China and tax in focus at outback mining meet

SYDNEY/SINGAPORE (Reuters) - Chinese demand and a controversial new tax on resources will be in focus at a key mining industry gathering in the Australian outback next week, testing the appetite for new mining projects.

With overhangs in metal stocks and questions over how fast China can keep growing, miners trying to drum up funds for new projects can expect a lukewarm reception from lenders at the August 2-4 Diggers and Dealers meeting in Kalgoorlie, Western Australia.

London Metal Exchange stocks of copper, lead, zinc and other metals have eased in the last month, but remain above year-ago levels, suggesting a recovery in global demand has yet to hit its stride. With lingering worries about a double-dip recession, Chinese stocks of base metals also remain a market risk.

"Despite strong demand in the first quarter, we believe it is unlikely that there has been significant erosion of the large unreported base metal stockpiles that accumulated in China in 2008/9 and need to be eroded before we get genuine pricing tension," said Daniel Major, an analyst at RBS Global Banking and Markets.

A Reuters mid-year poll of analysts showed only tin and nickel price forecasts were raised from estimates in January, while projections for copper, lead and zinc were cut and aluminium was unchanged.

Australia's mining industry faces additional uncertainties ahead of an election on August 21, with the government planning to bring in a new 30 percent tax on mining profits on iron ore and coal, while the opposition has pledged to drop the tax.

Prime Minister Julia Gillard, who is ahead in the polls, agreed a watered down tax with global miners BHP Billiton (BLT.AX) (BLT.L), Rio Tinto (RIO.AX)(RIO.L) and Xstrata (XTA.L), but small and mid-range miners are upset they were not consulted.

"If the Prime Minister thinks that the mining tax issue is dead and buried, she is wrong," said Simon Bennison of the Association of Mining and Exploration Companies (AMEC), which is resuming an advertising campaign against the tax.

There are also concerns over the impact on miners from undecided climate change policies on the use of coal and energy.

"I think most people are looking forward to getting this election out of the way and getting on with business," said Charles Fear of Perth-based Argonaut, a financial adviser to mining companies.

GOOD NEWS FOR COPPER MINERS?

A forecast by the International Copper Study Group (ICSG) sees world 2009-2013 copper mine capacity growth averaging more than 4 percent a year, 1 percent faster than in the decade to 2009.

"But the growth is skewed heavily towards the end of the period and the recent pattern has been for the ICSG to eventually lower its forecasts," BNP Paribas metals analyst Stephen Briggs said, cautioning against a rapid increase in capacity.

The impact on demand for resources from a slowdown in China is in the frame after economic growth cooled to 10.3 percent in the second quarter from 11.9 percent in the first quarter.

BHP Billiton and Rio Tinto, which rely on China for a quarter of annual sales, have warned that slower China demand would weaken sentiment and heighten market volatility.

Iron ore miners might regret this year's hard-won fight against steel mills to shift pricing to the spot market as prices drop off and new entrants face hurdles to development.

Spot prices .IO62-CNI=SI are trading well below the new $160 a tonne CIF third quarter contract price, with forecasts continuing to point south.

Hardest hit in the sector may be Australia's burgeoning magnetite iron ore sector, which has enjoyed growth in foreign investment, particularly from Chinese steelmakers.

Under the new mining tax, magnetite producers will be taxed at the same rate as the rest of the iron ore sector, despite shouldering additional processing costs of around $15 per tonne to create a saleable product.

GOLD PROJECTS

Gold miners are in a better spot to parade new projects.

Since the start of 2008, gold has stood head and shoulders above other major asset classes, appreciating 49 percent while equity markets and oil and copper price are still in negative territory over that period.

Still, take away the crisis mentality that makes bullion a safe-haven investment, and gold looks precarious, said Research Capital Group gold analyst Tony Parry.

"On balance we are cautious on the medium term outlook for gold, and see more chance of it trading below the $1,200-mark than above it," Parry said. Spot gold prices stand at $1,160 an ounce.