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XSTRATA AND AUSTRALIAN MINING TAX REFORM (A)

Original written by professor Daniel J. Blake, and MBA alumni Aaron Cowper and Patrick Gatland at IE Business School. Original version, 25 June 2013. Published by IE Business Publishing, María de Molina 13, 28006 – Madrid, Spain. ©2013 IE. Total or partial publication of this document without the express, written consent of IE is prohibited.

"Australians actually own these resources and deserve a fair share back from them." – Kevin Rudd, Prime Minister of Australia

The Australian Government’s announcement of sweeping reforms to its mining tax regime came as an unpleasant shock to its vibrant mining industry, and to one firm in particular, Xstrata. Although headquartered in Zug, Switzerland and possessing significant operations in North and South America and Africa, Xstrata’s presence in Australia was substantial. Its Australian coal, copper, nickel and zinc operations accounted for 33% of its total assets, 36% of its capital expenditure and it employed more than 12,000 Australians (including contractors). Between 2002 and 2010, Xstrata had invested A$45 billion dollars in the Australian economy, of which A$4.8 billion went to meeting its tax and royalty obligations. Xstrata estimated that this represented an average effective tax rate of 40% and that the proposed tax reforms could raise the effective rate above 55%.1 Such a tax hike would, in Xstrata’s view, cut deeply into their profits, limit the funds available to invest in new operations, and call into question the viability of current and future projects in Australia.2

The new tax proposal came at a time of considerable growth and success for Xstrata, thanks in large part to its Australian operations, which in 2009 had accounted for 40% of its earnings.3 Participating in an industry whose purpose is to extract materials from sovereign land, Xstrata’s performance was inextricably linked to the political environments in which it operated and the risk that political conditions and policies could change and harm investment returns was never far away. However, Xstrata’s significant exposure in Australia was understandable because Australia was considered as an investment location with low sovereign risk thanks to its political stability, strong democratic institutions and effective rule of law. Nevertheless, Xstrata now faced the strong possibility that a popularly elected Australian government would raise its tax burden significantly.

In order to respond effectively to the challenge posed by the new tax, Xstrata needed to address several questions. Was the new tax inevitable? The tax had yet to be passed into legislation. This gave Xstrata time to try and persuade the government to adopt a different approach to mining tax reform. However, as a foreign multinational, how far could Xstrata go in intervening in the policy process of a democratic country? Xstrata would need to be careful in how and to whom it made its case. Perhaps allying with other mining companies could help them to increase their influence over the government? However, early signs were that the government was firmly committed to its proposed tax regime. Could

1 Xstrata RSPT Fact Sheet. (June 2010). 2 Ibid. 3 Ibid.

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Xstrata be confident they would succeed? Should they hedge their bets and suspend some or all of their Australian operations and/or focus on expanding operations elsewhere? It was clear that a carefully executed market and non-market strategy was needed to either preserve Xstrata’s profitable position in Australia, or to ensure that any financial damage to its existing and future operations from the new tax was minimal.

MINING, POLITICS & TAX REFORM IN AUSTRALIA

THE GLOBAL MINING INDUSTRY

The global mining industry is concerned with the extraction and processing of valuable minerals from the earth such as iron ore, copper, coal, gold and diamonds. The process of mining takes place in several stages. 4 First, prospecting and exploration is conducted to identify new mineral deposits. Then, feasibility studies are undertaken to determine the cost and level of difficulty in extracting those minerals as well as the ability of the company to raise capital for the development and construction of the mine. The next stage is production, which involves the actual building of the mine, extraction and processing of the minerals, followed by shipment of the final product to consumers. The final stage involves reclamation of the mining site, which entails restoration of the environment surrounding the mine to its original state after the mineral deposits in the mine have been exhausted. The process from exploration to reclamation can last up to several decades for very large mines.

The resources that are extracted through mining are non-renewable, requiring mining companies to continuously discover new mineral deposits and develop them for extraction. Accordingly, mining companies’ location decisions are driven in large part by the availability of minerals. While new sites continue to be developed, a growing trend across the industry is the increasing scarcity of easy-to- access high-grade ores. This has forced miners to: a) seek out lower grade ores;5 b) exploit more remote locations that lack infrastructure and pose greater logistical challenges. Both of these strategies raise extraction costs and increase the time it takes to get new mines online and bring commodities to market. This is significant because even the development of high-grade mines require large capital investments. For example, the development of one top tier mine in the Pilbara region of Australia is expected to cost over $US10 billion.6 The need for such significant up-front investment in the development of new mines causes access to capital to be crucial for global mining companies. Moreover, while it can take years for new mines to be developed to the point where minerals are actually extracted and sold, the demand for minerals is volatile. The use of minerals such as iron ore, for example, in heavy manufacturing and construction means that demand is highly cyclical, tracking broader patterns in the global economy. In this regard, while demand in developed markets has flattened, the mining industry has turned increasingly to serving the rapid growth and industrialization of emerging markets since the mid-2000s.

At the corporate level, the mining industry can be broken down into the three broad sets of players. The most visible are the diversified global mining companies such as BHP Billiton, Xstrata, Vale and China Shenua. These firms have operations in multiple mining sectors and operate in multiple geographic locations. They specialize in developing mines, extracting and processing minerals and shipping them to domestic and international markets. While they are direct competitors, it is not uncommon for them to also cooperate in the development of large-scale mines. The second set of companies is the “junior miners”. As their name suggests, they operate on a much smaller scale, are typically highly localized and focus on prospecting and exploration. In between the global and junior

4 Pacific North Coast Integrated Management Area (PNCIMA). (2007). Atlas of the Pacific North Coast Integrated Management Area, p54. Retrieved from: http://pncima.org/site/atlas.html. 5 Low grade ores contain more waste material around the target commodity. 6 PWC. (2012). Mine: The Growing Disconnect, Review of Global Trends in the Mining Industry.

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miners in terms of scale are the “mid-tier” mining companies. These mid-tier miners typically engage in mine development and extraction within a narrow geographical and/or product range.

MINING IN AUSTRALIA

Australia boasts some of the world’s largest deposits of ores and minerals – including coal, iron-ore, gold and uranium – and is a major center of mining activity. Although minerals are extracted across the continent, mining activities are mainly concentrated in the resource rich states of Western Australia and Queensland. Australia is the world's largest exporter of coal, iron ore, lead, diamonds, rutile, zinc and zirconium; the second largest exporter of gold and uranium, and the third largest exporter of aluminium.7

Mining has been an integral part of the Australian economy since the 19th Century when discoveries of silver and copper deposits, followed by major gold rushes, spurred huge growth in the early Australian colonies. Since then, Australia has experienced several mining booms, however, the 2000s were a period of unprecedented growth for the industry. Demand for commodities such as iron ore and coal increased as a result of accelerated growth, urbanization and industrialization in China, India and other emerging markets in Asia. Australia’s geographic location meant it was well-placed to take advantage of growing markets in Asia. The mining boom also increased the sector’s profile and importance in the Australian economy. Overall, mining now constitutes more than 8%8 of Australia's GDP and over 40% of Australia's exports.9 Over 90 projects worth a total of A$174 billion (13% of Nominal GDP) are under development and the figure spikes to A$832 billion (60% of GDP) when projects under consideration are included.10

A large number of mining companies, both local and foreign, operate in Australia. They account for almost 20% of the Australian Stock Exchange (ASX) by market capitalization, and almost one third of the companies listed on the ASX.11 These companies saw their earnings grow several-fold on the back of the mining boom. Among the leading beneficiaries were BHP Billiton and Rio Tinto, who along with Xstrata make up the “Big 3” global majors operating in Australia. These firms were able to capitalize on their substantial Australian operations by shipping iron ore, copper and other minerals to China, Japan and the rest of Asia. However, beyond these three companies, many mid-tier and junior miners have also benefited from the growing demand for Australia’s commodities.

