UPDATE: Australia's Miners Drop On Tax Review Proposals

Australian mining companies fell sharply Monday as investors factored in lower earnings for the companies after the government said Sunday that it plans to introduce a 40% tax on the industry's profits.

Analysts cut target prices and earnings estimates for many of the firms and said that the proposed Resource Super Profits Tax could cause potential mergers and acquisition suitors to reassess their valuation of target companies.

Credit Suisse analysts said that the proposals could force the country's two largest miners, BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RTP), back to the negotiating table on their proposed A$116 billion joint venture to combine their iron ore assets in Western Australia's Pilbara region.

"We are still committed to the joint venture. We are assessing the impact but it is a bit early to say," a BHP spokeswoman said adding there is "still a great deal that is unclear" about the detail of the tax changes.

Rio Tinto wasn't immediately available for comment.

Mining companies were still digesting the implications of the plans, which came as part of a review of Australia's entire taxation system which will also see the country's headline corporate tax rate reduced to 28% from 30%.

Royalty payments that mining companies currently pay to state governments will also be rebated as part of the proposals, reducing the net effect of the tax changes below the headline rate of 40%.

The proposals still have to pass Australia's parliament, where several recent major laws have failed to get through the Senate, where the government lacks a majority.

Opposition leader Tony Abbott told Australian Broadcasting Corp. radio on Monday that he was "deeply hostile" to the plans, but refused to say whether he would oppose the laws in the Senate.

Miners nonetheless suffered a savage sell-off in morning trading in Sydney.

At 0210 GMT, Macarthur Coal Ltd. (MCC.AU) was down 7% at A$14.89, Iluka Resources Ltd. (ILU.AU) was down 5.6% at A$4.38, Mount Gibson Iron Ltd. (MGX.AU) was down 3.5% at A$1.65, while Rio Tinto was down 3.6% at A$69.51 and BHP was down 2.6% at A$39.72.

Macarthur, which has been the subject of a takeover bid by the U.S. miner Peabody Energy Corp. (BTU), could see its suitor's plans hit by the tax review's impact on its valuation, according to Macquarie analysts. "The prospective fall in (Macarthur's) net present value...is likely to see Peabody reassess its estimate of 'fair value'," Macquarie said.

Initial sharp falls in share prices had recovered somewhat by late morning. The slide had been "at the upper end of what we'd been expecting," said Brendan Fitzpatrick, a mining analyst at Deutsche Bank in Sydney.

Deutsche Bank estimated that the new rules would hit sector valuations by 7%, a reduction which should already be at least partially factored into share prices.

"After completing the detailed analysis it wasn't as detrimental as it appears on the first review," he said, citing the fact that the introduction of the changes will be pushed back to 2012; the rebate of state royalties; the reduction in the main corporate tax rate; and the fact that depreciation and amortisation will not be included in the tax calculation.

Companies with large numbers of offshore projects and in an early stage of development would be likely to fare best, he said, as the taxes will only hit profits, rather than revenues, from Australian mines. However, overseas companies with significant Australian operations will be affected.

Mick Davis, Chief Executive of Anglo-Swiss mining giant Xstrata, said that under the plan, Australia would have the highest taxes on the minerals sector anywhere in the world.

"(It) will result in significant and disproportionate additional taxation on the industry and could well curb the large scale, long-term investments required to develop Australia's natural resources for the benefit of all Australians," Xstrata said in a statement.

For energy companies, there was little change in the new tax regime to cause much concern.

Australian oil and gas producers are already subject to the Petroleum Resource Rent Tax, which is at a rate of 40% of company's taxable profits.

"It's almost like everybody else catching up to where we're at," said Woodside Petroleum Ltd. (WPL.AU) Chief Executive Don Voelte.

The Australian government said projects within the scope of the PRRT can elect to transfer into the RSPT and that it anticipates that many projects will make the transition over time.

-By David Fickling; Dow Jones Newswires; david.fickling@dowjones.com

(Rebecca Thurlow, James Glynn, Ross Kelly in Sydney and Neil Sands in Melbourne contributed to this article)

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