Mining shares weaken as threat of Australia's supertax still looms

Markets become aware that change of Australian prime minister does not necessarily mean change in plans to tax miners' profits

A BHP Billiton iron ore facility in Western Australia. Photograph: Tim Wimborne/Reuters

Mining groups face a long period of uncertainty over the introduction of a controversial supertax in Australia following a change of leadership in the country, City analysts are warning.

Welsh-born Julia Gillard became Australian prime minister on Wednesday after Kevin Rudd stood down before a leadership ballot had been held. Rudd had backed a plan to slap a 40% tax on mining groups' profits, but large companies such as BHP Billiton and Rio Tinto said such a move had threatened $20bn worth of investment in the country. The tax would be imposed in addition to corporation tax and other royalty rates, and the miners claimed it would see their total tax rate rise from 40%-50% to 50%-57%.

Initially, mining shares rose on hopes the tax might be withdrawn by the new regime, but such a climbdown would cause financial problems for the government, which is trying to move its budget back into surplus by 2013. Indeed, Gillard said she agreed with the idea that mining companies should pay more tax, although she promised to review the situation and conduct negotiations. BHP welcomed the prospect of talks but Rio maintained any new tax should not apply to existing projects and should be set at an internationally competitive rate.

Analysts at UBS said they still believed the supertax would be introduced by the ruling Labor party, although it was likely to be watered down. But analyst Olivia Ker added: "Given the proposed new negotiation, the resolution of details may now be further in the future, opening up a longer period of uncertainty for the miners. We currently estimate a 18% impact to Rio, 15% impact to BHP, and 7% for Xstrata from the tax. We consider this the worst case scenario and see potential upside from here."

Ahead of Rudd's resignation, there was speculation that Labor could easily lose the forthcoming election in October, and the conservative opposition has already said it would not proceed with the tax.

Mining shares moved lower in London, with worries about global demand in the wake of poor US housing figures and cautious comments about the pace of economic recovery from the US Federal Reserve adding to the uncertainties over the Australian tax.

The miners most affected by the Australian situation all fell sharply. At the close Rio Tinto had lost 108p to £32.82, Xstrata was down 32.7p at 985.3p and BHP Billiton was 31p lower at £19.20. Other miners were hit by worries of a global slowdown in demand for commodities, with Kazakhmys losing 59p to £11.10 and ENRC down 44p at 967p.