Just how much money will the government’s revised mining tax end up raising? It’s a more complicated question after the 2011 result from Rio Tinto and the half-year figures from BHP Billiton.
They confirm the Australian iron ore industry is probably second only to Apple in terms of the world’s richest business. If Rio Tinto and BHP aren’t making superprofits, no one is and never will. Rio is achieving gross profit margins of about 75%; BHP 65%, compared with the gross margin of 38% for Telstra in its latest half-year profit, issued yesterday.
Telstra used to be the benchmark for the corporate naysayers who resented what they saw as huge profit margins (Telstra’s are down from about 44% in the past five years).
Overall, BHP’s profitability was underlined by the fact that the near-record EBITDA of $US18.7 billion for the first half was earned on a 9.7% improvement in group revenues to more than $US37.4 billion.
That’s a profit margin on 50%. BHP’s iron ore business had profit margins of 65% in the December half year ($US7.9 billion on revenues of $US12.14 billion), up from 62.8% ($US5.8 billion on revenues of $US9.38 billion) in the December, 2010 half year.
Rio Tinto, which reported its 2011 earnings yesterday, depends far more on its iron ore business than BHP does. It doesn’t have BHP’s huge spread of resources, especially limited coking-coal assets and no oil and gas.
Rio had earnings before interest, tax, depreciation and amortisation of $US28.52 million on sales of $US65.67 billion in 2011, compared with a gross profit of $US25.97 billion on sales of $US59.21 billion in 2010. That was a gross profit margin of 43.4% in 2011, down marginally from the 43.8% margin for 2010.
Rio said its WA iron ore business had EBITDA of $US20.01 billion, up from $US15.14 billion in 2010. That’s a gross profit margin of 74.5%, in sales of $US26.8 billion, up from 2010’s very rich 71.8% in sales of $US21.07 billion.
But the results from the two giants also underline the fact that it’s not going to get this good again, as costs rise and iron ore and coal prices peak for the next year or so. And that raises more doubt about just how much money the federal government will raise from the new mining tax. Remember that the government has already overcommitted its spending on the planned revenue from the tax (and the opposition isn’t much better, having decided to keep the costly rise in compulsory superannuation even without the tax).
(Telstra said earnings before interest, tax, depreciation and amortisation (EBITDA) rose 3.75% to $4.75 billion, a profit margin of a still fabulous 38%.
Even other big mining companies are not as profitable as BHP and Rio Tinto. According to figures released in London this week, the proposed merger of Glencore and Xstrata (34% owned by Glencore) would produce a new company with (for 2011) revenues of $US209.4 billion and adjusted EBITDA of $16.2 billion.
By way of contrast, the combined Glenstrata had a margin of just 7.75%, with Xstrata’s margin of 33% by far the best of the two companies. And that factors in the genius the companies, both of which are headquartered in the Swiss tax haven of Zug.
Glencore and Xstrata have no meaningful involvement in iron ore, or in oil and gas production (as BHP does). That makes them relative also-rans, especially in Australia. Anyway, Glencore’s primary skill is in minerals marketing, often using transfer pricing to keep the tax burden of it and its subsidiaries as low as possible.
And why are these super returns to peak for the time being? Well iron ore prices are about $US140 a tonne, after falling below $US120 a tonne last September and October and peaking about $US183 a tonne in the first half of last year. Coking and thermal coal prices have also fallen sharply as well as the impact of the Queensland floods have eased and demand weakened as China and other economies in Asia slow.
Development costs also continue to rise. Rio moaned about that yesterday. Rio confirmed $US3.4 billion of expansion spending on Wednesday in the Pilbara. Four months ago the same spending plans were announced and the cost was $US3.1 billion. That’s a 10% jump in just over three months, which is a surge by any measurement.
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