Rio, Fortescue unlikely to pay MRRT

According to The Australian, falling iron ore and coal prices may mean that the governments Mineral Resource Rent Tax (MRRT) may collect no revenue from some of our biggest miners.

BHP (ASX: BHP), Rio Tinto (ASX: RIO), Glencore Xstrata and Fortescue (ASX: FMG) have all indicated that the prices of iron ore and coal will mean that they are unlikely to pay the tax for the rest of this year. Even though Rio already paid an unknown amount in April, where it realised an average $US150 a tonne for iron ore, the increasing likelihood of a price around $US90 per tonne will mean they won’t be liable to pay the tax.

With the biggest Australian and international miners, particularly from Brazil and Canada, increasing production, the supply of iron ore will greatly surpass the world’s demand which will put downwards pressure on prices.

The poor performance of the tax may mean that if Kevin Rudd wins at the next election, we may witness a change in the way it is implemented or calculated. In the meantime, the price of coal has slumped and government is relying on iron ore producers like Rio and Fortescue to collect some form of revenue.

Fortescue chief financial officer Stephen Pearce said “we’re not seeing any MRRT in our future”. The complexities of the calculating the tax has attributed to the shaky forecasting provided by treasury back in 2011 when it was implemented by Julia Gillard. The fact that BHP, Rio and Xstrata all collaborated on the design of the tax is also a factor that has led it to where it is today.

As long as Rio continues its strong expansion in the Pilbara, it is unlikely to be liable to pay the tax when the price of the steel-making ingredient is so slow. This is due to capital spending and depreciation being deductible against it.

Foolish takeaway

Rio and BHP continue to be the most promising of the big Australian miners because of their low costs of production and strong balance sheets however there are higher yielding stocks that have potentially more growth and safety. The risk of a much lower iron ore price may mean that investors can find a cheaper entrance point in the near future.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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