'MMDR passage will ensure raw-material supply for plants'

When all the locations are through the auction process whatever mines comes they will be a ready to run mine where most of the clearances will be there. So any smelter when he is planning his affair setting up the end use plant he will reasonably will know that he will have the raw material resources at available so that the end use plant does not wait for the end use raw material securities. So that is a good thing which has happened.

Nigel: Just to talk something with regard to your company itself, you get your iron ore from your Chhattisgarh mine and I think you are taking nearly around a million tonnes from there?

Mundra: Now, our capacity is a million tonnes which we are building up so it is about one million tonnes.

Nigel: So, the total royalty if I take iron ore price of around Rs 3500-4000 per tonne will be what? Will be around Rs 60 crore?

Mundra: Yes, it will be about Rs 60 crore a year.

Nigel: So, now you will be paying Rs 60 crore plus another Rs 60 crore because you will be paying to district mineral fund (DMF) as well? So that will be a total outflow of around a Rs 120 crore? So, that will be Rs 60 crore additional that you will be paying?

Mundra: That is right.

Nigel: I was just looking at your quarterly numbers, that should be around Rs 70-75 crore, so your total earnings before interest, taxes, depreciation, and amortization (EBITDA) for a financial year will be around Rs 300 crore. So, now we are talking about a 20 percent hit if I am taking another Rs 60 crore hit, it could hit your EBITDA by nearly around 20 percent, this payment towards DMF?

Mundra: Right now what our EBITDA is without considering the iron ore consumption because so far we were not running the iron ore mine.

Nigel: What is your targeted EBITDA for FY16?

Mundra: Each tonne of iron ore- if we go for the capacity use will save us about Rs 3000-4000 per tonne. So, if we are mining about half a million, even half a million to that extent our EBITDA will also go up. So far in this year we are not having any contribution from iron mine.

Menaka: What the impact on your EBITDA will be in the next year because of this additional contribution to the DMF?

Mundra: There will be a positive contribution to our EBITDA because we were not using any iron ore captively current year. Next year we suppose even if we use half a million and if you say Rs 3,000 each tonne we are using there will be an additional EBITDA of Rs 150 crore. Even if we have to pay about Rs 30-50 crore extra still there will be a positive contribution to the EBITDA has compared to the current year.

Menaka: I want to clarify one detail this 100 percent contribution to the DMF, 100 percent of royalty is a threshold limit. I think the states can decide what they want to apply or levy in that sense. So is it possible that in fact the DMF contribution may not be 100 percent of royalty and it may be less than that depending on what decisions are taken by the states and which the mines reside?

Mundra: We will have to see the fine print of this bill whether it is discretionary to the state government or it is mandatory to recover 100 percent equivalent to royalty as a DMF fund.

Menaka: You want pay making any DMF contributions so far. So is there any mention in the bill of having to make up for the lack of DMF contribution so far. So is there any retro impact in the bill? I am just asking because we do not know the full details either?

Mundra: No, that is right, we will have to see, but I do not think there can be any retrospective effect. This is all prospective only and it is mandatory for state government too recover 100 percent because it is as per the bill. I do not think any discretionary is given to the state government. Still we will have to see the fine print of the bill.

Menaka: Who gets impacted the most because of this DMF contribution bit, Nigel laid out some names, Tata Steel, Steel Authority of India (SAIL), these are some companies that stand to get impacted. There was some confusion about coal. Our colleagues in Delhi are telling us that coal is outside the jurisdiction of the MMDR bill. So coal is not impacted by any DMF contribution. What is your understanding in this?

Mishra: Yes, coal will be out of it. Coal will not be part of this. So, basically whoever is the existing licensee, who is enjoying the license, they will be impacted with this kind of increase in the DMF.

But, overall, whoever does not have a license but has an end-use industry and they were waiting for mineral licenses, they will benefit because they were the ones who were saying that we have spent billions of dollars in the end-use steel plants and others but we do not have access to the minerals. That way, they would benefit because of this bill is passed.

Menaka: So, you are saying the overall net impact is a far bigger positive than a negative because of the DMF bit?

Mishra: Not because of the DMF, because of this bill getting passed and hopefully very much like coal sector where there were bids open process and bidding happened. Even in other minerals like iron ore and others there will be immediate bids which will be coming up. So, people who have end-use plants, they can have access to minerals.

Nigel: With regard to the pricing of the mine, how do you benchmark it? At least for Coal India you had 80 percent of your supply form the country coming from Coal India so you had a benchmark but for iron ore, for bauxite you do not have a single producer that is producing more than 70-80 percent in the country so; do you think that will be bit of a challenge?

Mishra: But you want benchmarking for what?

Menaka: For the auction.

Mishra: What will be the benchmark price?

Nigel: What do you think?

Mishra: I do not think it can be determined through the market process. Currently if you look at it, other than royalty there is nothing these guys are paying so apparently it will be either production sharing contract (PSC) or royalty or a combination of both. So, it needs to be seen how the bid process is going to be designed and in a manner.

Also the new players have been complaining that it is unfair that they will have to pay bid price whereas the existing player can continue to enjoy the license and in fact if the existing license is a fresh license that gets converted into a 30 year to 50 year license. If it is you are on an extension, that gets extended till 2020 or 2030 so, in this manner the new players are complaining that it is not a level playing field.

Menaka: We have heard from even Sajjan Jindal of JSW that while they were very happy that we were moving to an auction system, this was one sticking point or one hurdle because it does not level the playing field at all. Have you’ll done any work on analyzing what the price difference will be eventually in what an auction based mine output will cost the new guys versus what the old guys are playing let’s say for iron ore or bauxite, what is the likely difference to be, 30-40-50 percent in cost?

Mishra: Not really. There is –unlike coal where there was one monopoly supplier and rest all were forced to buy from them, in iron ore and others it was a very fragmented field and the licenses were with many smaller players who were not the end users.

So, there was already a market mechanism and like any commodity, there is a price which the buyer is paying. If you are a steel producer you are buying that commodity at certain price. So, if you do a truly competitive auction process, the outcome would reflect what price they are expecting in terms of what they are already paying and that should give them some amount of saving on that price.

Menaka: Saving on that price based on what they are buying from the open market but what I am trying to understand is what will the difference in costs be for let's say companies like Sarda which already have mines and are paying based on the earlier discretionary method and hereon companies that will have to acquire these mines through an auction process and therefore their output costs will go up. What do you expect that difference to be like?

Mishra: Mathematically if you look at it, it is only the differential which is of the district mineral fund what we are talking about. If one guy is going to pay one the royalty and the other guy is going to pay 100 percent of the royalty, logically what you bid for would be the two-thirds only.

However it will not happen like that because it will be a competitive process so maybe you will end up paying more than the existing player. However, given the condition of the commodity cycle right now if you conduct a bid process right now you may not get huge premium.

Menaka: You are saying that the input cost will remain much same or maybe 10-15 percent different between those who already have mines and those who will acquire then through auctions.

Mishra: Yes, because the new players will not have headroom to play very aggressively even if you have an auction process right now.