India metal and mining-- Mining tax: an opportunity to accumulate Macquarie Research,

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India metal and mining
Mining tax: an opportunity to
accumulate
Event
􀂃 Time to cherry pick: Metal and mining stocks have corrected sharply since
the approval of the draft of the Mines and Mineral Development Act (MMRD)
by the Group of Ministers (GoM). We see the new proposal has already been
slightly watered down from the earlier version and think that there is a
possibility that some more waivers will be introduced by the time it is
approved by the Cabinet and Parliament. The maximum impact will be limited
to 10% of PAT in the worst case, while some stocks have already corrected
by much more. We think this is a good time to accumulate defensive names
like Coal India, JSP, JSW Steel and Hindalco.
Impact
􀂃 New proposed tax – already watered down and expect more: The new
draft proposal calls for only a 26% share of profits for coal mining; for non-coal
mining, the new liability is equivalent to royalty paid. Thus, for iron ore, the
cost is now just US$3/t compared with US$9-10/t (based on 26% of profits)
earlier. If the expenses for social welfare are allowed as a deduction, this can
be even lower. We firmly believe that when the final bill is cleared, the impact
will be even less. Lastly, given the approvals required, we think this bill may
take another few years to pass.
􀂃 Impact can be easily passed on: Because the whole industry is likely to be
affected, we believe the likelihood is good that most of the cost increase will
be passed on. We see no reason why Coal India will not pass on the
increased costs to consumers, given its wafer-thin margins.
􀂃 Already makes Indian metal sector one of the most taxed globally:
Including these proposals, the metal sector in India for some commodities will
be at the highest end of taxation. Iron ore is now taxed at almost 70%. Taxes
will have to be reduced whenever commodity prices fall, we believe, otherwise
it will impede the growth of the nascent mining sector in India.
Outlook
􀂃 Coal – most likely to be passed on: Coal India is working on thin margins
and appears unlikely to be able to absorb this unless it is allowed to net off the
CSR spent (Rs22bn in FY11, will reduce burden to Rs3bn, or 2% impact).
􀂃 Iron ore – will have to be absorbed: With this, iron ore taxation rises above
70%. We believe that, as iron ore prices decline, the industry will see tax cuts.
􀂃 Steel – little impact: The impact should be less than $15–20/t. This, we
believe, can be partly passed on.
􀂃 Zinc and lead – have to be absorbed: The impact on zinc and lead is linked
directly to international prices, given the nature of royalties. We believe this
will have to be absorbed.
􀂃 Cement – The impact may be close to Rs3/bag, which we think can be
passed on in a bull period.
􀂃 Aluminium – negligible impact: The low contribution of bauxite in the value
chain has reduced the impact on aluminium.