The benefits of the mining boom have extended beyond the mining industry to the broader Australian economy. While most major developed economies went into severe recessions following the global financial crisis of 2008, the Australian economy managed to avoid the same fate thanks in large part to the performance of the mining sector and the continued growth of its emerging market consumers. However, while the economy was doing well overall, concerns were growing in academia and government circles over the sustainability of the economic gains made thanks to the mining boom. Some were worried that the mining industry (and Australia’s export economy) had become highly dependent on Chinese demand for its natural resources, and that an expected slow-down in Chinese growth would hurt the Australian economy.12 Others were concerned that Australia was developing a “two-speed economy” in which many industries were not enjoying the same success as the mining sector. In contrast to the increasing volumes of exported mineral resources, other Australian industries – including manufacturing, agriculture and tourism – were experiencing zero or negative export volume

7 Sharieff, Afzal; Masood Ali Khan, A Balakishan. (2007). Encyclopedia of World Geography: Volume 23, Australia and its Geography. New Delhi: Sarup & Sons., pp13–14. 8 Year Book Australia 2012. Retrieved from: www.abs.gov.au/ausstats/[email protected]/mf/1301.0 (Industry->Mining industry). 9 Iron ore, coal and gold alone represented 48.5% of Australia’s exports in 2011. Australian Government, Department of Foreign Affairs and Trade. (2011). Composition of Trade Australia. p42. 10 Metals & Mining in Australia Industry Report. Datamonitor. (July 2011). 11 ASX and Australian Resources. Retrieved from: http://www.asx.com.au/research/asx-australian-resources.htm. 12 China drives engine of Australia’s success. Financial Times. (February 3, 2010).

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growth.13 This was partly a side effect of the mining industry’s success, which had contributed to a rising Australian dollar, and the consequent weakening of non-mining sectors through the “Dutch disease” effect.14 These concerns prompted experts to argue that Australia must do more to diversify its economic base away from mining and invest in infrastructure and education to build a sustainable knowledge-based economy to serve the non-resource demands of its emerging Asian neighbors.15

POLITICS IN AUSTRALIA

Australia has a federal system of government where power is shared between a central federal government, which sits in Canberra, and the governments of its eight states and territories. Both the federal and state governments have the authority to raise tax receipts by the taxation of businesses and regulate industry through their own laws. The Federal government operates a parliamentary system of government, which means that the head of government (Prime Minister) is the leader of the ruling party in the House of Representatives.16 As head of government, the prime minister and his/her cabinet are responsible for developing and implementing a legislative agenda.

The political system is dominated by two main political groups: the Australian Labor Party (ALP) (a center-left political group with its history derived from the workers’ movement) and the Coalition which is a formal alignment between the centre-right Liberal Party (a party dedicated to economic liberalism) and the National party (a conservative party that positioned itself as the party of rural Australia). Although comprised of two parties the Coalition presents itself as a unified party Federally and the leader of the Liberal party is also the leader of the Coalition. While the two sides hold very similar policies on many social issues, there remains ferocious political debate on economic issues such as taxation and government spending. On such issues the center-right Coalition traditionally aligns with business and the center-left ALP with workers and unions.

REVIEW OF AUSTRALIA’S MINERAL RESOURCES TAXATION SYSTEM

Following 11 years of Coalition domination of the Federal government, Kevin Rudd led the ALP to victory in the 2007 general election. Riding a wave of popular support, the new prime minister sought to chart a new direction for the Australian economy and among several new initiatives he commissioned a review of the taxation system under the guidance of the Secretary of the Department of the Treasury, Ken Henry. Henry and his review panel spent two years analyzing the Australian taxation system before releasing a report on May 2, 2010, which outlined long-term and often sweeping recommendations for tax reform, including the mining sector.

In Australia, the Government and the public are considered the owners of the country’s natural resources.17 The value of these resources is realized by granting commercial licenses to mining companies with special expertise for the extraction and processing of the ores and minerals that lie buried in the earth. The Australian people receive a portion of the financial wealth generated from the exploitation of its finite natural resources when the government levies a tax on the resources that are extracted by private companies. The remaining portion of value generated from the natural resources remains with the companies.

13 Two-speed economy could limit further rate rises. The Australian. ( April 8, 2010); Reserve Bank of Australia. Minutes of the Monetary Policy Meeting of the Reserve Bank Board. (6 April 2010). 14 In economics, the Dutch disease is the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. 15 Diversify or die: economists warn on mining dependence. ABC News. (March 24, 2010). 16 The Australian parliament has two chambers, the House of Representatives and the Senate. 17 Hogan, L. (2007). “Mineral Resources Taxation in Australia”. Abare research report. p24. Retrieved from: http://adl.brs.gov.au/data/warehouse/pe_abare99001339/arr07.1_resource_tax.pdf

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While simple in principle, Australia’s mining taxation landscape in 2010 was complex and varied in practice. There was no unified technical approach to mineral taxation across the federal and state governments and different regimes relied on combinations of royalty systems, income-based taxes, rent-taxes, licenses, stamp duties and charges.18 The majority of taxes, however, employed output- based royalty systems, which tax a mining company based on the volume of minerals it extracts.19 This meant that as global demand drove up mineral prices during the boom years of the mid 2000s, Australian governments were collecting an increasingly smaller share of the total value of their country’s natural resources.20 Since the mining boom began, Australia had seen its share of mineral profits dwindle from around 45% of their total value seven years earlier to less than 15% in 2008-09 (Exhibit 7).21

The Henry Review concluded that Australia’s current resource taxation system was overly complex, economically inefficient and failing to earn the Australian community a sufficient return on its natural resources. The Henry Report therefore advocated that it be replaced by a tax on economic rents generated by the mining sector (“resource rents”).22 The Report recommended that this tax be levied at a rate of 40% and applied uniformly across Australia with federal and state governments negotiating “an appropriate allocation of the revenues and risks” from the tax.23

In addition to helping Australians capture a greater proportion of the total value of their natural resources, the Henry Report argued that a tax system based on resource rents would be more efficient than an output-based royalty system because it would create a partnership between the government and each mining company. As the government would recoup the same share of the miners’ earnings regardless of the size or cost of a mining project, the government would be required to bear more of the risk of mining projects along with the heightened reward during boom times. With royalty taxes, governments claimed a greater share of the profits of more costly projects. This had the effect of making mining companies more risk averse when deciding on whether to undertake new mining projects and often shortened the natural life of a mining project. The Report also argued that there was increased sovereign risk associated with output-based royalty systems because as the value of natural resources increased in times of economic boom governments were tempted to change the taxation system to capture a higher proportion of the value of the natural resources being exploited.

