Monday, October 3, 2011 Experts` take on new mining bill Source: IRIS (30-SEP-11) Experts` take on new mining bill Source: IRIS (30-SEP-11)

The cabinet approved on Friday a bill calling for coal miners to share a maximum 26% of their profits with local communities and for other miners an amount equivalent to royalties.

Let`s take a look, what experts have to say on new mining bill:

PINC Research:

The draft bill, approved by the GoM in July 2011, which received the cabinet approval today, is expected to be tabled in both houses during the winter session for parliamentary approval and enactment. This bill, if passed, will be applicable to both the existing and new mines. However, on the positive note, we expect this to facilitate land acquisition, which is one of the biggest obstacles in increasing mining output in India.

In the event of the enactment of this bill, on an as-is-basis, all mining companies will have to account for cash outflow on account of profit sharing and increased royalty. Based on initial information, we attempt to assess the impact of the Mining Bill on metals and mining companies.

For Coal India, profitability and earnings to the shareholders would depend on 1) whether self-incurred social overheads are allowed to be set-off against 26% profit sharing as proposed and 2) whether the proposed 26% profit sharing is classified as expenditure for income-tax purpose. Depending on different scenarios, we estimate Coal India`s EPS to be lower by 4-19%.

Ferrous companies with substantial mining operations like TataSteel India, SAIL, JSPL, Sesa Goa, NMDC, Usha Martin, Godawari Power, etc will be impacted directly with the implementation of this bill. Although lesser integrated players like JSW Steel and Bhushan Steel would have marginal direct impact we believe the benefit would be short-lived as prices of iron ore and coal in India could rise on cost-push. Assuming price hike, we estimate FY13 EPS impact of 6-18% and fair value impact of 4-19% for ferrous companies in our coverage universe. The fair value impact is least for Tata Steel (3%) and highest for Godawari Power (19%).

Profitability of non-ferrous companies like Hindustan Zinc, Hindalco, NALCO and Sterlite will also be impacted due to 100% increase in their royalty payment. In our coverage (HZL, Nalco), assuming price hike, we expect fair value impact of 9% for HZL and 3% for Nalco.

Prashanth Tapse, AVP - Research, Mehta Equities:

Mining counters were in action as Cabinet approved bill calling for coal miners to share a maximum 26% of their profits with local communities and for other miners an amount equivalent to royalties. As cost of production gets higher, mining companies will be forced to pass on the extra cost to final users.

Coal India will be hit the most as it will have to share one fourth of its profit, which means lesser money for growth and dividends. Considering the above rationale there would considerable reduction in profitable growth which leads to lesser money for future growth. Hence earnings estimates will be equally below the market consensus and therefore we believe the stock can test 290-310 levels in the new term.

Manohar Annappanavar, cement, metals & mining analyst, GEPL Capital:

With this new mining bill, we are `slightly negative` on Sesa Goa; `negative` on Hind Zinc, Coal India, and `neutral` on JSW Steel, Bhushan Steel. It is not clear whether the bill is applicable only the new projects or to the existing projects is not clear yet. Introduction of the bill in the parliament would result in a) Non-coal companies paying 100% of the royalty towards local development, which varies 5.9% to 16.4%. b) Similarly, coal companies like Coal India will have to shell out 26% of their profit.

Accordingly Sesa Goa would be the least impacted with royalty constituting 5.9% of PAT and Hind Zinc would be impacted the most with royalty constituting 16.4% of PAT. As far as coal companies are concerned, the bill passing would be negative for Coal India as the company would have to shell out 26% of its PAT.

Nitesh Bang, Research analyst, Magnum Equity:

Most of the coal companies will be going for a downgrade. In terms of EPS analysis, we expect EPS of all integrated players in metal space which includes Tata Steel, SAIL, Sterlite, Hindustan Zinc and Hindalco to be impacted by 8-14% depending upon their mining integration. . The companies that are major producers and are into mining will face the burden. Sesa Goa and JSPL would be some of the other miners to see an impact.

We were expecting lower profit sharing for coal mining companies because it would be difficult to share 26% and that would again take the government share to 50% of their total profit. Hence, we expect a decline in profit sharing for most of the coal companies. This would again impact most of the power companies too, this is a bit negative. The bill also seeks to create a special court to dispose off cases pertaining to illegal mining quickly. The MMDR bill does not favor resaving mining areas for the PSU unless it was imperative to do so.

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.


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