Xstrata scraps A$30m Australia expansion plan as new tax looms

The growing row over Australia's proposed 40 per cent tax on mining profits intensified yesterday when Xstrata said it was halting copper exploration in the country.

The company said it needed more "certainty" about the so-called Henry tax before committing about A$30m (£18m) over the next three years. Its decision is the latest threat from the mining industry, which will face an effective tax rate of 58 per cent if the plans become law.

However, the Swiss-based miner is not cutting production in Australia. Steve de Kruijff, Xstrata Copper's chief operating officer in North Queensland, said: "Exploration activities are high risk and, while the targets we had identified are prospective, the proposed tax has introduced great uncertainty about the potential impact on the economics of developing resources into viable operations in Australia

"It would also change the relative economics of these prospects compared with exploration programs that Xstrata Copper is pursuing in other parts of the world."

The Henry tax also threatens to scupper the US coal giant Peabody's takeover of its Australian rival Macarthur. Yesterday, Peabody cut its offer from A$3.6bn to A$3.4bn, directly blaming the tax, which may be implemented in 2012. Macarthur rejected two bids of A$3.5bn before accepting Peabody's first offer.

One of the other potential suitors was Xstrata, which held talks about a takeover with the Australian firm's shareholders. Macarthur said last month that it understood these discussions to be "preliminary and highly conceptual".

Last night, Xstrata refused to comment about the negotiations with investors, or whether Peabody's revised offer would lead to Xstrata making a bid of its own.

BHP Billiton has said that its expansion plans, which include the massive Olympic Dam uranium mine, could be jeopardised by the new tax on mining profits. Its chief executive, Marius Kloppers, said on Sunday: "The uncertainty is in place, it would be very difficult to approve any of those projects."

Rio Tinto has also said it will review its Australian projects.