Significant elements of the Henry Report’s recommendations for the mining sector were adopted as government policy upon the Report’s release on May 2, 2010.24 Prime Minister Kevin Rudd and Treasurer Wayne Swan announced that, following the Henry Report’s recommendation, the Australian Government would be introducing a Resource Super Profit Tax (RSPT). The RSPT would levy a 40% tax on the profits of all mining companies, which exceeded the 10-year Australian government bond rate, and the starting base would be determined by the accounting book value of all existing capital. Existing projects were to be included in the new regime and the states would continue to receive royalties from their mining operations, which would be refunded by the federal government to the mining companies. Finally, resource companies could claim an accelerated depreciation of some assets and extraction deductions under the new regime.25 The RSPT was expected to yield increased public revenues from the mining sector, which would be passed on to the rest of the economy through

18 Ibid. 19 Ibid., p. 10. 20 Australia’s Future Tax System. (2010). p226. 21 Ibid. 22 Resource rents are earnings generated from the exploitation of a natural resource that are in excess of the level of earnings that a firm would need to receive in order to be willing to continue the same exploitation of that resource. 23 Australia’s Future Tax System. (2010). p231. 24 The Henry tax review – what it means for you. news.com.au. (May 3, 2010). 25RSPT v MRRT – the differences. The Sydney Morning Herald, Business Day. (July 2, 2010).

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a lower company tax rate (reduced from 30% to 28%) and increased retirement savings for Australian workers.26

Prime Minister Rudd lauded the RSPT, saying it would fortify the Australian economy: "This long-term plan released today builds a stronger economy by using super profits earned from the resources owned by all Australians”.27 Through this statement, the RSPT can be viewed as a response by the government to growing public concerns that the mining boom was not delivering wider benefits to the Australian population and the growing belief that a facility should exist to take some of the wealth generated by the resources boom and return it to the economy when needed (e.g. in times of natural disasters, fiscal shocks and unexpected technological change), or use it to invest in infrastructure and public services such as health care, housing, education and climate change.28 Another issue that was raised was intergenerational equity, and whether or not today’s boom generation had an obligation to save and provide wealth for future generations.29

IMPLICATIONS FOR THE MINING SECTOR

Before its implementation, it was difficult to estimate exactly what effect the proposed RSPT would have on mining companies in Australia. On the day it was announced, analysts estimated that the earnings of BHP Billiton would fall by 19% and that the drop in earnings for Rio Tinto could be as high as 30%.30 Shareholders began voicing their concerns about the mining tax immediately – with A$16 billion dollars wiped off the value of resource companies on global stock markets within three days of the RSPT’s announcement.31 Some market analysts indicated that the RSPT would raise the total effective tax rate of mining companies from 43% to 57% once it was fully implemented.32 The mining industry projected that the rise in tax revenues from the resource sector would equal A$12 billion in the first two years of the tax.33

The mining companies were confronted with a difficult situation. Not only were they faced with the introduction of legislation that could potentially take a larger share of their profits but the tax was likely to have broad appeal because the government had coupled it with a lower company tax rate and increased retirement savings. As one media commentator pointed out, “Imposing a hefty new tax on multinational mining companies to increase the superannuation savings for mums and dads: you don't need a political science degree to see how a measure like that will play out in the electorate”.34

THE MINING SECTOR RESPONDS

Mining companies operating in Australia came out overwhelmingly against the RSPT. Having not consulted with the mining industry prior to releasing the proposed tax reform, the Rudd government indicated a willingness to engage with the miners at length on the implementation of the new tax, establishing the Resources Tax Consultation Panel as a vehicle through which the mining industry and government could coordinate over the details of the new tax.35 Mining executives were eager to use

26 Ibid. 27 Australia to tax “super profits” of mining boom. The Sydney Morning Herald. (May 2, 2010). 28 Australian Industry Group. (2010). “Managing Australia’s Mining Boom”. Retrieved from: http://www.aigroup.com.au/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/LIVE_CONTEN T/Economic%2520Indicators/Research%2520Notes/2010/Sovereign_wealth_fund.pdf 29 Ibid. 30 Australia plans 40% tax on mining sector. Financial Times. (May 2, 2010). 31 PM Kevin Rudd expecting miners to threaten closures over super tax. news.com.au. (May 5, 2010). 32 Australia plans 40% tax on mining sector.Financial Times. (May 2, 2010). 33 Xstrata RSPT Fact Sheet. (June 2010). 34 Opinions divided over Henry tax review. ABC: The 7:30 Report. (May 3, 2010). 35 The Hon Wayne Swan MP, Deputy Prime Minister and Treasurer. Resource Tax Consultation Panel. (2010). Retrieved from:

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these consultations to voice their concerns regarding the RSPT directly to the government, with Xstrata CEO Mick Davis expressing his desire to “engage constructively with government to discuss the full implications of the proposed regime on the mining industry and to clarify a number of outstanding issues in respect of the tax proposal.”36 To this end, Xstrata was the first of the big three mining companies to accept an invitation to engage in talks directly with the Consultation Panel on May 10, 2010. Xstrata sent a delegation to the talks led by the CEO of Xstrata’s coal division, Peter Freyberg, who used the meeting to raise a number of concerns with the RSPT, including the application of the regime to ongoing operations, the 40% tax rate, and the entry point at which profits were deemed “super profits”. However, Freyberg was unable to make any progress on these issues as the Panel only had authority to discuss implementation of the tax.37 This pattern repeated itself with numerous other mining companies and the mining sector soon became openly frustrated with the limited terms of reference the government offered for consultations in which none of the fundamental elements of the tax including the rate, its scope of application and how the tax was going to be calculated, were open to debate.38 Nevertheless, Xstrata executives would go on to meet with government representatives several times over the following weeks to discuss the RSPT with little tangible result in terms of changing the government’s position on the tax.

Executives in the mining industry were swift to enter into consultations with opposition political parties to express their concerns over the RSPT. They quickly found support from the leader of the Federal Opposition, Tony Abbott, who clearly stated his opposition to the tax. Within a few days of the Henry Report’s release, Mr. Abbott was quoted in the media saying, "I had a very good meeting with senior mining executives and I reiterate that I can see no good arguments for this great big new tax.”39 Mr. Abbott committed to rescind the tax if successful in the upcoming election, which was expected to be held towards the end of 2010.40

Mining companies also sought to address the public directly on the matter of the RSPT. Many of their public communication and outreach activities were organized through the Minerals Council of Australia (MCA), the peak industry association for the mining sector whose members include Xstrata, BHP Billiton and Rio Tinto and account for up to 85% of Australia’s mining output.41 Through the MCA, the mining industry ran full page advertisements in the national newspapers stressing that mining companies made significant tax payments and that the sector’s contribution to government revenues had increased from A$2.6 billion in 1999 to A$21.9 billion in 2009.42 The MCA also launched a one week advertising campaign on the same day in Western Australia and Queensland.

To help orchestrate their public relations campaign against the tax, the MCA engaged the services of Lawrence Creative Strategy (LCS), a company specializing in corporate and political communication. Starting on May 9, and under the slogan “Keep Mining Strong”, LCS promoted a message that stressed the benefits and the importance of the mining sector to Australia’s economy through a variety of media including television commercials, print advertisements and a dedicated website.43 The Keep Mining Strong campaign also had social media content on Facebook and Twitter and the slogan was printed on t-shirts, which were even worn by the leader of the Opposition, Tony Abbott, as a signal of solidarity with the mining industry.44 This centralized campaign was complemented by advertising

http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/029.htm&pageID=003&min=wms&Year=&DocT ype=; Rudd takes tax swipe at Barnett. The West Australian. (May 5, 2010). 36See: http://www.xstrata.com/media/news/2010/05/03/0100CET/ 37 Xstrata stunned by Wayne Swan’s committee. The Australian, Business. (May 13, 2010). 38 Mining bosses threaten to boycott tax talks. The Sydney Morning Herald. (MAY 11, 2010). 39 Party leaders make a stand over resources. The Australian Financial Review. (May 6, 2010). 40 Henry ramps up pressure on miners; Rejects industry fears , Claims tax will boost growth , Project boom worries RBA. The Australian Financial Review. (May 14, 2010). 41 Minerals Council of Australia. (2013). MCA Member Companies. Retrieved from http://www.minerals.org.au/corporate/about_the_mca/mca_member_companies 42 Big mining bosses to rally army of shareholders. The Australian. (May 8, 2010). 43 See: http://www.stwgroup.com.au/what-we-do/projects/minerals-council-of-of-australia-keep-mining-strong 44 ABBOTT AND BISHOP JOG FOR MINERS. THE AGE. (JUNE 3, 2010).

