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The Mines and Minerals (Development and Regulation) Act, 2010 is now expected to be placed
in parliament. The act calls for sharing 26% of mining profits with displaced persons and hence
could have a substantial impact on the profitability of miners.
Development: There are media reports that the Group of Ministers (GoM) have approved the
draft bill of the Mines and Minerals (Development and Regulation) Act, 2010 (MMDR). The bill
is now expected to be tabled in the current ongoing winter session of parliament. The main
highlight of the bill is the proposal of profit sharing with the local affected population.
26% profit sharing of mining profits
Section 42 of the draft bill states the following: "The holder of a mining lease shall, in respect
of any person or persons holding occupation or usufruct or traditional rights of the surface of
the land over which the lease has been granted be, liable to, - (i) Allot free shares equal to
twenty-six per cent through the promoter's quota in case the holder of lease is a company, or,
an annuity equal to twenty-six per cent. Of the profit (after deduction of tax paid) in case
holder of lease is a person, on account of annual compensation, and, (ii) Provide employment
and or other assistance in accordance with the Rehabilitation and Resettlement Policy of the
State Government concerned; Provided that in case the company or the holder of a lease
does not make any profit after commencement of mining activity, the company or the lease
holder shall pay such amount in lieu of annuity for the first five years from the date of
commencement of the mining activity".
However, some important questions remain unanswered. (i) Is this applicable only
prospectively for new mines or even existing mines as there is no mention of prospective or
retrospective application? (ii) How will the genuinely affected population be identified? (iii)
Would companies be able to offset what they currently spend on CSR (Corporate Social
Responsibility) activities? (iv) Would the expense be deductible for the calculation of income
tax? Unless these questions are answered, we really cannot fully assess the impact it would
have on mining company's profitability.
Potential additional burden of US$2.5bn
On an industry-wide basis, the most affected industries would be coal and iron ore mining.
About 500mt of coal is mined in India and, if we assume Coal India as a benchmark for the
industry (based on its FY10 profit after tax of US$3.13bn and 26% of profit sharing amounting
to US$569m), it would mean an additional burden of US$700m for the industry on an annual
basis. For the iron ore industry also the impact could be substantial. If we assume industrywide volumes of 200mt and an industry-wide EBITDA margin of 50%, it would place an
additional burden of US$1.3bn on the iron-ore industry. All the other mining activities such as
bauxite, limestone, zinc ore, etc, would add to less than US$500m.
If we assume the mining profit sharing clause is applicable for existing and also for new
mines, then pure-play mining companies such as Coal India, NMDC, Sesa Goa would be the
most impacted. Pure-play mining companies have low value-addition and the 26% mining
profit sharing clause will almost be a direct impact on their bottom line. Coal India
management has in the past stated that the impact could be about 6% of its top-line and
could erode 30% of its EBITDA. Coal India also mentioned that it has its own CSR
programme and has requested of the government a set-off of the costs; if it accepted, it would
significantly dilute the impact of the act on its earnings. NMDC and Sesa Goa earn over 90%
of their revenues from selling iron ore. For Sesa Goa, we estimate a profit sharing payment of
Rs9.3bn in FY12F or 15% of its estimated earnings.
For non-ferrous metal producers such as Hindustan Zinc, Sterlite Industries, Hindalco
Industries, National Aluminium, etc, due to the high value-added nature of these businesses,
the impact of the act is less than 5% of the earnings. For example, bauxite sells for
US$40/tonne in the spot markets compared to US$2,200/tonne for end-product aluminium.
Impact on steel majors
Among steel players, those with captive resources of iron ore and coking coal will be more
adversely impacted. Steel Authority of India sources 100% of its iron ore from captive sources
as does Tata Steel's domestic operations. Tata Steel also sources 60% of its coking coal
requirements from captive mines. We estimate a profit sharing payment of Rs15.4bn or 21%
of its FY12F earnings for SAIL and Rs8.9bn or 14% of its FY12F earnings for Tata Steel. JSW
steel in contrast, sources less than 20% of its iron ore requirements and no coking coal from
captive mines and would have an impact of 5% on JSW Steel's FY12F earnings.
Proposed act yet to face parliament scrutiny
The government plans to raise Rs400bn in FY11 through the disinvestment of its stake in
public sector companies. The government has already divested 10% of Coal India and 20% of
MOIL Ltd in this regard. Media reports indicate that Hindustan Copper and SAIL, lined up for
coming to the market by end of FY11, could see their valuations impacted.
The act has yet to pass the scrutiny of the parliament and could be significantly diluted, and
several issues that we have raised earlier may be fully addressed.
We have Buy rating on Tata Steel, Sesa Goa, Hindustan Zinc, Sterlite Inds and Hindalco Inds.
We have a Hold rating on SAIL and National Aluminium. We have Sell rating on JSW Steel. We
do not have a rating on Coal India, NMDC, MOIL and Hindustan Copper.
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