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BHP, Rio Tinto Nicked by New Taxes

BHP Billiton and Rio Tinto are likely to underperform the Brazilian mining giant Vale on concerns related to Australian taxes and a China rate hike.

BHP Billiton (BHP) - Get BHP Group Ltd Sponsored ADR Report and Rio Tinto (RTP) - Get REINVENT TECHNOLOGY PARTNERS CLASS A Report are likely to underperform the Brazilian mining giant Vale (VALE) - Get Vale S.A. Sponsored ADR Report on concerns related to Australian taxes and a China rate hike.

Rio and BHP fell 4.3% and 3.0%, respectively, on the Australian Stock Exchange Monday, following the imposition of a new mining tax by Australia.

The mining giants extended the losses registered during trading on Friday which saw Rio Tinto, BHP Billiton and Vale decline by 5.76%, 4.46% and 2.55%, respectively.

Spreads on credit-default swaps on Rio Tinto jumped 7 basis points to 83 basis points and on BHP were up 4 basis points at 64 basis points, according to data provided by



A new Australian tax regime, aimed at restructuring the tax system and for ensuring government revenue, will impose a 40% tax on the mining profits of companies to pay for infrastructure, retirement and company levy changes.

Several miners have expressed their disappointment with the government's plan. BHP expects the total effective tax rate on Australian operations to increase to 57% beginning 2013 from the current 43%, according to a press release issued Sunday.

"The stability and competitiveness of the tax system have been central to investment in resources in Australia. If implemented, these proposals seriously threaten Australia's competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians." said BHP CEO Marius Kloppers.

BHP has about 51% of its assets in Australia.

Analysts at UBS estimate this "super tax" to reduce BHP's earnings by 17% and Rio's earnings by 21% in 2013. Mining companies will be taxed about 58% of their earnings, compared with 35% before this new tax regime.

The Australian Treasury Secretary Ken Henry anticipates the tax to be implemented in 2012 which is expected to raise A$12 billion within the first two years. Prime Minister Kevin Rudd told reporters, "This will use super profits on resources owned by all Australians. This will help convert Australia's strong economic position today into enduring prosperity."

In the past three years, the resources sector has contributed to around 18% of Australia's gross domestic product and 42% of export revenue, and has been the largest contributor to corporate tax revenue, according to BHP.

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Meanwhile, China, Australia's largest customer of natural sources, announced Monday a 50 basis points hike in the reserve requirement to 17% for the nation's biggest banks effective May 10.

This move will lead to lower bank lending to industries and hence a lower commodity demand in China. This will likely impact China's imports and could dent earnings of the mining giants.

These events compound the problems of BHP and Rio, which had anticipated production disruptions at a few of their mines during their respective March-quarterly reviews.

For the March quarter, BHP registered year-over-year growth rates of 22% and 9% for crude oil and natural gas, respectively. Production of lead, zinc, silver and nickel zoomed by 29%, 18%, 32% and 8%, respectively, while production declines for copper and uranium were 19% and 90%, respectively.

Production of iron ore increased by 11%, but was below analyst expectations. In fact, the company missed analyst output expectations in petroleum, copper and coal, while transcending expectations in manganese and nickel. Management cited weather and long wall changeovers for coal, lower grade for copper, and maintenance for petroleum as the reasons impacting production.

For the June quarter, the company anticipates output disruption for petroleum at Atlantis, for copper and uranium at Olympic Dam, and for coal at Hay point.

Management is confident that the recently implemented iron ore pricing based on spot prices is permanent. However, the China Iron & Steel Association is likely pressure the three mining giants following a 14% quarter-over-quarter drop in the country's steelmakers' profits during the March quarter.

Rio Tinto also missed analyst output expectations on iron ore, copper, aluminum and coal.

In the March quarter's operation review

, the company announced a year-over-year decline in copper and uranium output by 16% and 20%, respectively. In contrast, production of gold, bauxite, and hard coking coal increased 12%, 58%, and 35%, respectively during the same quarter.

As per


Analyst ratings guide, Rio has seven buy, three hold, and no sell ratings. BHP has seven buy, two hold, and no sell ratings.