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initiatives undertaken by individual companies, most notably by BHP Billiton and Rio Tinto and a smaller industry organization representing primarily junior miners, the Association of Mining and Exploration Companies (AMEC). Over a period of six weeks from the beginning of May until the end of June, the mining industry would spend A$22.2 million on the advertising campaign, with the MCA spending A$17.2 million, BHP Billiton A$4.2 million, Rio Tinto A$537,000 and AMEC A$274,000. 45 In the first month of the campaign, the MCA would commission 11 television commercials, which would be played on free-to-air television approximately 33 times per day. Such a well-funded and widespread public lobbying campaign was the first of its kind in Australia.46

In addition to advertising campaigns, mining executives made themselves available to the media consistently in order to make their arguments directly to the public. During the months of May and June representatives of mining companies and the MCA were being interviewed by and/or quoted in the press on a daily basis.47 However, Xstrata CEO Mick Davis took this approach one step further by writing an open letter to the editor of the Financial Times, which was published on June 2. In this letter, Davis summarized for a global audience many of the arguments that mining executives and the mining industry’s advertising campaign had been making in Australia. In particular, Davis stressed that the tax was punitive and that it was an exemplar of sovereign risk, which would jeopardize investment in Australian mining and in the Australian economy more broadly. He also warned that mining companies could choose to invest elsewhere where more favorable and predictable tax regimes could be found and that the costs would be ultimately borne by mining communities in Australia and superannuation funds that held mining stocks as part of their portfolios.48

Consistent with this argument, mining companies also responded to the proposed tax by shelving projects under development and publicly attributing their decisions to do so to the RSPT. On May 9, Xstrata stated that it would suspend copper exploration in North Queensland, with its chief operating officer Steve de Kruijff citing uncertainty regarding the Australian fiscal regime for mining. De Kruijff also warned that the new tax may deter Xstrata from reinvesting in existing operations in Queensland, while noting that Xstrata had contributed more than A$1.3 billion to the state’s economy in 2009. 49 Following Xstrata’s lead, another mining company, Fortescue Metals Group, shelved projects worth A$17 billion, while BHP Billiton threatened to suspend projects as well.50 One day after Mick Davis’ letter in the Financial Times, Xstrata suspended further mining operations worth A$586 million, and threatened to cancel a further A$5.4 billion worth of copper and coal projects.51 Xstrata also announced that it was conducting a review of the viability of growth projects worth $A22 billion in light of the RSPT with Davis warning that, “[a]ny 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.”52 By early June, one study by Deloitte Access Economics had found that up to A$55 billion in projects had been suspended as a result of the tax.53

While Xstrata fought to discredit the RSPT, they also sought to reshape the underlying debate surrounding mineral taxation by advocating several key principles on which any future mining tax reform should be based. In direct contrast to the RPST, Xstrata argued that a) industry must be involved in development of a new minerals taxation policy; b) any new tax must be prospective (only apply to future investments); c) minerals taxation should apply only to the resources beneath the

45 A snip at $22m to get rid of PM. The Sydney Morning Herald. (February 2, 2011). 46 How a $7m advertising campaign saved a fortune. The Age. (July 2, 2010). 47 See, for example, the following interview with the CEO of Xstrata Coal, Peter Freyberg. Xstrata blames tax for investment halt. ABC:Lateline Business. (June 3, 2010). 48 Punitive tax puts Australian investment at risk. Financial Times. (June 2, 2010). 49 Xstrata halts copper exploration in Australia on new tax. Mining Weekly. (May 10, 2010). 50 Xstrata threatens to scrap Australia projects over tax. Reuters. (June 3, 2010). 51 Xstrata blames tax for investment halt. ABC:Lateline Business. (June 3, 2010). 52 Xstrata reacts to the RSPT. MiningNews.net. (June 3, 2010). 53 $55bn in limbo amid dust-up. The Australian Financial Review. (June 9, 2010).

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ground and not to any value adding investments and activities undertaken by mining companies. Xstrata also advocated for economic fairness and competitiveness to be at the heart of tax reform and for any future taxation regime to have “certainty” so that firms know that they can trust the fiscal regime governing their Australian investment not to change during the lifetime of those investments. Without the latter, Xstrata argued, companies would not be willing to undertake long-term capital investments in Australia in the future.54

EFFECTS OF THE CAMPAIGN

GOVERNMENT REACTION

The government had originally envisioned a lengthy period of consultations with the mining sector for the tax was not due to come into force until 2012. However, the growing criticism of the RSPT and the widespread media campaign launched by the mining industry against a key government policy spurred the government into greater action. Leading government figures such as the Prime Minister, Treasurer, Wayne Swan, and Resources Minister, Wayne Ferguson made regular statements to media, stressing their unwillingness to yield to pressure from the mining industry and the government’s belief that the RSPT’s net effect on the economy would be positive.55 Competition Minister Craig Emerson targeted Xstrata directly, accusing it of engaging in a “scare campaign” with respect to statements it made regarding suspended investments and associated jobs losses.56 Emerson pointed to Xstrata’s purchases of land around the Wandoan mine site and the engagement of contractors at the Ernest Henry copper mine in the period following its claim that it was suspending both projects because of the RSPT.57

The government also initiated its own $38 million media campaign to defend the RSPT against industry criticism.58 The primary battleground in the media debate surrounded the actual economic effects of the RSPT. As the RSPT had yet to be implemented, the anticipated effects of the tax could only be estimated and those estimations rested on careful economic modeling and forecasting. As a result, the government and the mining sector reported widely differing projections. This was illustrated most starkly when both the MCA and the government used modeling performed by different units of the same consulting group, KPMG, to justify their positions. The modeling based on assumptions provided by the MCA found that RSPT would result in an effective tax rate of 54.7% on iron ore and a drop in iron ore, coal and bauxite returns by up to 57%. They also found that the returns on new gold, nickel and copper mines would make new investments unviable. However, modeling based on the government’s assumptions found an increase in mining output and economic growth following the RSPT’s implementation.59

POLITICAL PRESSURE

While the government was being attacked in the media by the mining sector it was also weathering a sustained attack from the Federal Opposition. Aware of the impending election, the Coalition moved

54 These principles were presented by Xstrata in multiple formats such as the pamphlet titled, Xstrata RSPT Fact Sheet (June 2010) and a briefing by Charlie Sartain, the chief executive of XstrataCopper. Sartain, C. (2010). Xstrata Briefing, Resource Super Profits Tax (RSPT). Retrieved from: http://www.xstratacopper.com/EN/Publications/Presentations/Xstrata%20Briefing%20Resource%20Super%20Profits%20Tax %20(RSPT)%20by%20Charlie%20Sartain,%20June%202010.pdf 55 For example, Swan denies super tax will put brake on boom. The West Australian. (May 13, 2010). Rudd defiant as Xstrata suspends $6bn project. The Australian Financial Review. (June 4, 2010). 56 $55bn in limbo amid dust-up. The Australian Financial Review. (June 9, 2010). 57 Media Release, Dr. Craig Emerson. “Xstrata campaign falling apart as more facts come to light”. (June 12, 2010).; Media Release, Dr. Craig Emerson. “Xstrata saying one thing, doing another”. (June 11, 2010). 58 Battle to win spin war heats up. The Australian Financial Review. (May 31, 2010). 59 Tax tipped to halt new mines. The West Australian. (June 2, 2010) ; BCA joins chorus of complaint about mining tax. Australian Financial Review. (June 3, 2010).

