gillard now face the spectre of a hung parliament.
All of this leaves the mining sector in limbo. Australia is the world’s largest exporter of coal and iron ore. The sector has contributed A$360bn to the economy in the past 20 years. It sees itself as the reason that Australia avoided recession. Firms naturally objected to the 40% super-tax proposal mooted by Rudd.
Rio Tinto pointedly announced a review of its Australian operations. As a consequence, Rudd was ousted by his own party and replaced with Gillard. When Gillard came in she cut the proposed rate to 30%. This would reduce the number of companies affected from 2,500 to 320, according to Sky News. The proposal was endorsed by the big three – BHP, Rio Tinto, and Xstrata. The tax would come into effect in 2012 and is forecast to make A$10.5bn in its first two years, $1.5bn less than the government originally wanted. The Conservatives, however, want to scrap the tax.
So what’s next for mining shares? Paul McTaggart at Credit Suisse is cautious: “The potential impact of the proposed mineral resources rent tax is far from positive for the iron ore and coal mining industries.” Conversely, “if the proposal for the tax is abolished, both the major miners will be likely to see a net benefit in terms of sentiment, with Rio the relative winner”. Indeed, McTaggart believes that if the Conservatives get their way, scrapping the tax would boost Rio Tinto Group’s valuation by 3.5% and BHP Billiton by 2%. Mining investors should watch this space carefully.