Xstrata Plc shelved spending on projects worth A$6.6 billion ($5.5 billion) in Australia, the first global mining company to suspend major work because of Prime Minister Kevin Rudd's planned tax on mine profits.

The A$586 million of work on the expansion of the Ernest Henry copper mine, approved in December, and the A$6 billion Wandoan coal project aren't viable under the new tax, Zug, Switzerland-based Xstrata said today in an e-mailed statement.

Xstrata's announcement may intensify pressure on the government to wind back its proposed 40 percent tax on so-called super profits. Rudd, battling a slump in approval ratings ahead of an election likely to be held this year, said the move was just the "argy-bargy of a very tense debate."
"The suspension of Ernest Henry is certainly ratcheting up pressure in the debate about the tax," said Peter Richardson, chief metals economist for Morgan Stanley Australia Ltd.

BHP Billiton Ltd. and Rio Tinto Group, which are reviewing projects in Australia, the biggest exporter of iron ore and coal, are also campaigning against the tax. Fortescue Metals Group Ltd., Australia's third-largest iron ore producer, last month put $15 billion of projects on hold. Xstrata is the world's largest thermal coal exporter.

"Where there's uncertainty, companies will be shelving projects or putting them on hold," said Michael Heffernan, a client adviser with Austock Securities Ltd. in Melbourne.

Eoin Treacy's view The issue of how much tax mining companies should pay is always going to be contentious and particularly so when investor confidence is still quite fragile. The issue has now become a political football which ensures that it will remain front page news for a while longer. At Fullermoney, we believe this tax is ill-timed and ill-considered but it is important to accept that brinksmanship is being practiced by both sides.

Xstrata putting A$6.6 billion in investments on hold is a clear escalation of the mining industry's opposition to the 'super tax'. Xstrata has quite a lot of leverage on its balance sheet so material changes in the presumed cost of new initiatives are likely to be major considerations for the company.

However, I wonder if there are other factors that also need to be taken into account. Coal prices are improving from a low base and China will need to import more coal if it follows through with commitments to shut down some of its own supply. This should be a positive for Xstrata but in such circumstances it is hardly in the company's interests to dramatically expand production because that would curtail upward pressure on prices. Therefore, I wonder if the timing of the decision to suspend new mine investment is wholly based on the super tax?

The 'super tax' issue, akin to a sword of Damocles hanging above the market, adds to uncertainty and has probably contributed to the speed with which many Australia focused mining shares have pulled back recently. Xstrata lost upward momentum from January and broke below the 200-day MA in May. It now needs to sustain a move back above 1050p to break the six-week progression of lower rally highs and indicate demand has regained the upper hand.