Ukraine might hike royalty payments for iron ore mining

Ukraine’s parliament might increase the mineral
resource royalty payments for iron ore mining companies, according to an April
22 report by epravda.com.ua, a business news site, which cited a recent law
draft.

 

The royalty payment base will change to the price of
final goods (iron ore concentrate, pellets and sintering ore). Presently, the
base is essentially the cost of iron ore mined before enrichment and
pelletizing, and amounts to USD 20-30 per ton of the final goods.

 

The royalty payment rate will depend on a price index
for 62% iron fines CFR China. The highest rate will be 16% (the index above USD
180/t), and will drop to 14% for the index between USD 150/t and 180/t), 12%
(between USD 120/t and 150/t), 8% (between USD 85/t and 120/t), 3% (between USD
65/t and 85/t) and finally to 0.1% (below USD 65/t), according to
epravda.com.ua.

 

Presently, the rate is 12% for a price index for 58%
iron fines CFR China above USD 70/t and 11% otherwise.

 

The Ukrainian parliament might consider the law draft
stipulating the new royalty regime in May, epravda.com.ua said, adding that the
new royalty payment regime might be become effective on July 1, 2021.

 

Dmytro Khoroshun: The
possible royalty payment increases (by up to 5x) should not impact
creditworthiness of either Metinvest (METINV) or Ferrexpo (FXPO LN), but both
companies might as a result decrease their dividend payout plans.

 

The royalty payment increases might amount to up to
15-20% of 2020 EBITDA for Metinvest and Ferrexpo for the periods of high
prices. These increases are heavy but affordable under the currently-high iron
ore and steel prices.

 

The increases we estimate from the epravda.com.ua
report are about twice the increases we estimated in March for
a switch to a regime with a flat 5% royalty payment rate.

 

However, when the iron ore prices fall to their
long-term values, the new regime royalty payments will be substantially lower
than the payments under the current royalty regime, we estimate.

 

Namely, during the high price periods like 2021,
Metinvest’s annual royalty payments (including 46% of royalties paid by its
Southern Iron Ore joint venture) might increase by up to USD 407 mln (18% of
2020 EBITDA) to up to USD 515 mln (23% of 2020 EBITDA), we estimate.

 

Ferrexpo’s annual payments might increase by up to USD
137 mln (16% of 2020 EBITDA) to up to USD 173 mln (20% of 2020 EBITDA) during
the high price periods.

 

The above estimates use as the new royalty payment base
the 62% iron fines CFR China price index (for 2021 assumed to average USD 170/t
in 1H21, falling gradually to USD 110/t in December), less a USD 40/t sea and
rail freight adjustment. We assume that both Metinvest and Ferrexpo are paying
USD 3/t in royalty under the current royalty regime.

 

If the 62% iron price index CFR China drops to USD
75/t (a reasonable long-term price), the new royalty regime with the above
assumptions will result in payments of USD 1.1/t, full 65% below the amount
paid currently.

 

It is yet to be seen whether a new royalty regime will
be introduced, and if yes what the details (the base definition and the rate)
would be. Considering the windfall profits the iron ore producers are currently
reaping due to high prices at the global markets, an increase in royalty
payment burden for Metinvest and Ferrexpo seems entirely possible.