Aussie Super Tax: Five Gold Stocks to Watch

NEW YORK ( TheStreet ) -- Australia's proposed mining tax remains in a state of high flux, the object of intense negotiation between industry chieftains, lobbyists, government ministers and parliamentarians in the Down Under capital of Canberra.

Lawmakers, of course, have yet to approve the levy (officially known as the Resources Super Profits Tax). And it's now understood that a final law probably won't be hammered out for months -- maybe not even by the end of the year.

Mining Stocks To Watch

Needless to say, the tax has raised the hackles of mining executives like nothing, perhaps, since the machinations of David Brower (the late and contentious former head of the Sierra Club). But the resources toll has created about as much confusion as it has controversy. The moving parts are many and intricate. And because the plan remains subject to negotiation, much of what has been publicized will likely change.

Case in point: Just today, word out of Australia is that Kevin Rudd, the progressive prime minister who set tax reform in motion and is the mining levy's champion, might have already buckled under the industry's pressure. Rudd is apparently ready to extend "an olive branch" to miners, in the words of the Sydney Morning Herald.

"The changes will go some way to meeting the general objections of the mining industry," the newspaper said, citing no sources.

Complicating matters further is the fact that, odds are, Australia's biacameral government will probably face elections sometime later this year. Whatever the case, mining companies are hunkering down, bringing in the lobbyists and media propagandists, and preparing for a long battle ahead.

At any rate, some clarification and correction is therefore in order:

For starters, the current proposal -- which would have the tax take effect on July 1, 2012 -- suggests a 40% levy on the "super profits" of specific mines, and not on the mining corporation itself. That headline 40% rate is perhaps the one figure in the proposal that's the most subject to change. It served, essentially, as a starting point for the government to begin talks with its mineral-extractor constituents, analysts say. Some believe that, when it's all said and done, 30% is the more likely rate.

There's been talk that the Super Profits Tax will replace the present state-by-state royalty system, itself widely viewed as needlessly onerous and confusing. Others have said no, that's not the case: the super tax would come on top of these royalty levies, which now range between rates of 2% and 10% and bring in about eight billion Australian dollars total per year to the country's six states and two territories.

According to the government's proposal, though, the feds would pay a tax credit to the mines meant to cover the whole of the state royalty payouts. The royalty vs. super tax argument is also a point of contention, and negotiation, between Australia's states and its feds.

Just how to define "profit" for the purposes of the super tax is also up for grabs, as one TheStreet commenter has noted. As it stands, the proposal suggests taking a cut of all operating profits of 6% or more. But this number is also in flux. According to the latest news from Australia, the government will raise this threshold profit rate to 10%.

What also remains to be seen is whether that means profit as calculated "at the gate" of each mine or further downstream. For example, a big mine's operations might entail a railroad that hauls the metal to the nearest port. Would the tax take its cut on the metal before it goes on the railcar or once it reaches the water? Once it reaches the water, of course, the metal has increased in value since it's that much closer to its end user. These questions have yet to be answered.

For investors and owners of mining-company shares, other obvious questions loom. Exposure to Australia, after all, varies widely from company to company.

Before the Resources Super Profits Tax man cometh, then, it's important to know which miners have substantial assets Down Under, and how this may impact their overall competitiveness.

The resource-rich island continent and former penal colony is known for many a mineral, including iron ore, coal and gold. Given the heady ascent in gold prices and the sheer number of miners trying to extract it, the gold production industry is as good of a place as any to start to answer a few super-tax-related questions.

Here are the top five gold stocks worth examining:

5. New Gold ( NGD)

New Gold, which explores for and produces gold, silver and copper, is one of the five largest gold miners in Australia, but also one of the smallest companies with one of the biggest mines. New Gold owns the Cobar Gold Field mine in New South Wales, which has 570,000 ounces of proven and probable reserves. New Gold estimates that 2010 gold production can reach 100,000 ounces.

