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UBS Investment Research
India Metals & Mining
C abinet approves draft Mining Bill
Event: Cabinet approves draft Mining Bill; approved by GoM in July
As per media reports, the Union cabinet has passed the draft Mining Bill which
was approved by the GoM (group of ministers) headed by the Finance Minister in
July, 2011. The bill will now be presented to the Parliamentary Standing
Committee for further discussion with all stakeholders after which it will be tabled
in the Parliament for voting. There is no clarity on the timelines as of now. Key
features of the bill- a) Non-coal minerals: Royalty to be doubled from the existing
rates; applicable to merchant/captive miners b) 26% tax on PAT for coal applicable
to both existing and upcoming mines.
Impact: Pure miners could get hit most; Steel/metals less impacted
As we had already highlighted in our note “GoM approves draft mining bill” dated
Jul 11, 2011, worst case analysis (assuming no offset against CSR expenses/no
increase in prices) shows that earnings of a) pure miners such as Coal India/Sesa
Goa could get hit most (c19%/23% of PAT) b) value adders’ profits (steel/metal
companies) would be less impacted (<12-13%). 26% profit share for CIL is only
applicable to mining PAT (excluding other/interest income - is c30% of PAT).
Action: Clarifications awaited; Draft bill could still see some delay/changes
We await clarity on issues such as 1) Profit sharing methodology for captive coal
mining of steel/metal/power companies 2) Will companies like Coal India increase
prices to offset potential impact of 26% profit share. Coal India in the past had said
it will raise prices if it’s required to share 26% of PAT 3) Will 26% tax on PAT be
tax deductible for tax accounting.
Impact on Coal India
Other income accounts for close to 30% of Coal India’s PAT. 26% profit share
is applicable only to mining profits; it is not applicable to other income/interest
income. Hence worst case impact on CIL will be close to 19%. CIL might
increase prices to offset the impact.
Assuming other income is not taxable and the resultant mining tax outflow is
not tax deductible for income tax accounting, the effective mining tax would
have been 17%/18% for FY10/11 and c19% for FY12/13 which is
significantly lesser than the 26% headline number.
We believe the applicable financial year for this bill to be effective would be
no earlier than FY13.
Coal India spent c20%/21% of FY10/FY11 PAT on social expenditure. Our
channel checks suggest that social spending will not be allowed to set off
against mining tax. However, if CIL wants it can lower the social
expenditure, in which case the final impact on PAT is likely to be lower than
19% for FY12/FY13.
Additionally, there is also a probability of CIL passing on a part of/complete
impact due to the mining tax to its customers as it does with some of the
state/level surcharges/cess etc. Alternatively, CIL can increase prices to
partially/fully offset the impact.
Additional tax or a much needed reform?
Apart from doubling royalty for non-coal minerals and imposing 26% tax on
PAT for coal companies, the bill (as per media reports) proposes to:
Create a Mineral Development Fund in every district, in which profit and
royalty shared by miners will be deposited and spent on the local population
and area development.
Give automatic mining approvals once a discovery is made after prospecting.
Currently, miners need separate approvals for surveying deposits,
prospecting and mining.
Free state governments from taking the federal government's approval for
granting mining leases.
Set up a) National Mining Regulatory Authority to address cases of illegal
mining and b) special courts in the State level for quicker resolution of the
cases.
Allow mining of small deposits in clusters where cooperatives can also apply.
Introduce a:
— Central cess equivalent to 2.5% of excise or customs duty to meet the
expenditure of an independent National Mining Tribunal and National
Mining Regulatory Authority at the Central level, and the capacity
building of the Indian Bureau of Mines.
— State cess of 10 % of total royalty.
We believe that though the mining bill is likely to increase the tax burden on the
miners, it will help reform the mining sector and facilitate investments. However,
earnings for companies with mining operations are likely to be negatively
impacted.
There are concerns that these higher taxes could make mining investment
unattractive, which we believe will not necessarily be the case. For ex: State run
companies like NMDC/CIL despite being public sector companies (and selling
iron ore/coal at discount to international prices) have had average ROEs during
FY07-FY11 of 40%/31% respectively.
We believe there is enough scope for the sector to absorb these additional costs
by efficiency gains etc.
Areas of Uncertainty/ Clarity Awaited
Coal India’s stance on whether it will raise coal prices to offset any –ve
impact due to the new policy. As per our estimates Coal India would require
to increase prices by c5-6% in FY12/13 to offset the impact of a 26% profit
sharing.
Treatment of over-burden, depreciation, depletion for the purpose of
computation of PAT in the case of Coal India and captive coal consuming
companies?
Will the mining tax outflow be treated as an expense for income tax
computation?
There is no clarity on the definite timeline by when this would be
implemented. Media reports indicate that the bill could be tabled in the
Parliament for voting in the winter session. However, there is always a
possibility that there could be procedural delays and prolonged deliberations
in the standing committee. We are not sure whether this would impact
companies’ earnings’ even for FY13.
