Mining boom: Killing the golden goose?

Could the big miners go elsewhere?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 13, 2012 1:19 pm AEST

Governments need to stop fiddling with taxation and royalty rules says BHP's chairman Jac Nasser.

BHP Billiton's (ASX: BHP) Nasser has called on state and federal governments to stop making changes, because it was doing grievous harm to Australia's reputation for stability as an investment destination, in an interview with the Australian Financial Review.

The most recent changes – the Queensland state government raising coal royalties – comes at a time when coal miners are scrambling to cut costs in the face of a 24% fall in coal prices. Analysts estimate the average cost of production for hard coking coal is around US$150, compared to the spot price of US$155 – which doesn't leave much margin for error. The Queensland government has predicted prices around US$200 a tonne this year.

BHP had already announced plans to close its Gregory coal mine in Queensland, because it was no longer profitable, while Rio Tinto Limited (ASX: RIO) closed its Blair Athol mine and downsized its nearby Claremont coal operations.

Investor confidence has plunged, and the outlook for investment in new mines looks shaky. The moves by the Queensland government could also backfire in an unexpected way. As a majority shareholder in QR National (ASX: QRN), falling coal volumes could see the company's revenues and profits hit, followed by a slide in the share price, which could then undermine (sorry!) the government's planned sale of its 34% holding. The sale, which is expected to reap a windfall of $2.8 billion, has already been factored into the government's balance sheet, to bring down its debt.

Miners may also need to look at how much they have been paying contractors, as a means to bring down costs. You only have to look at the profits of several of the mining services companies, such as Downer EDI Limited (ASX: DOW), which recently reported a 45% jump in earnings before interest and tax for its mining services division.

The Foolish bottom line

Australia's not the only place that has a tremendous amount of natural resources. South America – particularly Brazil, and Africa also have a wealth of valuable resource assets. If we're not careful, we could see investment in Australia move offshore. There's a fine line between benefiting from the proceeds of our mineral wealth and pushing the mining companies too far. It appears we may have strayed over that line.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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