The stock has eight buy ratings, five holds and no sells, with an average price target of $6.55. The stock has risen more than 81% year-to-date and sentiment is positive with a short ratio of 0.27.

4. Gold Fields ( GFI)

Gold Fields has two gold mines in operation in Western Australia. All told, the company is producing 620,000 ounces of gold a year from its St. Ives and Agnew mines, at a cash cost of $596 and $401, respectively.

With gold prices soaring to more than $1,200 an ounce, that means, of course, that Gold Fields can make anywhere between $600 and $800 for each ounce of gold it produces and sells Down Under.

Gold Fields currently employs more than 400 people and 858 contractors for its mines in Australia.

Analysts are neutral on the stock with four holds, one sell and one buy with an average price target of $14.28. Paulson & Co., the hedge fund managed by legendary investor John Paulson, is the third largest holder of the stock, with more than 23.5 million shares. The stock is up 3% for the year.

3. AngloGold Ashanti ( AU)

AngloGold has two projects in Australia: one operational and one explorative. AngloGold's producing mine, Sunrise Dam, delivered more than 400,000 ounces of gold in 2009 at a total cash cost of $646 an ounce. Its exploration project, Tropicana, is expected to produce the same amount of gold annually. AngloGold owns 70% of that project, and the feasibility study is scheduled for completion in the second half of 2010.

CEO Mark Cutifani said in a presentation at the Minerals Council of Australia's Minerals Week Conference that "we will not give up on Australia and Tropicana." Cutifani has said that he will continue meeting with officials in Australia to discuss details of the Super Profits Tax, but he's also hinted that the company could eventually decide to focus on projects in other countries. "We are still committed to our Australian mines , but what should be a 20-year development that our industry so desperately needs, has slipped back down the project priority list."

Paulson & Co. again is the largest holder of the stock, with almost 44 million shares after recently adding 900,000. Analysts are not as bullish as the hedge-fund manager appears to be. The stock has six holds (and no buy or sell ratings), with an average price target of $41.73. Year-to-date, AngloGold shares have gained just 5%.

2. Newmont Mining ( NEM)

Newmont Mining is one of the largest gold and copper producers in the world. The company, which has four projects in Australia, including one in New Zealand, recorded gold sales for 2009 of 1.2 million ounces at a total cash cost of $512 an ounce.

Newmont has said it will join its peers like AngloGold in working with the Australian government to play a "constructive role" in the Super Profits Tax decision process.

Newmont is trying to extend the life of two of its mines: Kalgoorlie and Tanami. Its third mine, Jundee, is gearing up to resume open-pit mining. More significantly for Newmont's prospects, the company is ramping up its all-important Boddington mine, which Newmont boasts could be the country's largest gold deposit. The company wants Boddington to reach full capacity in 2010.

According to mining analysts at Dahlman Rose & Co., if the tax is implemented, "costs at all of these assets should rise over time, reducing profitability." The firm isn't yet calculating the Resource Super Profits Tax into its valuation of Newmont, however, and currently has a buy rating on the stock.

The Denver-based miner's shares have 11 other buy ratings, nine holds and one sell, with an average price target of $64.74. The stock has popped almost 20% this year.

1. Barrick Gold ( ABX)

Barrick Gold is the largest gold producer in the world, with 11 projects in Australia, nine of which are operational. Barrick owns a variety of interests in the projects, from 100% to 37.5%.

According to the company's website, what Barrick calls its Australia Pacific region is home to mines containing 18 million ounces of proven and probable reserves. That's 13% of the company's total reserve base. In 2009, Barrick produced 1.98 million ounces of gold at a cash cost of $588 per ounce.

Analysts appear to love this stock, which has 22 buy ratings and 7 holds with an average price target of $51.64. Dahlman Rose & Co., for its part, has a hold rating on the stock and has valued Barrick's Australian operations at $2.49 a share of its net asset value. It's not just analysts who have taken a liking to the stock, which has a short interest ratio of just 0.81. Barrick shares are up 10% this year.
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-- Written by Scott Eden and Alix Steel in New York.
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.