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Xstrata suspends mining investments

World Coal,

Xstrata has suspended AU$ 586 million of expenditure with immediate effect. The suspended projects in Queensland would have created 3250 new jobs, which are now at risk. The decisions represent the initial findings from Xstrata’s ongoing review of planned investment into its Australian operations and growth projects as a result of the Australian government’s proposed Resource Super Profits Tax (RSPT).

Key Queensland growth initiatives to be suspended are:

  • AU$ 400 million Ernest Henry Mining (EHM) shaft underground mine project.
  • AU$ 91 million early works and detailed design for the first stage of the 30 million tpa, AU$ 6 billion Wandoan Coal Project and related infrastructure.
  • AU$ 82 million of additional exploration and sampling for Wandoan and the Surat basin.
  • AU$ 13 million of drilling on additional coal expansion projects in Queensland.

Mick Davis, Xstrata plc Chief Executive commented, “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 AU$ 6.4 billion. Neither will be viable if the RSPT is imposed.”

Xstrata Coal has spent approximately AU$ 200 million over three years progressing the Wandoan Coal Project through feasibility studies. Early works scheduled to commence from July 2010 will be suspended immediately, including drilling, the construction of workers’ accommodation, communications and road upgrades.

He went on to say, “In addition, the government’s decision to change the rules for existing investments has introduced the significant risk that any new investment in Australia may 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.

The proposed super resource tax on mining profits in Australia has caused disarray in the industry and has already derailed a merger effort between Peabody Energy and MacArthur Coal, after share prices were sent tumbling by the new tax’s announcement. Despite government assurances that it will work, consultation is necessary between mining companies and the federal government if the proposed tax is not to scare off any more investors, and damage the Australian mining industry further.

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