>STEEL SECTOR: Mining tax in Australia and its impact on total taxes paid

Mining tax in Australia could escalate costs yet again


The Australian senate has passed the resolution of 30% mining tax (Mineral resource rent tax-MRRT) on iron ore and coal which would become law from July 2012 and affect the profitability of all major miners including BHP Billiton and Rio Tinto. We see this development as a negative for the Indian steelmakers as we believe that coking coal prices (which had come down substantially during the last 6-9 months) would start moving upwards again and could escalate costs hurting profitability. We maintain our cautious stance on the sector and retain sell recommendation on Tata Steel and SAIL. We downgrade JSW steel to hold from buy.


■ 30% mining tax announced on iron ore and coal mining: The proposed tax would be applicable at EBIT level after allowance for capital investment at long term bond rate and would also allow credit for state royalty (~7.5% of sales price). Corporate tax rate would be applicable after taking into account the mining tax calculation. The Australian government estimates an additional tax of ~US$11.2bn from mining tax over the next three years. We see net additional impact of 15-20% on total taxes paid on mining of coal and iron ore in Australia. (See mining tax calculations below)


■ Coking coal prices could see progressive upward movement: We see mining companies resorting to higher prices to recover higher cost of taxation and expect coking coal prices to start moving up again progressively. Our calculations on mining tax indicate that ~10% price hike can be profit neutral for the miners. Coking coal prices had seen sharp correction over the last 12 months correcting from US$330/tonne to US$210/tonne. We do not rule out coking coal prices above US$250/tonne in H2CY12E once the mining tax becomes law.


■ Steel prices could also get support if raw material prices move upwards from here: We see the possibility of global steel prices getting support at current levels and even move higher if raw material prices of iron ore and coking coal gets pushed up due to higher prices from Australia. But we remain skeptical on this as steel prices would also be determined by global demand supply dynamics and China’s production run rate going forward and prices have remained weak in recent week due to higher supply.


■ Profitability of domestic steelmakers is directly linked to global coking coal price: Domestic steel companies remain exposed to cost escalations on coking coal front as the backward integration remains low and imports are primarily from Australia. We have currently built in coking coal contract price assumptions of US$230/tonne and US$240/tonne in FY13E and FY14E for our coverage universe. We maintain our estimates as of now but acknowledge upward risk to our assumptions. We see EBITDA fall of between 9-13% on an increase of US$20/tonne in our coking coal cost assumptions.


■ Maintain cautious stance: We do not change our estimates and target prices downwards as of now but maintain our cautious stance on the sector with concerns remaining on domestic demand growth, steel price sustenance in global markets and rising raw material costs on coking coal post mining tax in Australia. Maintain sell on Tata Steel and SAIL. Downgrade JSW steel to hold from buy. 

Mining tax calculation suggest that 10% price increase can happen from miners
We have tried to do a rough cut calculation for the total taxes paid and subsequent profits made by the mining companies on the mining of iron ore and coal. We have assumed a Capex of US$200mn and loans of US$100mn for a iron ore/coal miner having a sales revenue of US$100mn and operating cost of US$35mn. We have also demonstrated a calculation for new mining tax (on the basis of current understanding of its applicability) which allows for deduction of some part of capex and state royalties. We conclude that total taxes paid (including corporate tax, state royalties and new mining tax) would increase by ~20% post the new mining tax. We also note that 10% higher prices at the same cost and new tax structure could result in neutral to positive effect on the net profits of the miners from the mining of coal and iron ore. We would like to state that the calculations would differ from miner to miner as well as from project to project with new projects getting higher benefits on deduction for capex. Overall we conclude that the miners would be required to pay higher taxes and would be looking to pass the effect of the same to consumers in a progressive manner. As a result we see price of coking coal moving higher in the near future.

RISH TRADER