BHP’s Olympic Dam a potential casualty of Trump’s tax package

BHP’s Olympic Dam project.

Australia’s largest non-gas mineral development — BHP’s multi billion Olympic Dam extension --- has suddenly become a possible casualty of Donald Trump’s tax package.

Last night in Washington President Trump was optimistic, although snags arose in detailed negotiations over his tax measures, so the deal is not yet done.

While BHP is probably Australia’s biggest beneficiary of the tax package - assuming it passes - Olympic Dam stage two is endangered.

I emphasise strongly that no decision has been made to delay Olympic Dam but, with the Australian government not understanding the implications to Australia of the wider US tax measures, the outlook does not look good.

This time last year BHP was adamant that Olympic Dam stage two would be its next major copper project after the extensions to Chile. Olympic Dam would rank ahead of the giant Resolution copper mine in the US, where BHP has a 45 per cent interest.

That game is now changing and Resolution may go first because of the US tax package.

At the moment BHP is involved in a significant investment in Olympic Dam to de-bottleneck and improve the productivity of the operation. That investment is not in danger.

What is in danger is the next and much larger stage, which involves the construction of a huge, underground mine and a major investment in leaching to produce both copper and uranium. Although theoretically possible, it is unlikely that BHP would proceed with two enormous copper projects at once. It’s ironic that the Resolution project in Arizona comes from BHP’s ill-fated $US3billion 1995 Magma investment.

Magma had a large copper mine close to Resolution and that mine was shut down as part of the total Magma disaster. The complete Magma write-off shook BHP to the core and management seemed to want to bury the memory of the Magma mistake. So despite the fact that the Resolution areas had not been properly explored BHP sold 55 per cent of this new area to Rio Tinto for a sum that was so small that it might not have even hit the board table.

It was nearly as big a mistake as the Magma investment itself, because later drilling by Rio Tinto revealed an enormous and rich copper deposit.

But even though BHP is now relegated to a 45 per cent stake, with Rio Tinto the operator, the Resolution mine its still a huge asset for the Australian company.

Donald Trump is offering projects like Resolution the ability to write off their new mine investments with one stroke of a pen. But there is a catch. The projects must be started by September 2022.

Rio Tinto and BHP understand the Resolution ore body but they require approval from local authorities and the Indian tribes that have the land. That will take some years, which means that there will be rush to get Resolution started before the Trump time clock ends.

Olympic Dam also requires time to engineer the underground mine and leaching plants (both excersises are under way) plus the normal bureaucratic ridden approvals. If BHP doesn’t want to develop the two mines at once then if Resolution is ready by September 2022 it may get the nod ---particularly as it will be a Rio Tinto decision.

All around the world companies that have investment projects in the US are going to face exactly the same decision as BHP. Do we abandon our non-US investments, or at least delay, while we take advantage of the big Trump write offs?

And companies earning income from intellectual property, the US is the place to be based, because IP profits will be taxed at 12.5 per cent.

For Australia the message is clear: follow the US on tax, or be left behind. Australia might not be able to reduce its corporate tax in the same way as the US but it can certainly accelerate deprecation and a establish low tax for intellectual property income. It might also look at matching other tax initiatives to base IP in the US.

My guess is that if we don’t match the US on write-offs Olympic Dam will be delayed another five years, which will take completion up to around 2030. Meanwhile the lower US taxes on corporate profits greatly enhances the value of the US shale oil and gas deposits that BHP is selling and its oil investment in the US parts of the Gulf of Mexico (oil and gas investment already has generous write off allowances for tax).

But there is no doubt that the world’s capital is going to return to the US unless countries like Australia make an attempt to match at least part of the US package.

Fortunately for Australia we can afford it because there is many billions of dollars being totally wasted with Canberra’s duplication of the states activities and even larger sums are available if we were to embrace the new technologies in the delivery of commonwealth activities.

The trouble is that we don’t have politicians with courage to do these things. But as they see investment going offshore because of their inactivity it is possible that the penny might drop. Wouldn’t it be marvellous for the nation if they acted before the money earmarked for Australia was whisked away?