CANBERRA – Australian mining shares tumbled on Monday after the government slapped the industry with a new 40 percent profits tax, prompting global miners to warn that billions of dollars in new projects were at risk.

Shares in mining giants Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)BHP.L fell 5 percent and 4 percent respectively on the new tax, which the government expects to raise about A$12 billion ($11.1 billion) in its first two years.

The tax, to apply from 2012, also sent a chill through mergers in the mining sector, with takeover target Macarthur Coal (MCC.AX) falling as much as 10 percent, suggesting bidder Peabody Energy (BTU.N) might not go ahead with its $3.7 billion bid.

The centre-left government, which has made the tax a centrepiece of its re-election agenda this year, sought on Monday to defend the tax against miners’ assertions that it would force them to review A$100 billion in projects in one region alone.

“They’ve got to do their sums again and see whether the economics of these projects still stack up,” said Queensland Resources Council boss Michael Roche, referring to projects on the drawing board for the northern mining state of Queensland.

Western Australia, the largest mining state, has also warned of investment and job losses from the tax, without quantifying them, while BHP Billiton and Rio Tinto and a third global miner, Xstrata (XTA.L), said investment could be jeopardised.

Investors agreed, pushing the mining sector .AXMJ down 3 percent in a wider market off just 0.6 percent. There appeared to be no real winners, with the only mining stocks to gain being those working offshore. Shares in PanAust (PNA.AX), which focuses on Southeast Asia, were up 3 percent in a sea of red.

“There’s only one story in the market and that’s the resources sector getting slaughtered by the proposals announced over the weekend,” said Richard Morrow, stockbroking director at E.L. & C. Baillieu.

The government has picked a fight with the country’s most important single industry, which accounts for about half of exports, in a gamble that taking money from rich miners and using it to boost workers’ pension funds will prove a vote-winner.

Prime Minister Kevin Rudd faces elections in the second half of 2010, most likely in October. He is ahead in opinion polls and tracking to win a second term in office. For more news & graphics on tax changes, click on [ID:nAUTAX]

GOVT & MINERS DIG TRENCHES

The government unveiled the mining tax on Sunday as part of a shakeup of Australia’s complex tax system, arguing that tax revenue from mining has been steadily dropping as a percentage of their rapidly climbing profits over the past 10 years.

The reforms also included a cut in the company tax rate to 28 percent from 30 percent, and an increase in compulsory employer contributions to pension funds to 12 percent from 9 percent.

All the changes depend on the mining tax going ahead.

“Our aspiration and intent is for the mining industry to grow,” Treasurer Wayne Swan told Australia radio on Monday.

But the mining industry has hit back hard, led by Rio Tinto and BHP Billiton, which dominate the nation’s hugely profitable iron ore industry, the sector most vulnerable to the profits tax.

Well funded, the big end of the Australian mining industry is preparing for battle and will look to the Senate, where the government lacks an outright majority, to block the tax.

So far, it is very uncertain whether the Senate will approve the tax. The conservatives and at least one key independent senator say they are hostile to it, while the greens, which back the tax, say they want the revenue spent differently.

BHP & RIO TINTO FUMING

BHP Billiton said the plan would lift its local tax rate to around 57 percent from 43 percent.

Rio Tinto, the world’s second-largest iron ore producer behind Brazil’s Vale (VALE5.SA) and ahead of BHP Billiton in third, said the tax would send a bad signal to investors, especially because it applied to both existing and new projects.

Another global coal miner, London-based Xstrata (XTA.L), said the new tax undermined long-term certainty for mining projects.

One large mining state, Queensland, has already voiced support for the new tax, noting that Canberra’s plan to reimburse miners for state resource royalties meant that the overall impact on Queensland’s state government coffers was neutral.

But Western Australia, home to the iron ore industry and run by a conservative government, will prove harder to win over.

The only clear winners from Sunday’s tax reform package were those benefiting from the boost to Australia’s A$1.2 trillion retirement savings pool, the world’s fourth-largest.

Fund managers AXA Asia Pacific (AXA.AX) and AMP (AMP.AX) firmed in a weak market, as did the major banks, which also stand to benefit from the pension and other lesser reforms.

(Additional reporting by James Grubel; Editing by Mark Bendeich and Ed Davies)

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