I recently wrote an article titled 'What Next for Australian Resources' and alluded to the impact a likely change of government may have in the Federal election. As was anticipated, a Liberal - National coalition government was elected by a clear majority in the lower house (House of Representatives) and Tony Abbott will lead the country as Prime Minister. Abbott is a Prime Minister elect in the mold of John Howard, with a definitive leaning towards conservative government. However his mandate to remove two key pieces of Labor legislation if elected - the Mineral Resources Rent Tax (MRRT) and the Carbon Tax - may possibly be a little more difficult given the composition of the Senate (the upper house). This article will briefly examine which companies stand to benefit from an Abbott led conservative government.
The Politics of Government
The Labor Party's decision to introduce a tax on mining companies 'super profits' and its preference to champion global warming, led the government under Kevin Rudd to introduce two key pieces of tax legislation, being the Minerals Resources Rent Tax (MRRT) and the Carbon Tax. While the MRRT was meant to draw in huge revenue from the miners and help return the Australian budget to surplus, capitulation to the mining heavyweights lobby group and a collapse in iron ore prices, ultimately ended up delivering a watered down policy on the resources side which didn't deliver the revenue that Labor predicted in its forward estimates. The Carbon Tax however became a drain on the Australian economy, delivering huge increases on the cost of electricity and on utility suppliers ($580M bill for AGL Energy), and recoupable costs on airlines ($100M impost on Qantas and $50M impost on Virgin Australia). It would always be that this election would lead with the abolition of these two taxes as a priority for a Liberal National Coalition to address.
Here Today - Gone Tomorrow
At least that's what the Coalition promised as its election mandate, and it remains what will likely occur, however the timeline will likely be longer than the Coalition desires after a mixed result for seats in the Australian Senate, which provided a swing to some minor parties in addition to the Coalition. Even more interesting, was the election of Mining Magnate and Billionaire Clive Palmer to the lower house, and potentially two of his party members to the upper house (an ex national rugby player and an ex-soldier), as members of the 'Palmer United Party' (PUP). While the PUP under Palmer's 'guidance' will certainly support the abolition of both the MRRT and the Carbon Tax, the seats in the Senate held by Labor, the Greens and other minorities could potentially stifle the speed at with which Tony Abbott is able to pass legislation to repeal the tax safely through both houses. For the taxes to be removed it must be passed in legislation by both the upper and lower houses of parliament. And that's the rub for investors, as it could take until mid-2014 when the newly elected Senators assume their appointments, so there could be a potential lag for returns to flow through to companies affected by the taxes.
Aiding the benefit that would come from the removal of these taxes, is the value of a lower Australian Dollar, and a resurgent iron ore price well above consensus estimates. The obvious winners in that equation are the big miners RIO Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP), not to mention pure play iron ore miners like Fortescue Metals Group (OTCQX:FSUMF) who I have written specifically on before in a feature article titled 'Get On Board The Iron Ore Train'. Fortescue recently announced a final dividend of AUD$0.10/share representing an increase of 150% over the previous 12 months, and a suitable payback for investors who have backed the stock through the recent turbulent period. Most notably this represents a $102 Million dividend for principal shareholder and founder Andrew 'Twiggy' Forrest.
Energy companies such as Chevron Group (NYSE:CVX), AGL Energy (OTCPK:AGLNF) and Origin Energy (OTCPK:OGFGF) stand to benefit, especially as projects in the Liquid Natural Gas market come on line and capital expenditure projects begin to realize sustained operational revenue. It will also be more attractive to retain infrastructure development on the Australian mainland rather than move 'offshore', like Woodside Petroleum's decision to establish a floating LNG processing point off North West Australia.
In agriculture it will remain to be seen whether a decision in favor of Archer Daniels Midland (NYSE:ADM) proposed takeover of Graincorp (OTCPK:GRCLF) gets the go ahead from the incoming government. While Labor flagged a review of foreign ownership for rural land and agricultural assets, the National Party component of the Coalition is a rural/regional party, and even if the deal gets through there is likely to be a potential associated time lag. The Australian car industry is also waiting to see if the Coalition dumps Labor's proposal to drop fringe benefit tax off salary sacrificed car purchases - and McMillan Shakespeare (OTC:MCSLF) stands to benefit most from this reversal.
As Australian markets stabilize after a turbulent few years, the broader recovery has lagged USA markets, but as the wheels of a market recovery start to slowly turn, combined with a conservative government determined to govern wisely and boost consumer and business confidence, the next twelve months will provide opportunities to accumulate stocks at a discount to fair value, and which are likely to power ahead as the dollar stabilizes into its new normal and the shackles of burdening tax legislation are repealed. For Investors bullish on the Aussie market, it looks like promising times ahead in the lucky country.
Disclosure: I am long BHP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This advice is general in nature only. You should seek independent financial advice before making any investments of your own.