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quickly to join forces with the mining companies and make the removal of the RSPT one of its main platforms. The Coalition’s leader, Tony Abbott, described the RSPT as "an act of economic vandalism", arguing that it would have a negative impact on the Australian economy beyond the mining sector.60 Alluding to the large number of foreign institutions and individuals that held shares in Xstrata, Rio Tinto and BHP Billiton, the Coalition told voters that the tax was not “just a tax on foreign shareholders, [it was] a tax on the 500,000 Australians who work in the resource sector".61 Abbott also warned that other industries should be wary because the government might introduce a surprise tax on them as well.62 Overall, Abbott’s claims that RSPT was "an attack on Australian jobs, Australian investments and the superannuation and retirement savings of Australian workers,”63 echoed strongly the messages from the mining sector and by mid-June there was no doubt that the RSPT was going to be a major issue in the upcoming election and a tool the Coalition would use to raise concerns in the minds of voters about the performance of the government.

BUSINESS COMMUNITY’S REACTION

At the RSPT’s announcement commentators had suggested that Prime Minister Rudd and his ministers had engineered a politically favorable strategy by linking mining tax reform to a reduced company tax rate. Yet several weeks of the mining industry’s media campaign had succeeded in denting enthusiasm for the new tax within the broader business community and by June Australian businesses seemed to be heeding the warnings of the mining industry regarding Australia’s sovereign risk and damaged investment reputation rather than the promises of the Prime Minister and his colleagues. On June 21, 2010, Graham Bradley, President of Business Council of Australia (BCA), the leading representative group for Australian businesses, published an opinion piece in the Australian Financial Review heavily criticizing the government for its lack of transparency in developing the RSPT. In the article Bradley called for the government to abandon its “untested” minerals taxation policy and begin the process of developing a tax reform proposal again, this time with full stakeholder consultation.64

The concern from the BCA was echoed in the business community more generally. The figures for business confidence fell sharply in May 2010, particularly in the wholesale and manufacturing industries (along with mining).65 Consumer confidence figures released in early June 2010 showed that consumers had a more negative outlook about the economy after several weeks of the miners’ anti- RSPT campaign. While acknowledging that there were a number of factors that could affect consumer confidence, Westpac’s Chief Economist explained that the figures reflected a “mixture of concerns” that included “financial market turmoil and uncertainty around the government's proposed resource super profits tax”.66

The Rudd Government was not only facing criticism from the business community within Australia. Institutional investors from abroad were also critical of the tax. One portfolio manager of a New York based fund described the decision to implement the RSPT as “unbelievable”, while a JP Morgan Chase fund manager admitted that he had sold a quarter of his holdings in Rio Tinto and BHP Billiton following the announcement of the RSPT.67 Furthermore, other nations’ governments were trying to

60 Party leaders make a stand over resources. Australian Financial Review. (May 6, 2010) ; Resources row escalates as PM, Forrest trade blows. Australian Financial Review. (May 7, 2010). 61 Monday Anger at Canberra super-tax on miners. Australian Financial Review. (May 10, 2010). 62 BCA joins chorus of complaint about mining tax. Australian Financial Review. (June 3, 2010). 63 Miners slam Kevin Rudd’s mining tax sham. The Daily Telegraph. (June 3, 2010). 64 Scrap RSPT and start from ground up. Australian Financial Review. (June 21, 2010). 65 National Australia Bank. “Monthly Business Survey”. (May, 2010). Retrieved from: http://www.nab.com.au/wps/wcm/connect/fe6a020042c5b7888302bf8d6b96b23b/MBSMay2010.pdf?MOD=AJPERES&CAC HEID=fe6a020042c5b7888302bf8d6b96b23b 66 Consumer confidence slumps on mine tax uncertainty, market turmoil: Westpac. The Australian:Business. (June 9, 2010). 67 RSPT puts the wind up US investors. Australian Financial Review. (June 19, 2010).

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capitalize on Australia’s new tax proposal with the finance minister of Canada (a country with sizeable mining industry) claiming the introduction of the tax was "another competitive advantage” for his country.68

PUBLIC OPINION

With a federal election due to be called at the end of 2010 all sides of Australian politics were paying close attention to the political fallout associated with the campaigns of the mining industry and the Rudd Government. By mid-June 2010 it was looking like the government was losing the bruising battle for the minds of the Australian people. Political polling began to emerge indicating that the government would face heavy electoral losses in resource rich Queensland and Western Australia.69 One poll – commissioned by the mining sector – indicated that 48 per cent of those surveyed in marginal electorates were opposed to the introduction of the new tax and 78 per cent wanted the government to negotiate a tax "more acceptable to the mining industry" or to abandon the tax entirely.70 In a Herald/Nielsen poll published on June 7, 2010 it was reported that Kevin Rudd was leading his party to a political “wipeout” with two-party preferred figures for the Labor Party dropping by three percentage points in the month since the RPST was announced and the Coalition now leading the ruling ALP 53:47.71

To some political commentators it looked as though the intense campaign against the RSPT had been a major factor in damaging the government’s chances of re-election. On the other hand there was evidence to suggest that all the campaign had done was confuse the Australian public. What originally had been pegged as a government initiative to generate increased revenues and redistribute them to the wider community had become a complicated debate about sovereign risk, resource-rents and political consultation. Crikey.com, the Australian political blog, published an article that aggregated opinion polling for the month of May 2010. The article noted that support for the RSPT with the public had dipped from around half of the Australian population to only approximately 40 per cent by the end of May. However, the drop in support for the RSPT had not been converted into opposition to the tax either. The figures for those opposed to the government’s plans remained stable. Instead, the percentage of people who were uncommitted, unsure or could not say whether they supported the RSPT increased approximately 50%, rising in the Morgan poll from 14% to 21%.72 Some analysts of polling data also argued that the mining industry’s campaign against the RSPT had not converted the issue into something that would alter voters’ intentions in the upcoming election.73 Instead, the real damage that the anti-RSPT campaign had done was to the image of Prime Minister Kevin Rudd. On June 23, 2010 it was reported that focus groups considered that Kevin Rudd had become a negative influence on his party’s electoral chances.74

A PRIME MINISTER IS REPLACED

By late-June Kevin Rudd and his government were feeling pressure from all sides: the mining sector, business leaders, the Coalition and the electorate. Although the government had taken a firm stance on the mining tax, the growing pressure seemed to prompt a desire for further negotiation with the mining industry. Media reports began emerging that the government was prepared to make major

68 Canada mines Australia’s tax plan. Winnipeg Free Press. (May 21, 2010). 69 Labor facing wipeout in WA. The West Australian. (June 12, 2010). ; Queensland turns against Kevin Rudd over mining tax. news.com.au. (June 5, 2010). 70 Polls say Coalition would defeat Labor in next election over super profits tax. news.com.au. (June 7, 2010). 71 Labor faces wipeout. The Sydney Morning Herald. (June 7, 2010); Australian Prime Minister Kevin Rudd’s popularity plummets in wake of mining tax. The Washington Post. (June 15, 2010). 72 RSPT polling and low hanging fruit. Crikey. (June 2, 2010). 73 It’s Kevin Rudd, not mine tax, that’s hurting Labor. The Australian. (June 23, 2010). 74 Ibid.

