Cliffs Natural Resources Inc. (CLF), an international mining and natural resources company, has recently announced that the implementation of the proposed “Super Tax” by the Australian government would significantly increase its tax liability.
The Super Tax is a new tax added to the current federal and state taxes, royalties and other taxes already paid by producers in the Australian mining industry. Cliffs stated that its Australia-based iron ore operations have contributed $525 million (A$625 million) to tax revenues in the past decade.
Earlier this month, the Australian federal government had proposed the Super Tax on mining profits on Australian mines. Cliffs expects the proposal would increase its tax liability from the current 39% to about 60%, which would make the Australian mining industry the most heavily taxed industry worldwide.
Of late, Cliffs has invested heavily — about $387 million (A$460 million) — in the Australian markets through its Asia-Pacific Iron Ore division, which includes the company’s wholly owned Portman Limited and its iron ore assets in Western Australia. The Asia-Pacific Coal operating segment comprises 45% economic interest in the Sonoma Coal Project with QCoal Pty Ltd. of Australia.
In the event of the tax being imposed, the company might terminate the planned capacity expansions at its primary production complex near Koolyanobbing, Western Australia, which would increase annual production to around 11 million tons from a current rate of 8.5 million tons.
Cliffs Natural Resources Inc. is the largest producer of iron ore pellets in the U.S. Cliffs’ increasing international iron ore exposure, recovery in its coal business and longer-term diversification into the chromium business are huge positives for the stock. The company focuses on growing its international exposure in the face of a consistent decline in North American production.
By increasing its ownership in the Australian subsidiary Portman from 80% to 100% in 2008 and through its full ownership of the Canada-based Wabush mine, Cliffs has increased its capacity to about 50 million tons of iron ore. The company has recently raised its iron ore and coal sales and production volumes with steel demand recovering in the last couple of months.
The Super Tax remains only a proposal at this point, with a long legislative process ahead. Hence we maintain our Outperform recommendation on Cliffs.
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