Statement of Risk
We believe a sharp fall in metal prices which are linked to global economic
growth, would be the key risk factor for the stocks in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Metals & Mining
C abinet approves draft Mining Bill
Event: Cabinet approves draft Mining Bill; approved by GoM in July
As per media reports, the Union cabinet has passed the draft Mining Bill which
was approved by the GoM (group of ministers) headed by the Finance Minister in
July, 2011. The bill will now be presented to the Parliamentary Standing
Committee for further discussion with all stakeholders after which it will be tabled
in the Parliament for voting. There is no clarity on the timelines as of now. Key
features of the bill- a) Non-coal minerals: Royalty to be doubled from the existing
rates; applicable to merchant/captive miners b) 26% tax on PAT for coal applicable
to both existing and upcoming mines.
Impact: Pure miners could get hit most; Steel/metals less impacted
As we had already highlighted in our note “GoM approves draft mining bill” dated
Jul 11, 2011, worst case analysis (assuming no offset against CSR expenses/no
increase in prices) shows that earnings of a) pure miners such as Coal India/Sesa
Goa could get hit most (c19%/23% of PAT) b) value adders’ profits (steel/metal
companies) would be less impacted (<12-13%). 26% profit share for CIL is only
applicable to mining PAT (excluding other/interest income - is c30% of PAT).
Action: Clarifications awaited; Draft bill could still see some delay/changes
We await clarity on issues such as 1) Profit sharing methodology for captive coal
mining of steel/metal/power companies 2) Will companies like Coal India increase
prices to offset potential impact of 26% profit share. Coal India in the past had said
it will raise prices if it’s required to share 26% of PAT 3) Will 26% tax on PAT be
tax deductible for tax accounting.
Impact on Coal India
Other income accounts for close to 30% of Coal India’s PAT. 26% profit share
is applicable only to mining profits; it is not applicable to other income/interest
income. Hence worst case impact on CIL will be close to 19%. CIL might
increase prices to offset the impact.
Assuming other income is not taxable and the resultant mining tax outflow is
not tax deductible for income tax accounting, the effective mining tax would
have been 17%/18% for FY10/11 and c19% for FY12/13 which is
significantly lesser than the 26% headline number.
We believe the applicable financial year for this bill to be effective would be
no earlier than FY13.
Coal India spent c20%/21% of FY10/FY11 PAT on social expenditure. Our
channel checks suggest that social spending will not be allowed to set off
against mining tax. However, if CIL wants it can lower the social
expenditure, in which case the final impact on PAT is likely to be lower than
19% for FY12/FY13.
Additionally, there is also a probability of CIL passing on a part of/complete
impact due to the mining tax to its customers as it does with some of the
state/level surcharges/cess etc. Alternatively, CIL can increase prices to
partially/fully offset the impact.
Additional tax or a much needed reform?
Apart from doubling royalty for non-coal minerals and imposing 26% tax on
PAT for coal companies, the bill (as per media reports) proposes to:
Create a Mineral Development Fund in every district, in which profit and
royalty shared by miners will be deposited and spent on the local population
and area development.
Give automatic mining approvals once a discovery is made after prospecting.
Currently, miners need separate approvals for surveying deposits,
prospecting and mining.
Free state governments from taking the federal government's approval for
granting mining leases.
Set up a) National Mining Regulatory Authority to address cases of illegal
mining and b) special courts in the State level for quicker resolution of the
cases.
Allow mining of small deposits in clusters where cooperatives can also apply.
Introduce a:
— Central cess equivalent to 2.5% of excise or customs duty to meet the
expenditure of an independent National Mining Tribunal and National
Mining Regulatory Authority at the Central level, and the capacity
building of the Indian Bureau of Mines.
— State cess of 10 % of total royalty.
We believe that though the mining bill is likely to increase the tax burden on the
miners, it will help reform the mining sector and facilitate investments. However,
earnings for companies with mining operations are likely to be negatively
impacted.
There are concerns that these higher taxes could make mining investment
unattractive, which we believe will not necessarily be the case. For ex: State run
companies like NMDC/CIL despite being public sector companies (and selling
iron ore/coal at discount to international prices) have had average ROEs during
FY07-FY11 of 40%/31% respectively.
We believe there is enough scope for the sector to absorb these additional costs
by efficiency gains etc.
Areas of Uncertainty/ Clarity Awaited
Coal India’s stance on whether it will raise coal prices to offset any –ve
impact due to the new policy. As per our estimates Coal India would require
to increase prices by c5-6% in FY12/13 to offset the impact of a 26% profit
sharing.
Treatment of over-burden, depreciation, depletion for the purpose of
computation of PAT in the case of Coal India and captive coal consuming
companies?
Will the mining tax outflow be treated as an expense for income tax
computation?
There is no clarity on the definite timeline by when this would be
implemented. Media reports indicate that the bill could be tabled in the
Parliament for voting in the winter session. However, there is always a
possibility that there could be procedural delays and prolonged deliberations
in the standing committee. We are not sure whether this would impact
companies’ earnings’ even for FY13.
Statement of Risk
We believe a sharp fall in metal prices which are linked to global economic
growth, would be the key risk factor for the stocks in the sector.
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