February 3, 2010
Bullish BUCY and Mining
Equip, Australia Royalties
Likely Not A Large Concern
Investment conclusion: Australia’s rumored hike in
mining royalties, with press reports suggesting a 40%
tax, led to 3-10% decline in JOYG and BUCY stock
prices. We see the concern as minor. Our colleagues in
Australia have a detailed note out walking though
several scenarios; they suggest the likely tax is lower
than 40%, with some scenarios favorable for coal.
Snapshot of Australian surface mining equipment:
Australia is a large market for mining equip, with around
15-20% of deliveries in recent years. The fleet is mainly
mining coal, with iron ore around a quarter of fleet value.
Australia is reviewing its mining royalty system: the
potential change is still unpublished, but a review panel
may recommend changing current state based mining
royalties to a federal tax at 40%. Scenarios from our
mining team suggest a potential decline of 10% to 30%
in DCF values for Australian miners.
Reasons for limited concern: our colleagues believe
the likely tax will be under 20%, rather than the headline
40%. New project costs could be recouped before the
tax was imposed, so the impact on new development
might not be severe. If a simpler solution of imposing a
higher but uniform 10% royalty were imposed across
minerals, coal would be relatively unaffected, as its
royalties are generally high already.
Favor Bucyrus among mining equipment names:
we see the Terex transaction as 25% to more than 50%
accretive under reasonable assumptions. The stock is
up only 6% absolute, and has outperformed competitor
JOYG by 15% since the deal announcement. We see
upside in absolute and relative terms.
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