The Rising Influence of Rising Affluence

[dewophile]

the most significant factors that account for the difference between Q4 2010 tax and Q4 2011 tax are non-recurring:

Income tax expense increased from $11 million in 2010's final quarter to more than the $123 million in 2011's comparable quarter. During the fourth quarter, our effective tax rate increased to 35% compared with the full year rate of 19%. This was the result of a remeasurement of our deferred tax liability at Bloom Lake and the recording of a nonrecurring adjustment related to the Québec mining duty. Conversely, 2010's fourth quarter income tax expense was artificially low as we recorded a tax planning benefit related to Amapa

from the Q4 2010 cc:

During the quarter, Cliffs completed a legal entity restructuring related to the Amapa project that primarily resulted in a deferred tax benefit of $78 million. The Company indicated this tax benefit was a non-recurring, non-cash item

This "relative" tax rate dependent drag on earnings is likely to persist during FY2012; i.e. CLF projects a full-year 2012 effective tax rate of approximately 25% as compared to the FY2011 full-year tax rate of 18.7% (it was 22.5% in FY2010).

i don't think a 6.3% difference in tax rate is all that material, personally. in fact, as cliff generates more profit from canadian segment in future years (which is where most organic growth is coming from) their effective tax rate over time should decline (canada corporate tax is 16.5% and mining tax very competitive - in fact i think there will be more interest in canada from major miners given the tax set to go into effect in australia)

on a separate note what struck me from the quarterly result was just what a disaster the wabush mine has become. it turned what would have been a healthy profit from the candadian segment into the red - and it doesn't appear that the problems are totally behind them:

Eastern Canadian Iron Ore sales volume for the quarter was 1.9 million tons, which was made up of approximately 1.2 million tons of iron ore concentrate from Bloom Lake and 700,000 tons of pellets from Wabush. Although this segment's fourth quarter sales volume was significantly higher than 2010's comparable quarter, frankly, I am disappointed with the operational challenges we experienced at Wabush. These challenges, largely driven by equipment failures and the dryer operation of the mine, have led [ph] to increased downtime, resulting in lower production and sales volume out of Wabush Mine. They currently have temporary repairs in place and are studying the long-term solution.

in the PR they reiterated modest 2012 cash cost per ton in canada, guiding for a healthy profit in that segment, so i had hoped on the cc they would be more optimistic about wabush being under control (costs there had been escalating throughout 2011 and came to a head in Q4).