Hogsback wonders what the tax fuss is really about

JOBS might go in the coal industry, and some mines might close with the introduction of Australia’s carbon and mining taxes, but Hogsback wonders whether that also means coal mining profits will fall.
Hogsback wonders what the tax fuss is really about Hogsback wonders what the tax fuss is really about Hogsback wonders what the tax fuss is really about Hogsback wonders what the tax fuss is really about Hogsback wonders what the tax fuss is really about


Tim Treadgold

Perhaps “not” is the answer to the profits question as a simple analysis indicates, meaning that much of the thunder and lightning around the carbon and super-profits tax is political – or investors are sending a message, and if they are then what is the message?

One interpretation is that investors are treating the proposed new taxes as more of a nuisance. Or maybe they believe there is a bigger chance of the government changing before the taxes are introduced.

Two tests were applied by The Hog>/i> to the financial v politics question – what investors think, and what professional analysts think.

Investors are easy to test by looking at share price movements. In theory, a new tax should be reflected in coal company share prices well ahead of its introduction, given that the stock market is always forward-looking as it factors in future earnings.

Professional analysts are also easy to test by looking at whether they are still tipping coal stocks as a good investment, and whether they are forecasting higher profits.

The answer to both tests, conducted over a full-bodied South Australian shiraz, was clear – investors do not seem to be worried about the carbon and super-profits taxes, and neither do the analysts.

Of eight coal stocks measured over the past six weeks, the period during which the debate around the carbon tax went ballistic, four stocks posted share price falls, and four rose.

But of the miners which lost ground two fell by a smaller percentage than the ASX all ordinaries over the same period (from the start of May to the middle of this week).

A perfect example was New Hope Corporation, which rose by 4.5% as the carbon tax debate heated up, over the same time that the all ordinaries index was falling by 5%. Aston performed a similar trick, rising by 3.5%.

Metro Coal was the positive abnormality over the testing period, rising by 49%, while Whitehaven was the negative abnormality, falling by 12% – with some of that decline probably a result of failed negotiations to secure a takeover bid.

Macarthur Coal was also little different. At the start of this week it was down by 3.3% (still better than the all ordinaries), but lost a little more ground after the company said it had taken a price haircut on its PCI coal thanks to weak Japanese demand. When The Hog last looked Macarthur was down by the same amount as the all ordinaries, 5%.

The takeaway message from share price moves is that few investors seem to yet be considering the carbon and super-profits taxes as a disincentive to buying shares in coal companies.

The reaction of investment bank analysts is equally interesting, because none seem to have yet changed their views on coal companies. Most are still tipping industry leaders as stocks to buy.

Macarthur Coal is a good example. Analysts at Goldman Sachs are telling clients to buy the company because it is looking at several years of strongly rising profits. This year’s forecast net profit of $245 million will be superseded by next financial year’s $307 million, and swamped by the 2013 financial year forecast profit of $406 million.

Analysis of Whitehaven and Aston tells a similar story. Whitehaven’s profit is expected to be down this year, but rebounding to $185 million next year, and then up to a sky-high $396 million in 2013. Aston will have a flat year next year, but speed up from 2013, when it should post a profit of $42 million.

The interesting part about looking at coal companies, from a strictly investment perspective, is that their share prices are not being affected by the tax talk, meaning that investors see higher taxes as just another cost of doing business – or that they expect a change of government before the taxes become law.