The world is going tax-crazy, or so it seems when you keep seeing “special tax for this” and “special tax for that.” Australia has some of the most vast and untapped minerals, metals, and resources out there. A surprising proposal in Australia from May to suddenly tax 40% of mining profits was not welcomed at all by investors. The reason is more than obvious. Suddenly, Rio Tinto (RTP) and BHP Billiton (BHP) found themselves in a very large predicament. While not all uncertainties have been removed, some are dipping their toes in the water again as some resolution and logic is coming back into the fray.
Last week brought news that a resolution is being reworked for the larger mining giants. This has helped to put in a bid for some of these players. While the issues are not fully worked out and while the end-game is still not known, the belief is that the the Aussie Labor Party may have come to grips with reality and that large businesses that employee thousands upon thousands of workers cannot tax business into non-profit entities.
BHP ADRs are up over 6% from the lows of last week on this potential resolution. Rio Tinto ADRs are up almost 6% as well.
Rio Tinto Iron Ore’s CEO Sam Walsh has been quoted and referenced in many publications as saying that the new reworked tax structure has allowed BHP to at least restart its expansion studies at the Pilbara operations.
Australia’s competition regulator said Wednesday it had suspended its review of a proposed iron ore tie-up between Rio Tinto and BHP Billiton to allow the miners to make additional submissions.
Not everyone is cheering for joy. Deutsche Bank noted that this tax is a big win for miners, BUT… the firm cautions that this will still act as a hit to the valuations of the companies. Deutsche Bank even threw out the figures of a 2.6% decline in the net present value for BHP and more than 3.2% for Rio Tinto. Deutsche Bank notes that Rio derives 85% of its operating profit from Australia, versus 55% from BHP.
Investors just need to know that the final-final tax is still a matter that is unresolved. As far as what the taxes would have been or could have been versus what they will be, that is another matter that is still an unresolved issue. Reuters ran a detailed piece showing some of the tax implications and expectations.
This begs a legitimate question… At what point does taxation become theft?
The biggest risk to a sudden followed and lasting recovery in these shares is the constant pesky fears of the double-dip recession. If metals and minerals prices fall further or if the global economy does double-dip, the hoped-for resolution of this tax matter will have a limited value.
As far as a speculative options trade, investors need to go out past the election and past the immediate negotiating period. That leaves Jan-2011 CALLS. The BHP JAN-2011 $70 CALLS run about $5.50 right now and the the RTP Jan-2011 $50 CALLS cost about $4.50. While not exactly cheap, those look to be the speculative CALL options that traders would want to use for options speculating.
There is also the notion that maybe the options cost too much or that maybe it has just become worth the risks to tip-toe into the stocks rather than using the speculative options. After all, even in a market fall it is not likely that either stock will become worthless. Rio Tinto plc (RTP) shares are up over 1% at $46.00 and the 52-week range for the ADRs is $30.00 to $62.24. BHP Billiton Ltd. (BHP) shares are up over 2% at $65.20 and the 52-week range for the ADRs is $49.07 to $83.20.
