(Bloomberg) -- The world’s biggest mining companies producing iron ore from Australia aren’t paying their fair share in taxes, according to a lawmaker who wants a 20-fold raise in a state levy that’s been unchanged since the 1960s and the era of imperial pounds, shillings and pence.
The proposal has “overwhelming” support and Rio Tinto Group and BHP Billiton Ltd.’s objections don’t stack up, according to Brendon Grylls, Western Australia’s Nationals party leader. Grylls, a farmer and one-time baker turned politician, is championing the drive to raise the lease rental payment, levied on ore from the two companies, to A$5 a metric ton ($3.68) from 25 Australian cents.
“It is quite clear to me that Western Australia is not receiving a fair recompense for making our iron ore available,” Grylls said in an interview from his office in West Perth on Tuesday. “It was 2 and 6 converted to 25 cents when decimalization came in.”
Western Australia is home to the world’s largest iron ore mining hub, with cargoes from the Pilbara feeding Asia’s mills. The plan by Grylls’s Nationals, a junior partner in the state’s ruling coalition, has met with opposition from Rio and BHP, who say it will cost jobs, jeopardize investment, and place them at a disadvantage to rivals.
The fate of the plan may be decided in March when elections are held, and Grylls is betting his partners, the larger Liberal party, will need his support to form a government and he can push the rise through. The proposal was supported by 45 percent of voters, The West Australian reported in September, based on a poll of 1,700 people.
“None of the other charges that these companies pay are set at 1960s’ levels and have never been upgraded,” said Grylls, who wants the A$7.2 billion generated to help to mend the state’s finances, which suffered when the China-led resources boom turned to bust. “The real return on the iron ore in the ground to West Australians has been diminishing every single year.”
The industry isn’t swayed. The plan would destroy 3,400 jobs in the state and “make us uncompetitive against our biggest competitor, Brazil,” Reg Howard-Smith, chief executive of Western Australia’s Chamber of Minerals and Energy, said in a statement, after BHP referred Bloomberg to the group for comment. “This is a terrible piece of public policy,” he said.
The levy would make Western Australia the highest taxed mining jurisdiction in the world, Rio said in a statement, adding that competition is increasing given plans in Brazil to open a giant new mine, and urging a meeting with Grylls. “We would be delighted to meet with him again to again outline the problems,” the company said. Both Rio and Howard-Smith noted that other royalties had been raised in recent years.
The plan “would make existing mines less profitable and reduce the net present value of any new mines built by the two companies,” CRU Group analyst Adrian Doyle said in a report last month. “The proposed change to mining lease payments could result in investments being deferred or canceled due to reduced profitability or a perceived increase in legislative risk.”
The showdown comes as the miners’ fortunes have improved following the rout in 2014 and 2015, which culminated in iron ore prices sinking below $40 a ton. Benchmark ore with 62 percent content delivered to Qingdao rose 0.7 percent to $80.99 a dry ton on Jan. 12, according to Metal Bulletin Ltd. BHP gained 3 percent and Rio was up 3.1 percent as of 10:48 a.m. in London.
The charge targeted by Grylls was initially set when the now-vast industry was in its infancy. Using a standard indexation on the original figure, “gets you to around A$3.50,” said Grylls. “We struck it at A$5 for revenue gone.”
BHP and Rio have been battling his proposal through advertisements in local and national newspapers, warning of job cuts and investment curbs. Grylls’s proposal could cost 2,900 jobs in the Pilbara region and as many as 7,200 nationally, according to a Deloitte Access Economics study commissioned by the Minerals Council of Australia.
BHP said in September the increase would risk the development of the South Flank operation that may account for about a quarter of its ore output from Australia. South Flank could produce as much as 80 million tons a year if approved and would replace the Yandi mine once it’s depleted. BHP Chief Financial Officer Peter Beaven said the tax may benefit Brazilian exporters.
“I don’t accept the argument that they will stop investing: you don’t get to not develop your tenement,” said Grylls, citing rules that allow the state to reclaim resources that aren’t developed. “Remember who your landlord is,” he said, echoing a similar comment from Premier Colin Barnett.
In August, Rio described the plan as an “ill-conceived tax grab,” and followed with a rebuttal of Grylls’s claim miners aren’t paying enough. “A narrative that the Pilbara and the industry has not, or does not, pay its fair share is plain wrong,” said Chief Executive Officer Jean-Sebastien Jacques.
“I have no intention of smashing the iron ore sector,” said Grylls, who has used his position holding the balance of power before to force changes in state policy. The iron ore industry is good to Western Australia, except that real value isn’t being maintained, he said.
(Updates iron ore price in 10th paragraph.)
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