Last week, the Minerals Council Australia (MCA) came up with a KPMG report (download here) that suggested that the newly introduced Resource Super-Profit Tax (RSPT) would lead to many future mining projects being non-viable. This is of course a cornerstone in their scare-campaign about this tax and I had a look at the report to see what they did.
A preamble to this is that the timing and source of this report raises an eye-brow. I first presumed that KPMG must have some very fast modelers in order to be able to come up with a whole report on the effects of a new tax on new mines within weeks of the budget announcement of this new tax. It would be a testimony to how fast markets can generate research if there is a quick dollar on offer for it. However, this appears not to be a case of fast modeling. The research was commissioned way in advance of the budget. This is somewhat extra surprising if you reflect on the fact that KPMG also modeled the long-term consequences of the RSPT for the Treasury, as part of the Henry Review! At the same time, in the last months of 2009, they were apparently already modeling extensions of their RSPT models on behest of the Minerals Council Australia. Large sections of the report are hence devoted to explaining the differences which read a little forced to me. You can smell the guilt.
I doubt any formal codes of conduct were broken in terms of conflicts of interest, but I find it a little dubious that the same modelers are able to sell the advise to the Treasury that the RSPT will have no adverse long-term consequences whilst simultaneously selling advise to the MCA that there might be some negative short-run consequences. It is hard to see how you can conscientiously serve two masters at once.
I have the following quick comments to make about the content before turning to the main issue:
– The report nowhere gives you the actual models and codes used for the calculations. I could not find the code books either on the KPMG website, linked to within the report, or on the website of the MCA. It is hence very much a ‘trust me, I know what I am doing’ piece. Since these were the same guys as that did the calculations for the Treasury, they probably did know what they were doing, but it would be nice to have independent access to the data and models, and I gather from the introduction that the MCA could give this information out if it wanted to.
– The report is highly selective in terms of what it chooses to calculate and highlight. It doesn’t tell us what the RSPT would do to the Net Present Values (NPVs) of all possible future projects, but only talks about the NPV of the second quartile of profitable projects. This is of course because the first quartile will go ahead anyway and the third quartile will probably see increases in NPVs due to the cost-sharing in the RSPT. It loads the dice towards the negative to focus on only 25% of all considered future projects.
– The report leaves out the effects of all existing projects, at least in its headline treatment. As Chris Richardson pointed out in his presentation on June 3rd to the Minerals Council, existing projects will probably start to see more intensive mining activity because of the reduction in output-taxes associated with the RSPT increases the incentives to produce more at existing mines. This is also implicit in the KPMG report, but the finding that in the next 2 years mining activity should increase is not highlighted at all.
– Trying to make the argument that the RSPT leads to high overall taxes by international standards, the report compares effective tax rates under the new regime with existing tax rates elsewhere. The crucial questions are of course which commodities the comparisons are made to. In choosing comparison commodities, the report leaves out oil which is more heavily taxed than the mining industry would be under these changes (but where production and investment in oil exploration haven’t suffered in the slightest despite these high taxes!), but leaves it to a side-note on page 30 to mention this. Since mineral production is becoming more profitable, it is not at all strange to compare the future of mining with the present treatment of oil, since both involve exploration, investment, and production phases.
– The report itself mentions that long-term effects of the RSPT should be positive for mining activity (a similar point is made by Richardson).
– Computed internal rates of return look very healthy for all types of mining under the RSPT, something given little attention to.
– All these highly selective choices already make it clear that the report, and in particular the summary, is indeed not an objective appraisal but a piece of propaganda that was bought for a reason. The newspaper headlines ‘KPMG report shows miners are going to be ok the next 2 years and in the long-run’ clearly is not what the MCA wanted others to get from this report, even though such headlines would be warranted by it.
Then, to the true matters of substance.