Rio and BHP score points over Australian government with iron ore royalty deal

Rio Tinto and BHP Billiton yesterday agreed to pay Western Australia increased royalties if the companies' huge iron ore joint venture in the state is given the green light.

The controversial $116bn (£78bn) plan, which would see the mining giants combine their operations in the Pilbara region, still has a several competition hurdles to overcome, not least in Europe, where Eurofer, the steel manufacturers' association, has vehemently opposed the tie-up.

Western Australia's premier, Colin Barnett, said: "This outcome is the result of long and detailed negotiations conducted in good spirit over the past year. It is important for a number of reasons: it provides the people of Western Australia with increased value from this state's resources and it creates a level playing field for all iron ore producers in Western Australia."

The deal is a political coup for the two London listed groups after weeks of increasingly fraught argument between the mining industry and Australia's federal government over its proposed 40 per cent resources tax. Mining companies argue that the tax will deter investment in Australia, while Prime Minister Kevin Rudd's administration claims that the industry has made billions of dollars of profit without contributing appropriately to the Australian exchequer.

Yesterday's royalty agreement also included operational changes that the two companies said would, "promote greater efficiency and flexibility for Rio Tinto's and BHP Billiton's current operations".

Under the deal, the two groups will be permitted to share infrastructure and blend ore across their combined networks.

A final decision on the joint venture deal is still some way off.

Rio Tinto and BHP Billiton have a tightrope to walk in persuading the Australian authorities to sanction the move, while at the same time fighting the implementation of the 40 per cent tax.

The industry has organised rallies against the levy in recent weeks, creating bad publicity for Mr Rudd ahead of the Australian general election, which is likely to be in October.

Last month in the Western Australian state capital of Perth, demonstrators marched through the streets carrying banners reading "axe the mining tax".

The mining companies are especially concerned about the tax being applied retrospectively, and that other governments may take a lead from Australia and impose a resources tax of their own.