The chairman of Gindalbie Metals, Geoff Wedlock, believes the company’s Karara iron ore project will be “caught mid-stream” by the Resource Super Profits Tax (RSPT).
In a letter to the company’s shareholders, Wedlock said the project would have an additional tax impost but would not receive any of the benefits, such as accelerated depreciation, infrastructure development or the exploration rebate.
“Gindalbie supports well thought out reform to our tax system,” he said.
“As a principle, however, any reform proposal should apply only to new investments, not to existing projects or projects such as Karara which are under construction and were committed to under the expectations of the existing system.”
Wedlock said it “defied all investment logic” that the returns above long-term bond rates (currently 5.7%) represented a ‘super profit.’
“Debt providers understandably want to see returns well above the company’s cost of capital, which is more like 12%,” he said.
“In addition, we are making substantial investments in regional, common-user infrastructure.
“This infrastructure will be available for generations to come and does not have to be built by the Government, yet Gindalbie and its investors receive no rebate, relief or recognition for this investment.”
According to Wedlock, more than half of the $2 billion capital cost will be invested in building or improving common-user infrastructure, including rail, power, roads and port facilities.
“Karara will initially generate around $1 billion in annual export revenues, building to $3 billion annually as the project grows,” he said.
“Under the existing arrangements Karara will generate approximately $55 million a year in Government royalties at its start-up rate, rising to $165 million annually with expansion.
“These specific royalty payments are in addition to the corporate and other taxes that Gindalbie is also obliged to pay.”
Wedlock said the project would be going ahead regardless of the tax, thanks to the “full support of Chinese partner Ansteel.”
“However the proposed tax changes will have a significant impact, as they will reduce the returns for the project and put planned and possible expansions at risk,” he said.
“We are fortunate that Karara is such an exceptional long term project.
“There are many others which may not proceed under the new tax arrangements.”