METALS & MINING SECTOR UPDATE

Parliament approves MMDR (Amendment) Bill, 2015, will lead to increase in cost of production

The Government of India has passed the Mines and Minerals (Development and Regulation) (Amendment) Bill, 2015 (MMDR). It makes way for the auctioning of all the mining leases (notified minerals). All leases shall be for the period of 50 years from the date of commencement. It provides deemed extension for the period of 15 years (March 2030) for captive miners and 5 years (March 2020) for the merchant miners, removing uncertainty on renewal of mining leases. However, it also increases its contribution to District Mineral Foundation to 100% of the royalty for existing miners, as against one-third proposed earlier in the ordinance. We believe, the clearance of the bill will push the cost of production higher for companies such as SAIL, Tata Steel, Hindalco Industries, Hindustan Zinc etc. to name few who have captive mining, thereby impacting their profitability. However, the bill is positive for non integrated players like JSW Steel (Rating: Buy - CMP Rs.918, TP Rs.1300), Sesa Sterlite, etc, to name a few as these companies can now look to secure mining blocks through competitive bidding, which will help them to secure the raw materials.

Contribution to District Mineral Foundation (DMF) increased to 100%

The Mines and Minerals (Development and Regulation) Amendment Bill, 2015, was passed by the Rajya Sabha with few changes. Contribution to DMF by the existing miners will now increase to 100% of the royalty amount, as against one-third proposed earlier in ordinance. The provision of increase in DMF amount is applicable only to the existing miners whose lease were granted prior to the passage of new Act. Once the existing mining lease expires in 2020 (merchant miners) or 2030 (captive miners), contribution to DMF will be limited to one-third of the royalty payments in line with the ordinance. The setting up of DMF is for the interest and benefit of persons affected by mining related operations. In addition, miners will have to make payment for National Mineral Exploration

Trust (NMET), which is set at 2% of royalty.

Existing miners to take a hit

The bills brings relief for the captive miners as its removes the uncertainty over the renewal of the mining lease, but at same time, it increases contribution to DMF, which will directly impact the profitability. Increase in the contribution to DMF to 100%, will lead to the higher cost of production for the captive miners, whose mining leases were granted prior to the MMDR (Amendment) Bill, 2015. Given the weak demand and muted realization, we believe it will be difficult for the companies having captive mining operations to pass on the increase in cost of production to the end users, thereby impacting their profitability

Non-integrated players to benefit

The allocation of lease through auction route could benefit companies which lack captive resources. We believe, companies such as JSW Steel and Sesa Sterlite would be the key beneficiary as they lack captive resources. Other players who will get benefits are Kalyani Steel, Kirloskar Ferrous, Jindal Steel and Power, etc. to name few. Given the aggressive bidding witnessed in coal block auction, we believe the notified minerals under MMDR (Amendment) Bill, 2015, will also witness aggressive bidding from the players, thereby capping the gain from captive mining. Besides this, because of declining natural resources prices, benefits from the captive mines (won under auction route) would be minimal, as compared to third party sourcing. However, this can turn fruitful in longer term

as companies get access to captive raw materials, thereby providing them with long term security. Key things to watch out would be at what rate these resources get auctioned. For eg: captive iron ore prices are ~Rs1,500/tonne and imported iron ore are ~Rs4,500-5,000/tonne. Thus, the price at which natural resources are bagged, would decide whether there is actual benefit or not.

Captive resources for long term

Mining leases for the notified minerals (Iron ore, bauxite, Limestone, Manganese ore) will be granted through auction route as compared to allocation route earlier. The lease shall be granted for the period of 50 years (earlier 30 years) giving long term security of captive resources to the mine holders. The existing mining leases would be deemed extended upto 15 years (March 2030) and 5 years (March 2020) for captive and merchant miners respectively or till lease expiry period or period of 50 years from the grant of lease whichever is later, after fulfillment of condition. Post the expiry of such lease, mines shall be put for the auction.

Quicker and simpler process

Prior to the Amendment of MMDR bill, the State Government was required to obtain prior approval of the Central Government before granting mineral concessions, in respect of ten minerals in Part C of First Schedule (like iron ore, manganese, bauxite, copper, gold, etc.). The Amendment now removes the need for such "prior approval". Similarly, approval of mining plan by the Government would no longer be mandatory as a provision has been added under Section 5(2)(b) permitting the State Governments to devise a system for filing a mining plan, obviating need for prior approval by the Government.

Minerals	Current Royalty Rate %
Bauxite	0.60
Copper	4.62
Zinc	9.50
Lead	14.50
Silver	7.00
Iron Ore	15.00

Companies Impacted	FY14 Royalty Amount	FY14 EBITDA	FY14 PAT (RS MN)
Tata Steel	11300	109,963	64,122
Additional cost towards DMF will have a impact of ~8% on standalone EBITDA and ~4-5% on consolidated level
SAIL	9,156	44,895	18,942
SAIL would see significant erosion in EBITDA, given weak demand and subdued steel prices. The company will find it difficult to pass on the increase in cost of production
Hindalco Industries	NA	NA	NA
Impact on aluminium makers would be low given the lower rate of royalty on bauxite compared to other minerals
Hindustan Zinc	10,273	69,615	69,046
Impact HZ would see maximum impact on its profitabiltiy, this would also impact SSLT consolidated profit

Companies that could have a marginal impact on their profitability are NALCO, Sesa Sterlite, Jindal Steel and Power, amongst few others who have captive mining operations.

The salient provisions of the Amendment Bill are as follows

• All mineral concessions will be granted only through auction {Sections 10 B &11}.
• Direct auction for mining leases for bulk minerals; auction of prospecting licences-cum-mining leases for deep-seated minerals {Sections 10 B & 11}.
• Uniform lease period of 50 years; no renewals; auction at the end of lease period; will solve problems arising out of SC judgments on second and subsequent renewals {Section 8 A}.
• Transition period of minimum 15 years for captive mines and 5 years for other mines; no sudden stoppage as a result of the Amendment {Section 8 A (5) and (6)}.
• All pending applications at State level (over 60 thousand) will abate except in a few cases where action is in progress/vested right exists {Section 10A}.
• Central Government empowered to prescribe deadlines for various processes and to issue binding directions to States {Section 20 A}.
• Central Government to frame separate rules for atomic minerals {Section 11 (B)}.
• The previous approval of the Central Government will not be required for grant of mineral concession except for Atomic Minerals {Amendment to Section 5(1)}.
• Enabling powers for reservation for the public sector to continue {Section 17 A}.
• Higher penalties and jail terms for offences; special courts may be constituted, if necessary {Amendment to Section 21(1) & (2)}. .
• District Mineral Foundation to take care of people and areas affected by mining {Section 9 (B)}. 
• National Mineral Exploration Trust to be set up for impetus to exploration {Section 9 (C)}.
• Easy transfer ability of concessions obtained through auctions so as to attract private investment and FDI {Section 12 (A)}.
• Powers to Central Government to intervene even where State Governments do not pass orders within prescribed time lines; this will eliminate delay {Section 30}.