Australian resource tax: Impact on CLF

Impact of this tax hike on Australian miners on CLF (Cliff's Natural):

Right now, CLF revenues from Australia are 22% of total. After depreciation, cost of goods, and operating expenses, the percent of net income is approximately 17%. That is this quarter's reality.

Assuming Aussie net income was 20% of total net income going forward, a 40% tax on top of existing taxes (assuming this is a double tax) for the Australia segment raises the total effective tax rate of the company by about 560 basis points. A double-tax of 40% on top of 30% yields an effective tax rate of 58% for Australian profits. If it is merely a bump up from 30% to 40%, then the results are of course much more benign. Given a long-run US segment tax rate around 35% (just for simplicity), that would mean company wide effective tax rate goes from 34% -> 39.6%.

Now let's also say CLF net income equals $8/share going forward for the next twenty years, again for simplicity.

A 560 basis point effective tax increase company-wide would decrease that $8 EPS by $.68 a year. Since this starts two years forward, this has no impact immediately. Every year from year 3 to year 20 thereafter (I've just done 20 years in this model), the impact would be modeled at $.68/year.

The NPV impact would be $4.60 to the share price if the forward earnings were discounted at a 10% rate. The NPV impact would be $3.15 share if the forward earnings were discounted at a 15% rate.

In the event this proposal results not in a double tax, but instead is just a specific mining industry alteration to the corporate tax, then the impact equals .24/share annually. The present value total impact is equal from 1.12 to 1.64 (15% to 10% discount rate). Substantially less meaningful.

Today the share price fell $3.58 for CLF. Considering the proposal hasn't passed and the stock is now 20% off highs, it is safe to enter and likely a good buy. Taxes like this mean less supply in the long run, which is great for ore pricing worldwide in a growth scenario. But remarkable how efficient these markets are.

Click here for the Excel spreadsheet showing the derivation.