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changes to the way the RSPT would be applied.75 A few days after these reports began to emerge, on the morning of June 23 2010, Kevin Rudd announced that his government would undertake a broad, two-year negotiation process with key stakeholders of the mining sector in a bid to win support for the RSPT.76 Almost all elements of the tax were to be included in the negotiation process including the cornerstone 40% rate, the one element of the tax that the government had previously been unwilling to alter.77

June 23 2010, was however Kevin Rudd’s last full day as Prime Minister. That evening he was informed by his Deputy Prime Minister, Julia Gillard, that she would be challenging him for leadership of the Labor Party and consequently leadership of the country. Realizing that support for him within his own party had disappeared Rudd stepped aside, making way for Gillard to become Australia’s first female Prime Minister.78 On taking the reins of the leadership Gillard explained that she had deposed Kevin Rudd as Prime Minister because the government “had lost [its] way”.79 In her first day as Prime Minister Gillard conceded that she needed to immediately address the mining tax issue and as a sign of reconciliation with the mining industry suspended the government’s advertising campaign in defense of the RSPT and invited the mining industry to do the same.80 She then extended an invitation for direct negotiations with the big three miners: Xstrata, BHP Billiton and Rio Tinto.

The events of May and June 2010 had been unlike anything the Australian public or media had ever witnessed before. A media campaign that had been orchestrated by private companies had ultimately contributed to the deposition of the most powerful person in Australian politics. It was clear that the mining sector had struck a powerful blow against the government’s plans to introduce the RSPT. In the view of Rio Tinto’s CEO, the removal of Kevin Rudd meant the RSPT was now “dead”.81 However, Kevin Rudd’s replacement by Julia Gillard and her offer to enter into direct negotiations opened up a new set of strategic choices for the senior management at Xstrata.

WHAT SHOULD XSTRATA DO NEXT?

The first choice facing Xstrata was whether or not to accept the offer of a media truce and halt the advertising campaign. The campaign had been the backbone of the mining industry’s efforts to sway public opinion and to put pressure on the government to take on board the industry’s main concerns regarding the new tax. Moreover, the campaign had been credited with playing a significant role in lowering Rudd’s public support and weakening his position within the Labor party. However, while the prime minister had changed, the Labor party, which had endorsed the RSPT, still remained in power. Xstrata and its fellow mining companies had to decide whether or not it was wise to lift the media pressure now, at precisely the moment when the Labor party was vulnerable and wrestling with internal divisions. After all, the new prime minister would have to call elections soon, and the Opposition had come out firmly against the RSPT. Furthermore, given the political damage the campaign had caused the Labor party, perhaps redoubling their advertising efforts was the best course of action to convince the Labor party to drop the tax entirely.

On other hand, its electoral concerns might make the new Gillard government more willing to make concessions than the Rudd government. Kevin Rudd was a popularly elected prime minister that had

75 Rudd gives ground on mining tax. The West Australian. (June 19, 2010); Australian report boosts mining shares. The Daily Telegraph. (June 11, 2010). 76 Broader negotiations aim to win industry support. Australian Financial Review. (June 24, 2010). 77 Mining tax rate to stay: Ferguson. The Age. (May 24, 2010). 78 After the tumult, enter the new PM. The Age.(June 25, 2010). 79 Australian Government, The Treasury. Chris Bowen, Interview with Leigh Sales. (2009). Retrieved from: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=transcripts/2010/080.htm&pageID=004&min=ceba&Year=&DocType = 80 Gillard, BHP can ads in mining tax truce. ABC News. (June 24, 2010). 81 Gillard makes mining tax her top priority. Financial Times. (June 25, 2010).

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made the mining tax a key policy initiative for his government. Gillard on the other hand had yet to win an election as party leader and her political reputation was less invested in the RSPT. In light of what happened to Rudd, it was definitely to Gillard’s advantage to try and make peace with the mining sector and she had taken the first step of approaching Xstrata to begin negotiations.

Whether or not to accept Gillard’s offer to negotiate was another key choice facing Xstrata. While Gillard might be more willing to make concessions, there was no guarantee that she would be willing to concede enough to satisfy Xstrata. The Rudd government had also intimated that they would be willing to consult with the mining sector and make adjustments to the RSPT. However, the Rudd government had also shown great reluctance to revise key elements of the tax while being open to very lengthy discussions with the mining industry. 82 While Xstrata had met with government officials several times since the RSPT was announced, these meetings yielded very little in terms of tangible changes to the RSPT. Would entering into negotiations with a new government be any different? Would Gillard follow Rudd and aim for lengthy consultations over several months or even years? What impact would participation in such a process have for the momentum the mining industry had built up in the media against the RSPT? Xstrata executives also had to consider what the consequences would be if they did turn down the offer of negotiations with the Gillard government.

If Xstrata agreed to negotiate with Gillard, then their final choice was whether or not to accept Gillard’s offer to negotiate exclusively with themselves, BHP Billiton and Rio Tinto. While these three companies were the largest miners in Australia and would shoulder the largest tax burden of the RSPT, the media, advertising and lobbying campaign had been a collective effort across the mining industry, with the involvement of large, small, diversified and undiversified mining companies. Although the big three miners had negotiated with the Rudd government as a group, this occurred in the context of weeks of broader consultations with many other mining companies.83 At this point in time, it appeared that Gillard was mainly interested in negotiating with the big three mining companies. Xstrata would therefore have to consider if accepting Gillard’s negotiation invitation would affect the unity of the mining lobby. Moreover, if the negotiations resulted in a compromise with respect to tax policy, would the rest of the mining industry accept the outcome? As one of the invited companies, did Xstrata have an obligation to represent the Australian mining industry as a whole at the negotiating table, or just itself? While the change of leadership could certainly be viewed as a victory for the mining industry, Gillard’s offer to negotiate and call a truce on advertising meant that it was not immediately clear how Xstrata could best capitalize on that victory.

82 Up until the day before the leadership challenge, Rudd was referring to two years of consultations to build support for the RSPT. Broader negotiation process aimed at winning industry support. The Australian Financial Review. (June 24, 2010). 83 See: http://www.xstrata.com/media/news/2010/06/16/0700CET/

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EXHIBIT 1 XSTRATA’S AUSTRALIAN OPERATIONS

Source: Xstrata RSPT Fact Sheet. (June 2010).

