The benefit sharing mechanism proposed for the mining sector could see companies restructuring operations in an effort to have a lesser impact on their top line once the new regime is in place.
A 10-member ministerial panel had in early July finalised such a mechanism, to be part of the new mining legislation. Experts and sector insiders have already started raising concerns over its far-reaching impact. “It would make companies devise manipulations and re-structuring of their operations in an attempt to separate mining from other activities. Companies would like to ensure that the operations of an entity, profits of which are being shared, are kept to bare-bone mining,” said Amrit Pandurangi, senior director, Deloitte Touche Tohmatsu.
The overall impact of the compensation regime, experts believe, would include a hit on the valuations of mining companies and a spurt in the prices of commodities like iron ore and coal, resulting in high costs for power and steel. “Profitability and, therefore, valuation of companies will be affected, as they grapple with additional cost pressure which cannot be passed on completely, owing to current market sensibilities. We also expect significant impact on coal and iron ore prices and the prices of final products like steel,” said Pandurangi.
| MINING MATTERS |
| * Impact on valuations of cos and spurt in prices of minerals like coal and iron ore and finished products like steel likely after new law takes effect |
| * Coal prices to go up by Rs 100 per tonne, causing a 10p rise in power prices over a base rate of Rs 2.9 per unit |
| * Industry chambers say annual hit of Rs 15,000 cr for mining industry due to profit & royalty sharing |
| * Sharing of 26% profit would cause annual outgo of Rs 2,823 crore for Coal India |
| * Addl Rs 12,200 cr hit to non-coal sector due to sharing entire royalty with locals |
Negative fallout of such a splitting of operations would be issues of increased taxation due to sale and purchase of the commodity from the mining entity to the selling entity and transfer pricing in case of exports.
Another major and more direct impact, experts say, would be on commodity prices. “The benefit sharing burden for Coal India Ltd (CIL) would push up its production cost by Rs 60-100 a tonne. This, when passed on, would translate into an increase of up to 10 paise in power prices for the consumer,” said an analyst from an accounting and consultancy firm. “The decision would decrease the cash flow available to Coal India for growth or distribution of dividend and, thus, would hit the company’s valuation.”
CIL is the state-owned monopoly coal producer and accounts for 80 per cent of the 530 million tonnes of annual domestic production (the rest of the output is from fileds meant for captive use only). Coal sector companies would have to share 26 per cent of their profits as compensation with locals, while non-coal mineral companies would share 100 per cent of royalty, according to the decision of the Group of Ministers on mining.
