BHP writes me a letter

A couple years back, during the depths of the Global Financial Crisis, BHP shares dropped from a high of $48 and were on or around $30. So I thought to myself, I have a feeling China and India will want us to keep digging up things out of the ground, so I might buy some of those shares. Within two weeks of my buying the shares, the price went down to $21. I bought some more (not a lot more, but enough to convince myself I was being a wise investor). In April this year they had risen to $43 a share. So I was feeling pretty clever, and thought about selling them, but thought hey, China and India will want us to keep digging stuff out of the ground. SO I kept them. Now they are at $39.13.

Do I feel foolish? Not at all. In fact I’m quite happy with my shares. Why? Because at a time when most of Europe seems to be wanting to run and hide under the bed until the economic storm blows over, with China suggesting it wanted to slow down its hosing boom, and with the Australian Government saying it wants to introduce a resources rent tax, the worst they have fallen to is still roughly 22% above what I paid for them (as you can see here). If the RSPT is supposedly going to ruin the company, I’m not seeing it in the stock price.

One of the added benefits of being a BHP shareholder is that yesterday when I got home I had a letter from BHP Chairman Jac Nasser. It was nice of him to write to me personally, and best of all it came on the Friday, so it fitted in perfectly with the “Friday Funnies” theme.

He wrote to tell me how things were going with the RSPT negotiations. Not well it seems. He tells me that the Government is doing things all arse up. He says the Australian Government “traditionally engaged with industry on major taxation reform prior to it being announced”.

I wondered to myself what was the Henry Tax Review? I wondered as well whether my Company Board had bothered to provide a submission to the Review, given it was easily the biggest taxation review undertaken in the last 30 years. So I had a look. That’s be a no. I guess Nasser and Co were too busy to notice that it was on – and hey they had the Mineral Council of Australia to do their work for them – but surely BHP could have put in something given the idea of a rent tax was pretty well being mooted as a possible tax change even before the submissions closed, and it seems it will destroy us all, so you think they’d really want to warn the Government about it.

Oh well. Spilt milk I guess.

Nasser then outlaid four things any new tax on minerals should have (geez, Jac, this really would have been useful in a submission to the Henry Review…)

1. Not fundamentally change the rules of the game on existing projects, both as a matter of fairness, and so to protect Australia's reputation as a stable place for investment.

This is essentially the world’s biggest mining company stamping its foot like a 5 year old and saying “it’s not fair!!!!”

Second, he argued it needs to be competitive with other countries (ie less tax is better), thirdly that they need to vary according to the kind of mineral resources mined – which it actually already is to an extent, because the tax doesn’t tax minerals, it taxes profits – if you’re mining a mineral that doesn’t generate super profits, you don’t have to worry about it… And finally it needs to just be on minerals alone – ie we just want to pay our royalty and get your stinking hands of our profits (which we’ll pretend have little to do with mining).

He then attached a funny one pager with 10 points, that was so good I thought it best to share. Let’s have a look.

Ok let’s go through them point by point.

1. Future prosperity at risk??? Oh rilly! Good to see there’s no hyperbole involved here. Anything to back that up Jac, you know like a collapse in investment, share price back to GFC levels? No… ok let’s keep going then.

2. Globally uncompetitive? You mean no one would want to mine here and make massive windfall profits? I think you might be wrong there. Sure we my not be as competitive, but things change, other nations might also like the look of an RSPT… especially when (as we know don’t we Jac) you’re not going anywhere until you’ve dug everything you can out of the ground. You might be able to make more money in Sierra Leone, but that won’t stop you making money here as well – it’s not like you don’t have a finite amount of capital – if you did you’d never expand at all.

3. Other resource-rich countries? Were any of these countries on par with Australia in terms of stability of economy, government and infrastructure? Don’t lie Jac, we know you’re scared Brazil, South Africa and Canada will follow suit, and stop telling us Australia should compete with some corrupt African nation, that you can go in and rape at will.

4. No consultation? The Henry tax review – it was in all the papers, you really should have paid attention. And also, what is the  Government doing now? You really should keep up. 

5. Consequently? So you mean this is really still part of Point 4?

6. Oh dear, it seems the Government is never able to change anything – so when the WA or QWLD or SA Governments increase the royalty rate is that changing the rules halfway? What about when the Government drops the corporate tax rate – should it only apply to new ventures?

7. Oh Jac, “This means”?? Jac, this is still point 6 isn’t it?! And Sovereign risk? No Jac, sovereign risk is when a country can’t pay its bills – have a look over at Greece.

8. Well duh. But no one is stopping anyone making profits, in fact for many companies, the RSPT will actually be a good things that will encourage more investment!

9. Err Jac, this just looks like a rewording of point Number 1 (and Number 8, and Number 2 really)

10. As I guess you implies in point number 1, and number 8….

Jac, I gotta say, this looks more like at best 6 points, and a couple use pretty specious arguments, dodgy use of meanings, and the others dip in to the hyperbole bucket and say, I’ll have an extra helping!”.

I must say, if this is how you view an economically sensible idea, I’m starting to worry about my investment, Jac... might be time for me to think about selling those shares, before you make any investment decisions as nutty as the points you make in this letter.