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 a March
24 interview by Danylo Hetmantsev, the head of the parliamentary finances, tax
and customs policy committee, to biz.censor.net, a business news site.

 

The royalty rate was increased by 50% in 2020, and
currently a draft law is in preparation to increase the royalty payments
further, Hetmantsev said. He would prefer the royalty payment base to be a
Platts China price index rather than iron ore production cost that might be
manipulated, according to the interview.

 

The royalty rate will amount to 5% and the base will
be a Platts China price index in the new royalty calculation approach that is
being developed by the State Tax Service and the parliament members from the
People’s Servant party, according to a March 23 message in the Monopolistua
Telegram channel.

 

Dmytro Khoroshun: The royalty
payments under the new regime might increase by up to 3x for Ukrainian
producers Metinvest (METINV) and Ferrexpo (FXPO LN) during periods of high iron
ore prices, we estimate. However, when the iron ore prices fall to their
long-term values, the new regime royalty payments will differ insignificantly
from the payments under the current royalty regime.

 

Namely, during the high price periods, Metinvest’s
annual royalty payments (including 46% of royalties paid by its Southern Iron
Ore joint venture) might increase by up to USD 200 mln (9% of 2020 EBITDA) to
up to USD 307 mln (134% of 2020 EBITDA), we estimate.

 

Ferrexpo’s annual payments might increase by up to USD
67 mln (8% of 2020 EBITDA) to up to USD 103 mln (12% of 2020 EBITDA) during the
high price periods.

 

The above estimates use as the new royalty payment base
the recent high of a CFR China price index for fines with 65% of iron (USD
202/t, which corresponds to USD 180/t for 62% iron fines) less a USD 30/t sea
freight adjustment. The new royalty rate is assumed to be 5%, resulting in the
new royalty payment of USD 8.6/t. We assume that both Metinvest and Ferrexpo
pay USD 3/t in royalty under the current royalty regime.

 

If the 65% iron price index CFR China drops to USD
95/t (the 1-year low achieved in April 2020, corresponds to USD 81/t for 62% iron
index CFR China, which incidentally is reasonable as a long-term price), the
new royalty regime with the above assumptions will result in payments of USD
3.3/t, only 10% above the amount paid currently.

 

And when the iron ore prices drop to a low range of
below USD 80/t (62% iron CFR China), the royalty payments under the new regime
might slide below the payments under the current regime.

 

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 recent anti-oligarch statements
by Ukrainian top politicians, and 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.

 

And if the details of the new royalty regime are
reasonable (an adjustment for sea freight for the base, a rate not much higher
than 5%), the Ukrainian companies will not be worse off during the periods of
moderate and low iron ore prices.

 

We maintain our neutral view on METINV bonds.