New royalty will hurt us, say miners

The government’s move to increase the royalty minerals is set to hit mining sector earnings royally. Analysts feel that the move has come at the worst time possible.

Earlier, royalty on iron ore was set at Rs 8-27 per tonne, depending upon the grade. Now, royalty on ore has been changed to 10% ad valorem on the sales price.

Similarly, the royalty on zinc has been moved to 8% from 6.6% and on lead to 7% from 5%, both on the amount of metal in the ore.

Akhilesh Joshi, COO, Hindustan Zinc, told DNA Money, “Increase in royalty would definitely affect industry to some extent at this point of recession.”

An official with a leading mining company said on condition of anonymity, “This move by the government is unfortunate for the sector.” He said that the industry needs governments help to boost production and with this increase, the opposite is feared.

An analyst with a brokerage said the move is not a surprising one, adding: “This was expected as the government is under tremendous fiscal deficit pressure and needs to raise money. Disinvestment in public sector units is one way and this is another.”

An industry expert pointed out that these royalties were last revised in 2004 and are changed every three years. He said, “Instead of 2007, the government has revised the rates now, the worst possible time to do this. In the current government’s 100-day agenda, it has said improving the gross domestic product (GDP) is the prime concern of the government. How will they achieve that by this move?”

Moreover, with this move, India’s royalty charges are among the highest in the world. Against India’s 8%, the royalty on zinc in China and Brazil is fixed at 2% of sales revenue, in Western Australia at 5% if sold as concentrate and 2.5% if sold in metallic form. Canada has a 5% royalty on zinc ore and Poland charges 3%.

Another analyst with a domestic brokerage said, “This is an out and out negative for the sector. However, the impact cannot be correctly quantified at this point in time. There is still some clarity awaited on how the new royalty structure will be applied.” He said, “Maximum royalty burden has come on the iron ore mining industry, which has been set at 10% from Rs 8-27 per tonne earlier. According to my estimates, Sesa Goa’s earnings before tax, depreciation and amortisation (Ebitda) will fall by at least Rs 500 crore in FY11.” The analyst predicted that earnings per share (EPS) for the ore miner could fall by 18% due to this move.

Sesa Goa, a Vedanta group company, is India’s largest exporter of iron ore in the private sector. Another analyst predicted the EPS for Sesa Goa to fall by 12%. He said, “Last year, on an average, Sesa Goa paid Rs 19 per tonne as royalty and now they will be paying Rs 140 per tonne.”

Another Vedanta group company — Hindustan Zinc — is also bound to suffer, a third analyst said. “I expect that the new royalty will lower the profits of Hindustan Zinc by about 5%. We hope that the prices of metals on the London Metal Exchange continue to rise so that companies can lessen the impact,” he added.