Australia dangles tax carrot; China evaluates mine

SYDNEY (Reuters) - Prime Minister Kevin Rudd faced down mining tax protesters on Wednesday and promised immediate spending in Australia's largest resource state in an effort to placate opposition to a controversial mining tax.

Over $20 billion in new resource investment in Australia has been put on hold by global miners due to the tax, with Chalco, the listed unit of Aluminum Corp of China, saying on Wednesday it was evaluating a planned $2.5 billion bauxite project in Queensland.

Rudd is desperate to sell his 40 percent resource tax to miners and voters, worried about job losses in mining towns, ahead of a possible cliffhanger election expected in October.

"The government can announce today that we will be directing a bigger share of the proceeds of a resurgent resources boom back into resource states through critical infrastructure...," Rudd said in a speech in Perth, after running the gauntlet of some 1,000 protesters opposed to the mining tax.

Miners warn the tax is jeopardizing investment in the mining industry, a key export earner and regarded by some as saving Australia from recession during the global crisis.

"I don't believe investors' confidence in Australia has been directly shaken by the tax. The ASX (Australian Stock Exchange) is still outperforming the U.S., Europe and Japanese markets," Rudd said.

"And if you look at the major mining firms in Australia, such as BHP and Rio, they are also outperforming their competitor Vale, and there are no talks of introducing a mining tax in Brazil."

Rudd reportedly met Marius Kloppers, chief executive of top global miner BHP Billiton, late on Tuesday night, and on Wednesday was due to meet Andrew "Twiggy" Forrest, head of Fortescue Metals Group. Both have been fierce critics of the proposed tax.

"The prime minister made a quick knee jerk decision which shook the confidence of the nation," said iron ore billionaire Forrest, ahead of addressing anti-mining tax protesters.

Forrest has threatened to scrap up to $15 billion in future projects planned by Fortescue if the tax goes ahead.

In a sign the government may be more conciliatory toward miners, Finance Minister Lindsay Tanner said: "There are a range of things that we see as legitimate grounds for negotiations."

"The negotiations are very important and we believe they are proceeding in a constructive and sensible manner, but they are very complex," added Tanner, who was speaking at a Reuters newsmaker event for the Australian launch of Reuters Insider.

While Rudd would not move on the headline 40 percent rate, he did say the government was prepared to offer "generous transitional arrangements to mining firms."

CHINA MORE CONCERNED ABOUT SUPPLY THAN TAX

The Australian Financial Review said Chalco may drop its Aurukun bauxite project in Queensland, having struggled with rising costs, market oversupply, a requirement to build a refinery, and now the tax.

But Chinalco Vice President Lu Youqing told Reuters the group had not discussed pulling out of the project.

"We are pushing the project. Now we are comparing different proposals," he said, adding the tax was one factor under consideration.

Tanner said China's main concern in Australia's resource sector was not the new tax, but supply.

"Their primary concern will be long-term reliability of supply and Australia's track record ... has been extremely good and I would expect that to continue," he said.

Mining shares have seen billions of dollars wiped off their value since the "super profit" tax was first announced in May, and the government is under intense fire from miners and has seen its voter support plummet in recent months to the point it now risks being turfed out of office after only one term.

In an effort to win support for the tax, Rudd said the resource state of Western Australia, where the government is at risk of losing all its parliamentary seats, would receive A$2 billion worth of infrastructure from tax revenue.

He said spending in the mining state would start immediately, with projects aimed at development and job creation in mining towns and improved infrastructure in mining ports.

"That means more rail, roads, ports, and other crucial infrastructure to support the workforce in critical mining regions...," he said.

Rudd had already announced a A$5.6 billion mining tax infrastructure fund, which would not be spent until the tax came into effect in 2012, but on Wednesday topped it up with an additional A$400 million to be spent immediately.

GOVT COMMITTED TO TAX

Rudd has linked the tax with the 2010-11 budget in May, saying tax revenue would boost retirement savings, lower company tax and guarantee a surplus budget by 2012-13. All will be major issues in the next election.

About 1,000 protesters gathered outside the Hyatt Hotel in Perth where Rudd was speaking. Some waved placards saying "Super Tax, Super Stupid" and "Rudd's Mining Tax Hurts Us All."

But the government appears committed to imposing a tax.

"The government's position is ... the existing (resource tax) arrangements are both economically inefficient and also deliver an inadequate return to the Australian people," said Tanner.

"We are not going to be diverted from our core objective, to get a good deal for the Australian people for the extraction of resources that can only be extracted and used once."