Xstrata reacts to the RSPT

XSTRATA has suspended a total of $A586 million of investment in Queensland, putting question marks over the $6 billion Wandoan thermal coal project and the $600 million project to extend the life of the Ernest Henry copper-gold mine.
Xstrata reacts to the RSPT Xstrata reacts to the RSPT Xstrata reacts to the RSPT Xstrata reacts to the RSPT Xstrata reacts to the RSPT

Xstrata's Wandoan project

Blair Price

“Together these two projects in Queensland would have created 3250 new jobs which are now at risk,” the Swiss mining giant said.

Xstrata put the blame squarely on the resources super-profits tax and said the decisions were the “initial findings” of its ongoing review of planned investment into its Australian operations and growth projects.

“The review includes growth projects comprising total investment of $22 billion and the potential to create 14,725 new jobs,” Xstrata said.

Suspended work includes the already-approved $400 million Ernest Henry shaft underground mine project, plus $91 million of design work for the first stage of the 30 million tonnes per annum Wandoan project in the Surat Basin.

Another $82 million of exploration work for Wandoan has been shelved along with $13 million of drilling for the Rolleston West and Sarum coal expansion projects in the Bowen Basin.

Xstrata chief executive Mick Davis said the suspension of investment into these key projects made them less likely to proceed and ultimately compromised Australia’s ability to continue to benefit from future commodity price rises.

“The RSPT has created significant uncertainty for the future of mining investment into Australia and would impair the value of previously approved projects and exploration to the point that continued investment can no longer be justified,” he said.

“Our Australian management teams’ analysis demonstrates that the RSPT would significantly impact the value and cash flows of both of these projects.

“The impact of the tax eliminates the net present value of the Wandoan coal project almost entirely and substantially reduces the value of the Ernest Henry underground shaft project. The two projects involve significant risks and total capital investment of over $6.4 billion. Neither will be viable if the RSPT is imposed.”

Davis added that the government’s decision to change the rules for existing investments had introduced the significant risk that any new investment in Australia might again be subject to tax regime changes without consultation.

“Any potential Australian mining investment now needs to show a higher rate of return to compensate for the impact of the world’s highest mining taxation on cash flows.

“Investors will also expect higher project returns to justify the increased risk of investing in Australia.”

Davis said Xstrata would continue to seek “meaningful consultation” with the federal government over the new tax proposal.

“In the meantime, we have an obligation to make business decisions in response to changing circumstances and we continue to develop business opportunities and develop growth projects in countries which promote competitive and predictable fiscal regimes.”

Wandoan

Before the tax announcement from the Rudd government, Xstrata was investigating options to upscale its massive Wandoan project to a 100 million tonnes per annum mining complex catering to three other potential mines.

The open cut project was significant in its ambition to open up the Surat Basin thermal coal region.

Early works were expected to start next month, including drilling, the construction of worker’s accommodation and road and communications upgrades.

Operation and construction of the project was expected to create more than 3000 jobs over the next five years.

“The RSPT puts the future of this globally significant $6 billion project at risk, together with the development of the Surat Basin as an internationally competitive export coal region,” Xstrata Coal CEO Peter Freyberg said.

“We are deeply disappointed to put these important activities on hold and regret the significant impact their suspension will have on jobs, our project partners and surrounding regional communities.

“Our priority is to discuss the implications of this suspension with affected communities and other stakeholders. We will honour all obligations and agreements entered into with landowners and key stakeholders to date.”

Ernest Henry

This project would have progressively shifted the open cut operation into a major shaft underground mine.

It only received the Xstrata go-ahead in December and would have extended the mine life from 2013 to at least 2024.

Xstrata said the development of the smaller decline underground mine was “currently” planned to continue but with most of the underground work now suspended, the planned production rate has been halved from 2012 while the mine life has been reduced five years to 2019.

“The shelving of the capital investment for the EHM underground mine development so soon after the corporate approvals were obtained is extremely disappointing and threatens the longer term viability of our operations in north Queensland,” Xstrata Copper CEO Charlie Sartain said.

“This has been a very difficult decision, particularly with its immediate impact on our workforce and the local communities, and given our strong collaboration with the Queensland government last year to obtain internal approvals for the project.

“This project clearly would have benefited the region and Queensland as a whole.”