The possibility that a new Mining and Mineral Development Regulation Bill is just around the corner had the market spooked, sending the BSE Metal Index lower by around 3 per cent and the shares of Coal India lower by 8 per cent in Friday's trading.

The draft Bill includes clauses stipulating that Coal India contribute 26 per cent of its profits to a District Mineral Foundation. Metal miners such as Hindustan Zinc, Sesa Goa and NMDC would be required to shell out a sum equal to their current royalties, which will go into the same fund. However, the terms for metal miners are lighter than originally expected.

Iron ore miners such as NMDC and Sesa Goa pay a royalty of 10 per cent of the sale price on the iron ore they sell. According to this Bill, this outgo will now double to 20 per cent, with the extra payout going to the District Mineral Foundation. Sesa Goa, which exports almost all of its produce, would also be paying an additional 20 per cent as an iron ore export duty.

Vedanta controlled entities Hindustan Zinc and Sesa Goa may be among the worst impacted. Their royalty payouts in FY2010-11 stood at Rs 803 crore and Rs 250 crore, respectively. With higher payouts and pricing power capped by global miners, the hikes could eat into net profit margins.

These two standalone mining companies are likely to see their net profits erode by between 8 and 16 per cent (depending on final product). Given that NMDC sells its wares at rates lower than international producers, the company does have the scope to pass on a portion of the increased royalties to steel producers.

While the news does translate into lower margins on the long run for miners, it is still a far cry from the 26 per cent of profits that Coal India may need to pay out and most metal miners were expecting to be subject to. This would explain the relatively lenient 2-4 per cent dips in prices of miners such as MOIL and Sesa Goa compared to the whooping 8 per cent drop in the shares of Coal India.

STANDALONE MINING COS

The new bill is also likely to have a greater impact on standalone mining companies such as NMDC, Hindustan Zinc, MOIL and Sesa Goa than on metal producers with captive mines such as SAIL, Tata Steel and Hindalco.

With a lower proportion of end-product realisations accounted for by iron ore, metallurgical coal or zinc, the margins of steel and aluminium producers are likely to be less impacted by the move than those of the raw material producers.

However, the extent of the impact from increased royalties on companies with captive coal operations remains unclear as yet. Tata Steel shelled out Rs 615 crore of royalties to the government from their domestic captive mine operations in 2010-11. SAIL too operates captive iron ore mines to feed its steel capacity.

Both groups are likely to heave a sigh of relief knowing they got away lighter than the world's largest coal producer by reserves — Coal India.

SOOTY TEARS

The value of the government holdings in Coal India have had Rs 18,000 crore shaved off on Friday, with the news of the Draft MMDR Bill being approved by the Empowered Group of Ministers.

A 26 per cent profit sharing would entail a outgo of Rs 2,825 crore for Coal India based on its consolidated profits for 2010-11. While this move would severely affect the profitability of the company, Coal India could hike selling prices to handle the sharp rise in recurring cost. However, it also has to contend with cost pressures from the expected rise in wage bill this year.

Coal India already incurs a ‘social overhead' (Rs 2,228 crore for 2010-11) towards employee benefits, social welfare activities and community development and environmental expenditure. Whether this sum will be allowed to be set off against the proposed payout to the District Mineral Foundation remains to be seen.

The one positive aspect to this development is that with this payout decided once and for all, the uncertainty surrounding environmental and other clearances for mining projects may stand significantly reduced.

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