Caterpillar Inc. (CAT), the world’s largest manufacturer of construction and mining equipment, remains concerned regarding the detrimental effect of Australia’s proposed 40% Resources Super Profit Tax (RSPT) on its Australian sales and profits.
On May 2, 2010, the Australian government unveiled its new 40% tax rate on mining projects effective July 2012 that sent ripples of dissent through the mining sector. The proposed levy would be imposed on the companies’ returns that exceed the rate on long-term Australian government bonds (currently at 6%).
The government, however, will allow mining companies a tax rebate to offset the cost of resource exploration from July 2010. According to the government, the new tax would help all Australians share the benefits of a prolonged mining boom, fueled by demand from China and India, which helped Australia avoid a recession during the global financial crisis.
The government plans to use the proceeds from the resource tax to increase the pension fund. It announced an increase in employer-paid pension fund contributions for workers to 12% from the current 9%. The government has pitted itself against Australia’s most important single industry, mining, which accounts for about half of its exports, in a gamble that boosting workers’ pension funds will influence votes.
The new tax is expected to hit big miners such as BHP Billiton Ltd. (BHP), Rio Tinto (RTP) and Switzerland-based Xstrata, and is expected to generate about A$12 billion ($11 billion) in the first two years.
The new tax plan was severely opposed by mining companies on the premise that, if implemented, these proposals threaten Australia’s competitiveness and will jeopardize billions of dollars of proposed investment.
Xstrata has shelved spending on A$6.6 billion ($5.6 billion) of Australian projects, while BHP Billiton Ltd. and Rio Tinto Group are reviewing projects in Australia and are campaigning against the tax. Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, has put $15 billion of projects on hold. Over $20 billion in new resource investment in Australia has been put on hold by global miners strongly opposing the tax.
The government, however, has stayed put on imposing the tax, saying it would not stall investment. However, Australian Prime Minister Kevin Rudd may announce some changes to his mining tax scheme though he remained firm that the move might not meet the demand of the big miners that the scheme be scrapped entirely and be replaced with a new scheme.
Impact of RSPT on Caterpillar
Caterpillar boasts of the broadest line of mining equipment in the industry. Its mining equipment sales contributed approximately 28% of Caterpillar’s worldwide machinery sales. The Asia-Pacific region generated 24% of its 2009 sales. Offices in Australia, New Zealand and the South Pacific are covered by dealers with over 60 stores and supported by marketing district offices in Brisbane, Melbourne, Perth and Sydney. Caterpillar also manufactures mining equipment in Burnie, Tasmania.
Given its mining presence in Australia, Caterpillar remains concerned about the negative impact the mining tax will have on its profits. Caterpillar has, however, currently not faced any order cancellation or delay. Like all mining companies, Caterpillar is against the increase as it will impact the viability of future mining investment in Australia and also threatens the company’s long-term competitiveness.
Caterpillar’s fears are not unfounded. The levy is a 40% tax on profits at the EBITDA level that will be paid on top of regular corporate taxes. The net effect translates to an approximate 56% tax on profits, double the 28% corporate tax the companies pay currently. Higher taxes would lower profits and drop rates of return for many projects well below the current cost of capital levels.
Further, a significant portion of Caterpillar’s growth during the next few years is predicated on sizable new investments in mining, which is a high-margin business for the company, given its significant after-market opportunity. Thus, the imposition of such a tax would have a significant impact on long-term capital expenditures or investment decisions. With considerable investments at stake, the mining companies will subsequently deviate toward regions where such taxes are not imposed.
Another point of concern is that other resource heavy economies may follow suit and replicate such tax. The impact of the new taxes on mining equipment sales could be considerable over the long term and would have an obvious negative impact on Caterpillar and other similar companies.
We thus remain concerned regarding the negative impact the imposition of the RSPT could have on Caterpillar.
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