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Draft bill materially increases the cost of mining: The latest draft bill on
mining (post the Cabinet approval) highlights payment equivalent to 100% of
current royalty as compensation into the District Mineral Foundation (DMF) for
all major minerals, while for coal and lignite it is an amount equal to 26% of
previous year’s PAT from the mining operations. The language is ambiguous,
in our view, as to whether these payments would be a tax deductible
expense. The draft MMDR also allows State Governments to levy 10% of the
royalty as state cess and also allows the Central Government to charge up to
2.5% as an excise equivalent levy. Essentially if all the cess and levy proposals
are implemented, it would essentially mean 135% increase in the royalty
currently paid across non coal minerals and for Coal 26% PAT (ex other
income). The primary EPS impact, we estimate, would be 8% for TATA
and SAIL each, 7% for STLT (mainly zinc subsidiary). If the payment into
the DMF is a non deductible expense and the additional 3.5% levy also
flows through, then we estimate the earnings impact would be higher.
Coal- Some watering down in the future? While the draft bill highlights 26%
profit sharing for Coal (primarily impacting Coal India), the Bill also highlights
possibly looking into the profit sharing percentage or in case of other minerals,
also provide some alternative calculation methods, once the Mining Regulator is
established and gives its own suggestions. We estimate the earnings impact for
COAL would range between 0-10% depending on whether COAL is able to
pass on the higher cost.
Definition of transfer price not clear: In our view, there is no clear definition
of transfer price. This complicates the calculation of profit sharing for power
companies with captive coal assets like JSPL (NR).
What are the positives- Auctioning of mines, time bound approvals,
transfer of mining leases: The biggest positive, in our view, is the time bound
disposal of the applications for the various type of leases, with the Bill
highlighting 3 months for non exclusive reconnaissance license and 4
months for the other 3 licenses including Mining Lease. The bill also talks
about the transfer of mining lease, though multiple conditions have been laid
out. There are explicit guidelines on how the auctioning process can be
implemented by the State Governments.
So is it a near term event on the horizon? Difficult to say: There are more
details on the District Mineral Foundations (DMF), which would be the
agency to transfer the benefits from the above royalty/tax. The DMF would
be established by the State Government. From here it is difficult to predict
the timelines, given the implementation issues regarding the DMF,
primarily.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Draft bill materially increases the cost of mining: The latest draft bill on
mining (post the Cabinet approval) highlights payment equivalent to 100% of
current royalty as compensation into the District Mineral Foundation (DMF) for
all major minerals, while for coal and lignite it is an amount equal to 26% of
previous year’s PAT from the mining operations. The language is ambiguous,
in our view, as to whether these payments would be a tax deductible
expense. The draft MMDR also allows State Governments to levy 10% of the
royalty as state cess and also allows the Central Government to charge up to
2.5% as an excise equivalent levy. Essentially if all the cess and levy proposals
are implemented, it would essentially mean 135% increase in the royalty
currently paid across non coal minerals and for Coal 26% PAT (ex other
income). The primary EPS impact, we estimate, would be 8% for TATA
and SAIL each, 7% for STLT (mainly zinc subsidiary). If the payment into
the DMF is a non deductible expense and the additional 3.5% levy also
flows through, then we estimate the earnings impact would be higher.
Coal- Some watering down in the future? While the draft bill highlights 26%
profit sharing for Coal (primarily impacting Coal India), the Bill also highlights
possibly looking into the profit sharing percentage or in case of other minerals,
also provide some alternative calculation methods, once the Mining Regulator is
established and gives its own suggestions. We estimate the earnings impact for
COAL would range between 0-10% depending on whether COAL is able to
pass on the higher cost.
Definition of transfer price not clear: In our view, there is no clear definition
of transfer price. This complicates the calculation of profit sharing for power
companies with captive coal assets like JSPL (NR).
What are the positives- Auctioning of mines, time bound approvals,
transfer of mining leases: The biggest positive, in our view, is the time bound
disposal of the applications for the various type of leases, with the Bill
highlighting 3 months for non exclusive reconnaissance license and 4
months for the other 3 licenses including Mining Lease. The bill also talks
about the transfer of mining lease, though multiple conditions have been laid
out. There are explicit guidelines on how the auctioning process can be
implemented by the State Governments.
So is it a near term event on the horizon? Difficult to say: There are more
details on the District Mineral Foundations (DMF), which would be the
agency to transfer the benefits from the above royalty/tax. The DMF would
be established by the State Government. From here it is difficult to predict
the timelines, given the implementation issues regarding the DMF,
primarily.
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