Originally published by Robert Gottliebsen of The Australian.
06.06.2026
But even more disastrous is the looming long-term impact on the mining industry.
For more than half a century, the engine room of Australia’s long-term growth has been exploration expenditure and mine development, including gas.
But small explorers that once attracted large sums of high-risk capital are now being savaged by the combination of the proposed capital gains tax and the avalanche of ETF funds.
Nothing illustrates the transformation of the sector better than the announcement in the last week of June by Australian Rare Earths (ASX: AR3).
The company has developed considerable reserves of heavy rare earths on the South Australian-Victorian border. Like the Chinese deposits, they are in clay, which makes extraction far cheaper than the hard rock deposits which are more prevalent in Australia.
The company produced a pre-feasibility study and its early estimates of reserves provide a 12-year life, but more drilling will almost certainly substantially expand those reserves.
The study showed that the mine could be developed for around $178m and was forecast to produce a first full year of EBITDA (earnings before interest, tax, depreciation and amortisation) of $184m and an operating cash flow of $139m.
These are incredible figures that underline the low mining costs in extracting rare earths from clay, albeit that the forecasts come from a pre-feasibility study which is not the same as a full feasibility study. Nevertheless, the study was very detailed, with the main uncertainty being the price of rare earths.
A base assumption embraced the price levels that the US government has established for some heavy rare earths and reasonable market prices for other rare earths. An optimistic set of assumptions more than doubled the EBITDA.
Of course, if China again floods the market with rare earths and sends prices to lower levels, the economics would be totally different.
Currently, America and the rest of the western world are desperate for heavy rare earths and are looking for good deposits.
After the high profit projections, the market simply turned the other way; the shares remained around the 11c mark, giving Australian Rare Earths a market capitalisation of less than $30m.
In previous times, there would have still been a big discount for uncertainty, but not a complete “back turning”.
Sadly for the Australian junior miners, the speculative money the industry once attracted is being sucked into ETFs which are punting larger enterprises both here and overseas. They rarely look at small operations.
In former times, speculative money created mining booms, and it is those mining booms that have delivered the North West Shelf and many other Australian mineral projects.
Starting on 1 July 2027, the 50 per cent capital gains tax discount is replaced by a cost-based inflation (CPI) indexation system which can create capital gains taxes at close to marginal income rates. There is also a minimum 30 per cent tax that applies to “real” capital gains. Historic gains before 1 July 2027 are grandfathered to the current system.
For Australian Rare Earths and small miners, their big gains will be post-July 2027 and subject to the new tax.
The main shareholders in Australian Rare Earths are individuals and self-managed funds. The capital gains taxing in self-managed funds remains economic, but for individuals, the new tax rates greatly reduce the attraction of buying shares in separate companies – particularly those with high risk, but high upside.
Australian Rare Earths will need to apply for Australian and US government grants and/or loans and then sell part of the project to a large mining operator, particularly from the US or Canada.
It is the big overseas mining companies that will reap the harvest that previously was for Australians.
This year there have been 17 IPOs, of which 11 are now selling less than their issue price. And of those 11, seven are from the mining sector. Gold has clearly attracted speculative money, but the gold ETFs are looking for larger gold miners and not in the smaller company speculative business.
ETFs’ net gains and losses are netted and don’t face the same impacts of big rises in a single stock.
While investment in speculative assets carries rewards for self-managed funds, there is a limit to how much self-managed funds should be invested in high-risk areas.
Most of the exploration in Australia will now take place by foreign companies or Australians that have based themselves overseas where capital gains are at realistic levels.
In an ideal world, the ASX would be leading the charge to explain to governments the long-term damage they are doing to the nation, but unfortunately, the ASX itself has too many internal problems.
Australia is being warned that innovative, wealth-creating start-ups will disappear unless the proposed capital gains tax that decimates the potential big rewards for high risks is changed.