ECT Escapes Direct Impact of RSPT

The Federal Government’s controversial Resource Super Profits Tax (RSPT) has hit the headlines in a big way, rapidly escalating to a heavyweight stoush between the miners and the Government.

What is the likely impact on ECT’s business?

After seeking top level accounting advice, and closely examining the contents of the Henry Report, we are confident ECT should NOT be directly affected by this new tax. However we must point out that we may be indirectly affected. The question is, to what extent?

Let me explain.

It seems clear the RSPT will be limited to taxing profit on extraction based, or primary production resource activities at the first arms length point of sale.

To appreciate how that is likely to impact ECT, it’s important to understand our business model relative to the point at which the Government proposes to levy the tax.

ECT’s business model is based on licensing technology for a royalty per tonne and equity stake. We are not miners or resource owners.

Regardless of the RSPT, ECT will receive a royalty of A$5 per tonne from Australian licensees.

ECT also receives 10% free-carry equity in the licensed Company resulting in an annual dividend.

Neither the royalty nor dividend is subject to RSPT.

As an example, we are advancing toward the first commercial scale-up of our Coldry technology at Loy Yang Power Station in Gippsland Victoria with Vietnam-based TINCOM. ECT and TINCOM have established a joint venture company called Victoria Coldry Pty Ltd (VCPL) that will be licensed by ECT to manufacture Coldry. VCPL will purchase coal from Loy Yang mine and process it into Coldry black coal equivalent pellets for export to Vietnam and China.

What is the likely RSPT impact on Victoria Coldry Pty Ltd (VCPL)?

The RSPT will be levied on the profit Loy Yang make selling the brown coal to VCPL.

As a result an RSPT liability could flow through to VCPL by way of an increase in the sale price of the raw brown coal. This in turn would be passed on by VCPL to the customer.

Our current analysis indicates the impact to be less than $2 per tonne of finished product.

No RSPT would be levied on VCPL’s profit, as its selling a manufactured product.

Reports suggest black coal miners will have earnings trimmed by 15% in the first five years and that steps will be taken to pass on the impact of the RPST to customers.  To this end, ECT could actually benefit from a rise in black coal price. If black coal producers in New South Wales and Queensland are forced to pass on their RSPT payments to their biggest customers, Coldry becomes more attractive and competitive.

Broader Implications

It’s too early to precisely establish the full financial consequences to the resources sector.

The full implications of an RSPT are still up in the air. But it seems its introduction in one form or another is inevitable, despite strong, collective opposition from heavyweights in the resources sector.

Even today (11 June 2010) BHP Billiton has taken out full page ads in several newspapers highlighting their desire for consultation.

We will be paying close attention to the consultation process and also to the politics surrounding the RSPT introduction, which is expected in 2012.

Our accountants, RSM Bird Cameron, will also continue to monitor developments and we will keep you informed.

Thank You,

Kos Galtos
Chief Executive

For Further Information Contact:

Kos Galtos – Chief Executive +61 3 9909 7684 or info@ectltd.com.au

Emma Power – Monsoon Communications  +61 3 9620 3333 or 0419 149 525

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