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Metals & Mining
Equity Research
GoM approves draft Mining Bill; potentially negative for sector
Draft MMDR Bill approved by GOM, 26% profit sharing for coal cos
As per news reports today (including Reuters, CNBC), a 10-member Group
of Ministers (GOM) have approved the draft Mines and Minerals
(Development and Regulations) MMDR Act, 2011. The bill is likely to be
tabled in the Union Cabinet by July end, before being presented in the
monsoon session of the Parliament for final approval. As per the draft bill,
coal companies will have to share 26% profit with the local
population for their welfare and development. In case of other minerals
such as iron ore, bauxite and limestone, 100% of the previous year’s
royalty will be paid to District Mineral Development Fund which
will be used for the development of the mining area.
Potentially negative for mining cos; await clarity on execution
If this bill becomes a law, we think it would negatively impact the
profitability of all mining companies. While we continue to think that the
draft mining law would be a long-term positive for the industry, which has
been impacted by land acquisition and procedural delays (given resistance
from local population), we believe execution is a key concern.
For non-coal companies, we think that this would be easy to implement,
as it has been linked to the royalty, where a mechanism currently exists.
Effectively, it would be doubling of royalty payments, which is easier to
monitor and execute. For coal companies, execution of 26% profit
sharing clause would be a big challenge, in our view, and we await more
clarity on implementation issues such as segregating profits by mine
(especially for captive mines), availability of any set-offs against welfare
expenses, and if mines were to make losses.
Potential impact on profitability significant; await further clarity
If implemented, according to our sensitivity analysis for base metal
companies under our coverage, FY13E profitability may be impacted by
about 6-12 pp (based only on royalty sharing), with Sesa Goa’s profitability
potentially impacted by 12-15 pp. For companies with captive coal mines
(such as Tata Steel, SAIL, Hindalco), we await further clarity on issues such
as segregating profits by mines, unprofitable mines, transfer pricing. For
Coal India, FY13E profitability may be potentially impacted by 15-20 pp,
depending on whether part of the compensation would be offset by social
overhead expenses.
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