EXHIBIT 2 XSTRATA’S GLOBAL OPERATIONS

Source: Sartain, C. (2010). Xstrata Briefing, Resource Super Profits Tax (RSPT). Retrieved from http://www.xstratacopper.com/EN/Publications/Presentations/Xstrata%20Briefing%20Resource%20Super%20Profits%20Tax%2 0%28RSPT%29%20by%20Charlie%20Sartain,%20June%202010.pdf

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EXHIBIT 3 OTHER FIRMS IN THE AUSTRALIAN MINING INDUSTRY

BHP Billiton: BHP Billiton was formed in 2001 when an Australian company, Broken Hill Proprietary Company Limited and an Anglo–Dutch company, Billiton plc, merged. It is headquartered in Melbourne, Australia and is listed on the Australian, London and New York Stock Exchanges. BHP Billiton is the largest mining company operating in Australia and globally with a market capitalization of $US165.6 billion, and net operating cash flow of US$17.9 billion (year ending June 2010). Its business is focused on the discovery, development and conversion of a diverse range of commodities including: iron ore, coal, manganese, copper, aluminium, nickel, potash, petroleum and uranium. While its over 100 operations are spread across 25 countries, a substantial proportion of its activities are located in Australia; approximately 15,000 of its 40,000 strong workforce are based in Australia and Australia is the only country in which BHP Billiton has operations in all of its core mining sectors (with the exception of diamonds). Like other mining companies in the period leading up to the mining tax, BHP Billiton experienced considerable financial success with operating profits reaching $US 24b in 2008. The company’s business model targets mining and processing commodities for export and this is reflected in the high proportion of revenues it receives from countries, particularly in Asia, where its operational presence is comparatively small.84

Rio Tinto: Rio Tinto is an Anglo-Australian mining company with its main headquarters in London and listings on the Australian, London and New York Stock Exchanges. It is the third largest global mining company by market capitalization (US$ 90.5b in August 2012) with operating cash flows of US$22.1 billion in the year ending 2010. Rio Tinto is a market leader in a range of mining sectors including bauxite, aluminium, copper, uranium, coal, iron ore, and diamonds. Although it is a global company with operations in over 40 countries, like BHP Billiton a significant proportion of its operations and are concentrated in Australia and New Zealand where 46 percent of its US$95 billion in total assets are held. This significant presence in Australia makes Rio Tinto the its second largest mining company after BHP Billiton and, like BHP Billiton, much of Rio Tinto’s operations involve extraction and processing for export to Asia, with China and Japan combined responsible for 47 percent of its total revenue in the first half of 2012.85

Other mining companies: Beyond BHP Billiton, Rio Tinto and Xstrata several other global mining companies have smaller scale operations in Australia including Vale, China Shenua, AngloAmerican and Glencore. Among these only BHP Billiton and Rio Tinto are listed on the Australian Stock Exchange (ASX). Along with these global companies there are several mid-tier mining companies of which the majority are Australian owned. The most prominent of these companies during the debate on the new mining tax was Fortescue Metals Group whose operations are based exclusively in Australia and focus on the extraction and processing of iron ore for export.86 The final group of mining companies operating in Australia are the 100s of junior miners primarily involved in exploration. While the junior and mid-tier companies play an important role in the Australian mining industry, and the Australian economy more broadly, their relative scale is much smaller than the global majors. After excluding Rio Tinto and BHP Billiton from the list of the top 100 largest mining companies listed on the ASX, the remaining 98 companies have a combined market capitalization that is less than one third of Rio Tinto and BHP Billiton’s combined market capitalization (year ending 2012).87

84 BHP Billiton Annual Report. (2010). 85 RioTinto Chart Book. (2013).; RioTinto Annual Report. (2010).; Australian Securities Exchange Metals & Mining Sector Profile. (2013). Retrieved from: www.asx.com.au/documents/resources/asx_metals_and_mining.pdf. 86 Fortescue Metals Group Annual Report. (2010). 87 Australian Securities Exchange Metals & Mining Sector Profile. (2013). Retrieved from: www.asx.com.au/documents/resources/asx_metals_and_mining.pdf.

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EXHIBIT 4 MINERAL PRICES 1980-2012

Source: Financial Times/IMF

EXHIBIT 5 GLOBAL MINING MAJORS EARNINGS (2001-2010 )

Source: Compustat/WRDS

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EXHIBIT 6 MINING ACTIVITIES IN AUSTRALIA

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Source: Australian Government, Department of Foreign Affairs and Trade (2012). “Australia – Trading with the world”. Retrieved from www.dfat.gov.au/tradematters.

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EXHIBIT 7 COMPOSITION OF AUSTRALIA'S MINERAL AND PETROLEUM EXPORTS

Source: Australian Government, Bureau of Agricultural and Resource Economics and Sciences (ABARES), Australian Commodity Statistics 2009. Retrieved from http://www.daff.gov.au/abares

EXHIBIT 8

Source: Australia’s Future Tax System: Final Report

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EXHIBIT 9 PUBLIC OPINION POLLING ON RSPT

Source: Morgan/Essential Report/Newspoll. Reported in “RSPT polling and low hanging fruit”. Crikey. (June 2, 2010).

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EXHIBIT 10 “KEEP MINING STRONG” WEBSITE SCREENSHOT

Source: White, A. (2010). The mining-tax scare website is an excellent case study. Retrieved from: http://alexwhite.org/2010/06/the-mining-tax-scare-website-is-an-excellent-case-study/

EXHIBIT 11 OPPOSITION LEADER, TONY ABBOTT, DEPUTY OPPOSITION LEADER, JULIE BISHOP

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Source: “Abbott, Bishop shirt up and jog for miners”, (June 3, 2010), sbs.com.au.

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EXHIBIT 12 MICK DAVIS’ LETTER TO THE EDITOR OF THE FINANCIAL TIMES (JUNE 2, 2010)

Sir, the editorial regarding the Australian resources "super profits" tax (RSPT) ("Taxmen vs miners," May 31) betrays a disturbing level of ignorance of the proposal and utterly misrepresents the mining industry's position.

The RSPT is fundamentally more punitive than the 40 per cent rent tax imposed on the petroleum industry in Australia – a) the RSPT applies to existing investments; the petroleum tax was prospective only; b) the RSPT applies to any profit over the 10-year bond rate (6 per cent), well below any mining company's cost of capital; the petroleum rent tax includes a 5 per cent premium to the risk-free rate; c) the petroleum tax allows the full recovery of capital invested but the RSPT tax is payable before companies can recover the capital invested; d) the Australian government refuses to consult on the key elements of its proposal; the petroleum tax involved two years of industry consultation.

Miners already pay profit-based company taxes in addition to mineral royalties. And mining companies pay a higher effective tax rate than any other industry, according to the Australian tax office. No mining company is against the principle of a profit-based tax or sensible taxation reform. But the RSPT is a long way from that. It effectively introduces the government as an unwanted, noncontributing 40 per cent partner into our existing assets at a depreciated book value excluding intangibles, ignoring the substantial risks that have been borne by our shareholders.

Australia's reputation as a stable regime for foreign investment has already been damaged and investments in Australian resources are at risk of being delayed or cancelled. The consequences will be borne by mining communities, prospective employees, superannuation funds, customers, service providers and suppliers, impacting on Australia's prosperity, particularly in resource-rich remote or rural locations.

Resources are immovable but diversified mining companies have a choice of countries in which to invest. The government has shown itself willing to breach investors' trust and damage the economic case on which multi-billion dollar investments were made. In developing countries, we manage this risk by availing ourselves of fiscal stability agreements. Sovereign risk concerns about Australia may once have seemed absurd. Sadly, today they are foremost on every mining company board's agenda.

The mooted risk of other countries following suit is largely overdone. No other country is considering imposing such a punitive tax on its mining industry. Australia's resource taxation will be isolated as the highest in the world at 57 per cent. Indeed, many resource-rich nations regard this tax as an opportunity to gain a larger share of global mining investment – unfortunately for Australia, it is.

M. L. Davis, Chief Executive Officer, Xstrata, London SW1, UK

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EXHIBIT 13 XSTRATA SHARE PRICE (LSE)

EXHIBIT 14 XSTRATA’S PRINCIPLES FOR TAX REFORM

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Source: Xstrata RSPT Fact Sheet. (June 2010).

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EXHIBIT 15 XSTRATA ANNUAL REPORT 2009. SELECTED DATA WITH 2008 FIGURES.

