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Non Ferrous Mining - India
Assessing potential impact of
proposed mining tax
Group of Ministers approves draft Mining Bill
Group of Ministers (GoM) has approved the draft Mines & Minerals Development
and Regulation (MMDR) Bill. The draft bill recommends 26% profit sharing with
locals for coal companies & 100% royalty sharing with locals for non coal
companies. The bill will be presented to Cabinet & subsequently to Parliament &
may undergo several changes before it is implemented. However, if implemented
in the current form, the proposed mining tax could potentially hit EPS of metal cos
under our coverage by 1-11%. The impact is likely to be highest for pure play
miners including Coal India (assuming no pass thru), Sterlite and integrated steel
companies (SAIL & Tata). Al cos (Hindalco, Nalco) & non integrated steel
producers (JSW Steel) are likely to be least impacted as per our initial estimates.
Several issues remain, final approval could take time
The revised bill seeks to address implementation concerns partially by linking
mining tax to royalty for non coal miners instead of profit sharing proposed earlier.
However, in case of coal, there is still lack of clarity around how mining profits will
be defined for integrated cos (steel, power) having captive coal. Implementation of
mine wise profits will also be difficult in our view. There is lack of clarity around
whether social costs (R&R) will be allowed as deductible expenses. There could
be concerns around proposed tax discouraging investment in the coal sector.
Assessing potential impact of the proposed mining tax
Coal India 10% EPS hit, assuming no price hikes: Assuming 26% profit
sharing, we estimate hit to FY12-13 EPS could be 10-14%. CIL has pricing
flexibility & could raise prices to cushion mining tax impact though this may
be constrained by Govt. concerns around inflation. We estimate CIL will need
additional price hike of 5% to pass thru the higher mining tax.
Sesa Goa most impacted among non coal miners: We estimate the
potential hit could be highest for Sesa (8-9%) due to iron ore and Sterlite
(~6%) due to royalty linked tax on zinc, lead, silver and bauxite.
Steels: SAIL most impacted, JSW least: SAIL FY12-13e EPS could be hit
by 10-11% due to higher royalty on captive iron ore (100% integration). Tata’s
EPS could be hit by 6% due to captive iron ore & profit sharing on 50%
captive coking coal at its India ops. We assume notional profit based on CIL’s
coking coal prices as Tata does not classify mining profits separately.
Aluminum companies are least affected: Al cos including Hindalco (captive
bauxite, 30% captive coal) & Nalco (Captive bauxite) are least affected as
bauxite royalty accounts for a very small proportion of their costs. Also in
case of HNDL primary Al production accounts for only 34% of group EBITDA.
Table 1: Royalty Rates
Metal/Minerals Royalty Rates (%) Basis
Iron ore 10.0%
Of sale price on ad valorem basis (for lumps fines and
concentrates all grades)
Bauxite 0.5%
Of London Metal Exchange (LME) Aluminum metal price
chargeable on the contained aluminum metal in ore produced for
those dispatched for use in alumina and aluminum metal
extraction.
Bauxite 25.0%
Of sale price on ad valorem basis for those dispatched for use
other than alumina and aluminum metal extraction and for export
Lead 7.0%
Of LME lead metal price chargeable on the contained lead metal
in ore produced
Zinc 8.0%
Of LME zinc metal price on ad valorem basis chargeable on
contained zinc metal in ore produced
Zinc 8.4%
Of LME zinc metal price on ad valorem basis
chargeable on contained zinc metal in concentrate produced
Coal
Rs.55 to Rs. 180 Plus 5% of
the price of coal Based on grade of Coal
Source: Ministry of Mines, BofA Merrill Lynch Global Research Estimates
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