* Slim chance that courts would overturn mining tax - experts
* Govt holds line, says tax won't derail China trade talks
* Fortescue warns on div, but Gindalbie to go ahead with mine
By Amy Pyett
SYDNEY, May 25 (Reuters) - Australian miners suffered a setback in their campaign against the nation's proposed new mining tax on Tuesday, with two constitutional experts saying that a threatened court challenge was likely to fail.
Miners including Rio Tinto, BHP Billiton and Fortescue Metals Group have lashed out the 40 percent tax proposed by Canberra this month, saying it undermines the country's investment-friendly reputation and will hurt the commodity-dependent economy.
The country's biggest mining state, Western Australia, is preparing to mount a possible legal challenge against the levy on the grounds that it would exceed the central government's constitutional powers.
The constitution bars central government from taxing the property of the six states, and mineral resources are treated in Australia as though they were the property of the states.
But the two experts told Reuters on Tuesday that Western Australia, home to the nation's $28 billion-a-year iron ore industry, would be very unlikely to overturn the tax in court, citing the proposed structure of the tax and legal precedents.
"Challenges rarely succeed and there haven't been any for some years, partly because the law itself is pretty clear that there is great scope for how the Commonwealth (the central government) levies a tax," said Professor George Williams, a constitutional lawyer at Sydney's University of New South Wales.
Another expert agreed, noting that the tax would not, strictly speaking, apply to mineral resources themselves. Instead, it would apply to the profits derived from them.
"Depending on the drafting of the law it seems that a tax on company profits derived from resources, which have become company property, would be unlikely to fall into these limited categories (of unconstitutional taxes)," said Peter Mellor, tax specialist at Melbourne's Monash University.
A failed legal challenge would leave Western Australia and miners with only one real option to sink the tax: campaign for the defeat of Prime Minister Kevin Rudd's centre-left government at general elections widely expected to be held around October.
The tax, to apply from 2012, is the centrepiece of Rudd's re-election campaign. It underpins his promise to return the budget to surplus by 2012-13, to cut the company tax rate and to indirectly fund another pledge to boost retirement incomes.
Rudd unveiled the tax this month, arguing the government was not receiving its fair share of booming mine profits. He is gambling that miners will not fulfill their threat to pull projects -- an increasingly high-stakes bet.
Iron ore miner Fortescue has alone threatened to pull $15 billion in projects while giant rival, Rio Tinto has put every local investment plan under review, calling Australia its top sovereign risk concern because of the tax plan.
Fears that miners will cancel projects have also contributed to a recent sharp slide in the Australian dollar and share market, whose fortunes are tied heavily to commodities. The mining industry makes up around half of the nation's exports and around a fifth of the $1.15 trillion stock market.
Fortescue added on Tuesday that the tax would delay its plan to start paying dividends in two years.
"Now all our shareholders are facing a future with no immediate prospect of dividends," Chairman Herb Elliott said in a letter to shareholders.
BHP has already said it would not rule out a dividend cut due to the tax.
But Gindalbie Metals said its key Karara iron ore project is going ahead with the full support of Ansteel, its Chinese partner, despite the tax plans.
"However, the proposed tax changes will have a significant impact, as they will reduce the returns for the project and put planned and possible expansions at risk," Gindalbie said in a statement.
Shares in Fortescue fell 6 percent on Tuesday, while Rio, BHP and Gindalbie all fell more than 3 percent in a broad sell-off linked to European debt concerns.
The government, which is holding firm on the current proposal for now, is also dealing with concerns about the tax from China, Australia's biggest trading partner and top buyer of its commodities.
Trade Minister Simon Crean, just back from a trip to China, said he had reassured officials there that the tax would not lead to higher prices for major commodities such as iron ore and coal.
"The only time it (the tax) was raised as a concern was in relation to a potential impact on price," Crean told reporters. "I made it clear the tax will not put upward pressure on price." ($1=1.213 Australian Dollar) (Additional reporting by Rob Taylor in CANBERRA; Editing by Mark Bendeich and Lincoln Feast)