New Mining Bill knocks out coal, steel and metal shares

Coal India is trading almost 5 percent lower after the cabinet approved the new Mining Bill. Other metal stocks like Tata Steel have fallen by 2.5 percent, Sterlite Industries is down by 2.1 percent and SAIL is down by 3.5 percent.Analysts have started reworking the numbers downwards. Morgan Stanley says that the impact of the new mining bill on the operating profits of Tata Steel will be 2.1 percent and SAIL 3.2 percent.

The new mining bill will impact all metals, mining and power companies. Power generating companies will be impacted as coal is their main fuel. So expect higher electricity bills. Cost of producing goods will increase, thus resulting in an all-round rise in prices, further adding to the sticky inflation.One more reason for the Reserve Bank of India not to reduce rates.In other words the bill will impact the entire economy.

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[caption id="attachment_96644" align="alignleft" width="380" caption="The coal sector will be hit the most by the new Mining Bill, as the sector will have to pay the local community a fourth of the profits. Reuters"][/caption]

The coal sector will be hit the most by the new Mining Bill, as the sector will have to pay the local community a fourth of the profits, while in case of non-coal mining the outgo will be through royalty, which is a tax deductible expense.

Highlights of the draft bill are

1. Coal miners will have to part with 26 percent of their previous year's mining profits.

2. In new mines, lessees will have to hand over 26 percent of shareholdings to locals.

3. In existing mines, 26 percent of profits will have to be handed over to local residents.

4. For other mining activities, companies will have to pay twice their existing amount of royalty to government that they are currently paying.

Analysts had said that if the bill is implemented Coal India's profit is likely to come down 15 percent.For cement companies, it may be between 6 and 10 percent, because they mine limestone. Tata Steel shareholders will lose 6.9 percent of their earnings to locals in the mine areas, Hindustan Zinc 9 percent and Nalco 2.1 percent. This explains the slide in the overall metal index which has fallen by 2.25 percent.

Details of the bills are not available as to howthe money so collected from the mining companies will be given to the beneficiaries. Will it be proportionate to the land holdings they sacrificed or the number of people in the family?Also, for how long should the profits be shared? Is it in perpetuity, or for a fixed period?