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Resource centre on India's rural distress
 
 

Mining companies to take a hit of Rs 15,000 cr

-The Business Standard

 

Mining companies have warned of a price spiral in commodities once the new mining law provisions are in place. The industry sees the government decision of mandatory profit and royalty sharing impacting it by an estimated Rs 15,000 crore every year. This would include a Rs 12,200-crore hit on non-coal mining companies and Rs 2,800 crore on coal miners.

“The provisions of this Bill will affect the industry badly,” says Anand Goel, joint managing director, Jindal Steel and Power Ltd. “It will hit the valuations of major companies. The move will definitely result in a price spiral in end-products like power and steel. But what can we do, if the government wants it this way?” JSPL, part of the $15-billion O P Jindal Group, has a power production capacity of 2,000 Mw and a steel-making capacity exceeding three million tonne per annum. The company mines over 11 mt of non-coking coal and around 3 MT iron ore from its captive mines annually. The share price fell 3.7 per cent to close at Rs 502at the Bombay Stock Exchange (BSE) on Friday.

Industry also raised doubts over implementation of the proposal arguing that the provisions on the lack clarity. Rana Som, chairman of NMDC Ltd, India’s largest iron ore miner, says there is a need to review and examine the issues raised by the industry on royalty, profit-sharing and the methodology of providing assistance to project affected persons before the Bill finally becomes an Act. “Industry is concerned about the sharing of royalty and profit. The District Development Fund will be a discouraging factor,” notes Som, who is also chairman of industry chamber CII’s national committee on mining.

WHAT IT MEANS FOR INDUSTRY
 
* 26% profit contribution could be subject to manipulations. An integrated coal company could have mines in different district and it would be difficult to calculate profit for each mine separately
* Profit sharing and royalty contribution will create problems for existing mines where affected persons are not easily identifiable
* No cap on surface rent may lead to fixing of surface rent at abnormal rates
* Imposing both Central (2.5 per cent) and State Cess (not more than 10 per cent) will further increase costs

Shares of India’s monopoly coal producer, Coal India Ltd, plummeted 5.1 per cent to close at Rs 332.7 on The BSE. The profit-sharing clause, if it comes into effect, will mean an additional annual outgo of Rs 2,600 crore for the company, which already sells a majority of its produce at 40 per cent discount to the international benchmarks.

CIL Chairman N C Jha had earlier told Business Standard that problems on the accounting front might crop us as a result of the Bill. “Every project has to be treated as a separate costing and accounting centre. If a company is working in a large number of areas how do we keep different cost centres? If the company is making profit in Maharashtra, it cannot be shared in Madhya Pradesh,” he had said in an interview.

Karnataka’s iron ore mining industry, reeling under a Supreme Cout ban, came out in strong opposition, flaying the draft bill as one that “is going to be a disastrous Act” for iron ore mining. “The new law,” claims D V Pichamuthu, director of the Federation of Indian Mineral Industries (South), “will kill the iron ore industry, as it has proposed 200 per cent rise in royalty payment from mining. Already, the Karnataka government is charging 10 per cent royalty and 12 per cent forest development tax in addition to VAT.”

Experts believe the benefit-sharing proposal, while desirable in concept and intention, is unlikely to achieve desired results unless implemented properly. “The mining industry goes through cycles. Sharing profits or royalty may not be a problem for miners when prices are favourable. But it would be detrimental when commodity prices go down. The current law does not address this volatility,” adds Amrit Pandurangi, Senior Director, Deloitte Touche Tohmatsu.