TABLE 1: CONSOLIDATED INCOME STATEMENT

Before Before exceptional Total exceptional Total US$m items 2009 items 2008 Revenue 22,732 22,732 27,952 27,952 Cost of sales* (13,098) (13,098) (16,001) (16,001) Distribution costs (1,852) (1,852) (1,988) (1,988) Administrative expenses* (994) (994) (318) (318) Inventory write downs – – – (93) Liability fair value adjustments – 350 – (194) Profit on loss of control of joint venture – 194 – – Profit on restructure of joint venture – – – 213 Restructuring and closure costs – (156) – (125) Operating profit before interest, taxation, depreciation and amortisation 6,788 7,176 9,645 9,446 Depreciation and amortisation: – Cost of sales (2,388) (2,388) (2,372) (2,372) – Administrative expenses (31) (31) (24) (24) Impairment of assets: – Cost of sales – (2,553) – (974) Operating profit 4,369 2,204 7,249 6,076 Share of results from associates (56) (333) 12 (22) Profit before interest and taxation 4,313 1,871 7,261 6,054 Finance income 407 454 192 261 Finance costs (754) (795) (852) (1,147) Profit before taxation 3,966 1,530 6,601 5,168 Income tax (expense)/benefit (993) (669) (1,634) (1,304) Profit/(loss) for the year 2,973 861 4,967 3,864

Attributable to: Equity holders of the parent 2,773 661 4,698 3,595 Non-controlling interests 200 200 269 269 2,973 861 4,967 3,864 Earnings per share (US$)** – basic 1.05 0.25 2.77 2.12 – diluted 1.03 0.25 2.73 2.09 † Exceptional items are significant items of income and expense, presented separately due to their nature or the expected infrequency of the events giving rise to them. * Before depreciation, amortisation and impairment charges. ** The 31 December 2008 comparative earnings per share have been restated after applying a rights issue bonus factor of 0.57.

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TABLE 2: GEOGRAPHICAL SEGMENTS – CAPITAL EXPENDITURE

US$m 2009 2008 Capital expenditure Sustaining: Africa 210 228 Americas North 169 348 Americas South 400 415 Australasia 443 600 Europe 42 74 Total sustaining 1,264 1,665 Unallocated 1 9 Total 1,265 1,674

Expansionary: Africa 364 392 Americas North 341 568 Americas South 265 460 Australasia 1,366 1,985 Europe 23 44 Total 2,359 3,449

Total capital expenditure: Africa 574 620 Americas North 510 916 Americas South 665 875 Australasia 1,809 2,585 Europe 65 118 Total 3,623 5,114 Unallocated 1 9 Total 3,624 5,123

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TABLE 3: GEOGRAPHICAL SEGMENTS – ASSET AND LIABILITY INFORMATION

At At US$m 31.12.09 31.12.08 Total assets Africa 9,164 7,850 Americas North 6,282 7,344 Americas South 21,596 17,785 Australasia 19,684 15,529 Europe 2,964 2,867 Total segmental assets 59,690 51,375 Unallocated* 4,134 3,939 Total 63,824 55,314 Total liabilities Africa 1,934 2,027 Americas North 2,426 2,670 Americas South 4,770 3,967 Australasia 4,458 3,715 Europe 598 372 Total 14,186 12,751 Unallocated** 14,719 18,164 Total 28,905 30,915 Net assets Africa 7,230 5,823 Americas North 3,856 4,674 Americas South 16,826 13,818 Australasia 15,226 11,814 Europe 2,366 2,495 Total 45,504 38,624 Unallocated*,** (10,585) (14,225) Total 34,919 24,399 * Includes corporate assets not directly attributable to business segments. Such unallocated assets include goodwill, cash and cash equivalents, shares held on market, deferred tax and hedging. ** Includes corporate liabilities not directly attributable to business segments. Such unallocated liabilities include interest-bearing loans and borrowings, deferred and current tax and mining tax.

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TABLE 4: GEOGRAPHICAL SEGMENTS – PROFIT INFORMATION

Before Before exceptional Exception exceptional Exceptiona US$m items al items 2009 items l items 2008 EBITDA Africa 330 339 669 1,636 19 1,655 Americas North 608 (145) 463 761 (165) 596 Americas South 3,080 194 3,274 2,719 – 2,719 Australasia 2,765 – 2,765 4,229 (53) 4,176 Europe 279 – 279 368 – 368 Segment EBITDA 7,062 388 7,450 9,713 (199) 9,514 Unallocated (274) – (274) (68) – (68) Operating EBITDA 6,788 388 7,176 9,645 (199) 9,446 Share of results from associates (net of tax): Americas North (1) – (1) 9 – 9 Africa (58) (277) (335) – (34) (34) Australasia 3 – 3 3 – 3 Total 6,732 111 6,843 9,657 (233) 9,424

Depreciation and amortisation Africa 242 – 242 219 – 219 Americas North 472 – 472 508 – 508 Americas South 676 – 676 723 – 723 Australasia 919 – 919 789 – 789 Europe 102 – 102 147 – 147 Depreciation and amortisation 2,411 – 2,411 2,386 – 2,386 Unallocated 8 – 8 10 – 10 Total 2,419 – 2,419 2,396 – 2,396

Impairment of assets Africa – – – – 18 18 Americas North – 1,649 1,649 – 247 247 Americas South – 170 170 – 691 691 Australasia – 734 734 – 18 18 Total – 2,553 2,553 – 974 974

EBIT Segment result: Africa 88 339 427 1,417 1 1,418 Americas North 137 (1,794) (1,657) 253 (412) (159) Americas South 2,404 24 2,428 1,996 (691) 1,305 Australasia 1,845 (734) 1,111 3,440 (71) 3,369 Europe 177 – 177 221 – 221 Segment EBIT before exceptional items 4,651 (2,165) 2,486 7,327 (1,173) 6,154 Unallocated (282) – (282) (78) – (78)

29 IE Business School XSTRATA AND AUSTRALIAN MINING TAX REFORM (A) DE1-202-A-I

Operating profit 4,369 (2,165) 2,204 7,249 (1,173) 6,076 Share of results from associates (net of tax): Americas North (1) – (1) 9 – 9 Africa (58) (277) (335) – (34) (34) Australasia 3 – 3 3 – 3 EBIT 4,313 (2,442) 1,871 7,261 (1,207) 6,054 Finance income 407 47 454 192 69 261 Finance expense (754) (41) (795) (852) (295) (1,147) Profit before taxation 3,966 (2,436) 1,530 6,601 (1,433) 5,168 Income tax (expense)/benefit (993) 324 (669) (1,634) 330 (1,304) Profit/(loss) for the year 2,973 (2,112) 861 4,967 (1,103) 3,864

TABLE 5: GEOGRAPHICAL SEGMENTS – REVENUE INFORMATION

Before Before exceptional Exceptional exceptional Exceptional US$m items items 2009 items items 2008 Revenue by origin External parties: Africa 2,302 – 2,302 3,109 – 3,109 Americas North 4,936 – 4,936 7,394 – 7,394 Americas South 7,051 – 7,051 6,200 – 6,200 Australasia 6,025 – 6,025 8,512 – 8,512 Europe 2,418 – 2,418 2,737 – 2,737 Total 22,732 – 22,732 27,952 – 27,952

Revenue by destination External parties: Africa 562 – 562 725 – 725 Americas North 4,202 – 4,202 6,516 – 6,516 Americas South 1,264 – 1,264 1,415 – 1,415 Asia 10,127 – 10,127 9,894 – 9,894 Australasia 769 – 769 1,083 – 1,083 Europe 5,703 – 5,703 8,216 – 8,216 Middle East 105 – 105 103 – 103 Total 22,732 – 22,732 27,952 – 27,952

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