Australia's mineral exploration gains face capital gains tax hurdle

Australia's mineral exploration expenditure rose year over year in the quarter ended March 31, government data showed, but industry fears a new federal tax could stifle the momentum amid volatile markets.

Australian mineral spend rose 16.3% to A$949.3 million ($679.33 million) in the March quarter on the back of a 53.4% lift for gold to A$450.9 million, according to the Australian Bureau of Statistics data released June 2.

The uptick was despite cyclical headwinds tempering the London Bullion Market Association price's reaction to the Middle East war in March after new highs in January, according to an analysis by S&P Global Energy CERA.

Yet industry fears this momentum would be stymied by the federal government's May 12 proposal in the fiscal year 2026-27 (July-June) budget to replace the 50% central gains tax discount with cost base indexation for shares held by individuals, trusts and partnerships for more than 12 months, effective July 1, 2027.

While lauding "companies getting on ground to drill in numbers" amid "strong commodity prices and global appetite for our resources ... the real test will be the next quarter stats, as the dark shadow of the Federal Budget and CGT changes start to impact decision making," Warren Pearce, CEO of the Association of Mining and Exploration Companies, said in a June 2 statement.

"This is now the biggest challenge facing the mineral exploration industry," AMEC's statement said. "As investors start evaluating the risky nature of their portfolio allocations, we are already seeing companies take pause on their next steps. We'd expect to see the impact show up in future results."

"Whether it is [initial public offerings] put on ice or drill programs paused, we are at the start of this debate and already hearing and seeing a sizable change in the investment process."

State-by-state breakdown

Western Australia, which has historically accounted for the bulk of Australia's gold production and is the world's largest lithium and iron ore producer, registered a 25.3% increase year over year to A$681.3 million in total March-quarter mineral exploration spend.

In Victoria, where a significant part of the Murray Basin hosts the world's largest known deposits of mineral sands according to the Minerals Council of Australia, mineral exploration spending rose 29.8% year over year to A$34 million.

In South Australia, where BHP Group Ltd.'s Olympic Dam hosts top-two global resources of copper, gold and uranium according to S&P Global Market Intelligence data, mineral exploration spending declined 17% year over year to A$43.4 million.

Queensland, which produces most of Australia's world-leading metallurgical coal exports and hosts considerable critical minerals potential, saw a 19% year-over-year fall in mineral exploration spending during the March quarter to A$84.9 million.

Mineral exploration spending in New South Wales, which produces most of Australia's thermal coal exports which rank second in the world, rose 25.7% year over year to A$72.3 million.

Australia's total iron ore exploration spend rose 4.7% to A$186 million, while total coal exploration spend fell 22.7% to A$43.2 million over the period.

Broader concerns

AMEC met with Federal Treasury officials May 14 and again on May 29, a spokesperson confirmed to Platts, part of S&P Global Energy, on June 3. The industry group pressed the case for an exemption from CGT changes for mineral exploration investors, as "smaller companies rely on retail investors in order to survive," Pearce said in a May 29 statement.

Mineral producers and developers also expressed concern over CGT's impact on the pipeline of projects in Australia.

The tax changes will have a "significant impact. Let's be clear about it," Wayne Bramwell, managing director and CEO of gold producer Westgold Resources Ltd., told the Financial Review Mining Summit in Perth May 27.

"The ecosystem is: explorers exploring, developers building projects and producers producing. The large funds don't back the junior explorers," said Bramwell, who also chairs Australia's Gold Industry Group.

"The guys and girls doing a high-risk exploration will be significantly impacted by the capital gains tax because it's the mom and dad investors and the small fund managers who will now have a different view about the returns on that capital."

Darryl Cuzzubbo, managing director and CEO of Arafura Rare Earths Ltd., also told the summit that the CGT will hit small explorers where "people invest high-risk money with a very low baseline, so anything you do on the capital gains tax will have an impact."

"Going forward, it's imperative that in terms of policy positions, whether it be taxation, [industrial relations] regulation, I think it's very important for Australia to make sure it's positioned to be a really competitive destination," Matthew Holcz, chief executive of iron ore at Rio Tinto Group, told the summit.