Five key effects of the new mining reforms

Passage in the Rajya Sabha could be a gamechanger for the sector, says Barclays

Parliament passing of key mining sector reforms, including the Coal Bill, is likely to herald significant changes for the sector, according to a report from Barclays Securities (India).  The five key changes, as encapsulated in a March 22 report titled 'India Metals and Mining' by analysts Chirag Shah and Saket Yadav, include a windfall for state governments, higher operating costs for integrated-producers:

Increased production

The move is likely to result in greater exploration and production of minerals with Barclays estimating that it could help kick-start $50 billion worth of projects. India has only explored 5-20% of its total natural resources, compared to nearly 100% in other countries like Australia. The complexity of the mining regulation is said to have held back activities, which should being to gather pace as clear guidelines replace the earlier ambiguity. 

Windfall for states

There is likely to be a transfer of $300 billion from the private sector to state governments over a 30-year period because of the auctions, according Barclays estimates. Coal auctions could help the states of Jharkhand, Chhattisgarh, Odisha, West Bengal and Madhya Pradesh in particular. 

Producers likely to be hit

Integrated producers are likely to see a decline in their profitability criteria, with a lower return on capital employed. Earlier companies paid a nominal amount, which will increase significantly on account of the auction mechanism. The returns that companies on their investments will come down accordingly. 

Higher operating costs

Integrated producers are likely to see higher operating costs because levies have increased. Higher royalties will be a burden. Margins are likely to come down on account of higher pricing driven by the auction system. 

Greater regulatory clarity

The decision to go the auction route is likely to result in a more predictable and clear regulatory environment for the sector, according to the Barclays duo. There is greater transparency in allotment, and the extension of the lease to up to 50 years from the date of allotment will help resolve issues coming from Supreme Court judgements on renewals of such leases. In other words, mining companies are more certain about the process of getting an allotment, as well as how long they can make use of the mine when they have got one. They added that while coal auctions are underway, the auction process for minerals will take time on account of state level impediments and legislative issues.