Royalty paid to the government on Iron Ore is all set to be increased by 50% on the basis of recommendations of an Indian government panel. Mine owners who have been paying a royalty of 10% will now have to pay 15% according to the panel’s recommendations. The report is expected to be submitted to the Ministry of Mines in June, 2013 and later to the Cabinet Minister for his approval.
Iron Ore Royalty rates in India
Steel makers like TATA Steel and Steel Authority of India Ltd. (SAIL) and the public sector miners like National Mineral Development Corporation Limited (NMDC) will be the biggest losers if the hike in royalty is accepted. SAIL will have to pay 8% EBITDA (earnings before interest, taxes, depreciation and amortization) for FY14, which will decrease their target price of Rs 66 to Rs 56.
TATA Steel will also have to take an impact of 2% on EBITDA and their share target price will come down to Rs 356 from Rs 379. EBITDA impact of 3% is expected on NMDC, resulting to the fall of Rs 147 in here target price from the current Price of Rs 155. Impact of iron ore royalty rate hike on JSW and JSPL will be through price rise of iron ore fines in the local market.
Iron Ore Royalty Global Trends
If the recommendation for hike in royalty gets approved, then, India will be charging royalty of 15% on iron ore compared to 2.5% in Brazil and & 5% in Australia.
As per the experts, the acceptance of this report will bring a negative impact on steel makers as their profitability and Return on Capital Employed (RoCE) will be deteriorat further which is already at low levels. Hence they are hoping the recommendations given by the panel are rejected by the Ministry.