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BHP Results Share the Joy. Can't You Feel It?

How can anyone complain about BHP's record half-year profit? Over $10 billion ($10.7 to be exact) NPAT for the half year, with a 41 percent return on capital invested shows what a terrific job they're doing.

Think of all the good work they're doing for shareholders. The last few years have seen dividends topping 40 cents per share, with the share price growing at a rate of 20 percent (against a drop in the All Ordinaries of 13 percent). This has all helped Aussie Super funds, passing on the benefits of the outstanding growth of this great Australia to everyone who has lots stashed away for the future.

So why do we still have all this talk of the need for a mining super profits tax? Why would we want more money to find itself in the hands of the government when it can be distributed through the more effective method of share ownership? Heavier taxation on this mining giant would just slow down the growth and, for that, we'll all suffer.

We all suffer if growth slows

Or would we? BHP is an investment machine. And the more they invest the less tax they have to pay, which is why in the last half year BHP has paid just 24 percent tax. Their tax liability has only been above 35 percent twice in the last ten halves. Paying well below the company tax rate is fair enough, if they are investing in lots of development. But is that investment happening because they know they're paying a low price for the minerals they draw out of Aussie soil? Is someone saying "Quick, let's get it out before they change their mind?"

If the price they pay for minerals (the royalty payments) is too low, several things happen. First, money flows to BHP shareholders rather than the population at large. Some argue that that's a better place for it. It flows through to investment vehicles that allocate those resources far more efficiently than the government ever would. Secondly, it makes it too easy to make money. The sector expands faster than the rest of the economy, adding to the widening rich-poor gap, inflating house prices and forcing the RBA to lift interest rates to cool the economy. Sound familiar?

Of course BHP Billiton shareholders would never buy into this argument. Any moves to change the current profits bonanza would mean they'd have to accept a share portfolio that more closely matched the rest of the market.

A fair price

So, on top of taxes, the miners also pay the government royalties. But royalties are not a tax. They are a fee for extracting state-owned resources out of the ground and they're counted as a cost. It's not easy to tell from the BHP reports what is paid in royalties, but BHP did declare last year that all payments to government, including royalties, averaged 42 percent of profits from 2004 to 2009 --- the tax listed on their income statements over this period was 32 percent.

Is that a fair price? Let's put it this way, if someone started drilling on my land (although there's not much space and I would have to move the car) I'd expect to take half the pre-tax profits (in royalties), and then we'd each get taxed on top of that. But perhaps I'm just greedy. If they made $10 billion profit, I'd want $5 billion from them, then they'd pay 30 percent tax ($1.5 billion), leaving them with $3.5 billion. They've taken the risk and invested in infrastructure, but I had the goods. Am I being unreasonable?

Imagine if these resources sat on private land? Would the owners be asking the miners for a similiar deal?

The repercussions

If BHP and others are getting away with blue murder, then it really does mess up the balance of the economy.

A higher profits-based royalty payment would allow taxpayers to share some of the benefits of the mining boom. It might be at the expense of faster growth, but is that necessarily a bad thing? If we slow the rate of extraction we lessen the impact this rapid growth is having on the rest of the economy --- and this stuff isn't going to decompose. More will be left in the ground for the benefit of future generations. If you don't have kids you might not care about that. Instead you might want to think about how, if we're selling resources too cheaply then, as taxpayers notgetting our full whack, we're subsidising the growth of the Chinese economy.

Why kill the golden goose?

Yawn! Haven't we heard the "don't kill the golden goose" cry once too often? A company with more than half of its assets in Australia, returning a record earning result, is not on the verge of leaving these shores. Let's remember, this half-year result wasn't the highest for pre-tax profit for BHP â€"-- it was the highest for post-tax profit. It set the record for minimising tax. You don't want to kill the goose, but sometimes the goose can take the (golden) piss!

Or keep the status quo

All talk of hiking up government payments is, of course, socialist crap. I've been accused of that once or twice before. Perhaps, things are fine as they are. Besides, Julia Gillard isn't going to budge on this. All it takes is a $22 million six-week advertising campaign and she's gone.

And we all know any talk of alternatives is driven by that mob of sour pusses who didn't buy their BHP shares in time. The easiest solution is to get those people to buy in to the company so they stop whingeing. How about a government grant? A bit like the first home-buyers grant, but for BHP shares. Then we can all get rich and no-one will be left out. What a beautiful solution that would be.

Read the BHP Financial Results here.

See also:

Read more By The Numbers articles by Phil Dobbie here.

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