Sesa Goa sinks 10% to Rs 228 as Government finally announces Higher Mining Royalty…Worried ?

This Blog Piece is to address the responses of Madhu and P P Jain…welcome Jain…this is the first time you’ve taken the trouble to respond

The New Mining Royalty Policy……It was awaiting Ministerial Approval………10% Mining Royalty on Market Prices before Freight…a move away from a Flat Rate based on Weight

Today,the Ministry finally went by the recommendation of a specially constituted panel of 2007 to impose a higher Royalty rate of 10% and change the basis from weight to Market Price

This announcement had been expected for a long time now…but when it came it sunk Sesa Goa’s Share Price by 10% this morning…It closed at Rs 228

This Rationalisation of the Royalty Policy was part of the 100 Days committment of the UPA Government…it had proposed to adopt wherever possible the advalorem basis

The Last Policy was notified on October 14,2004 and for three years,no change would have been possible…The Study Group formed in 2007 gave their recommendations to the Ministry of Mines in October 2007…However this recommendation was delayed as Global Recession set in and Iron Ore Prices weakened considerably

Under the Old Flat rate Royalty Policy,the highest Rate was Rs 27/T for Iron Ore Lumps that had 65% Fe Content or more

Now under this new market FOB Price,less Transportation and allied costs to Ports,the Royalty will be 10% of the Adjusted Sales FOB Price

From April 2009,the CIF price to China has doubled to US $ 110/T….Adjusted FOB would range between US $ 60 to US $ 80…that’s Rs 2800 to Rs 3800 per Tonne…10% Royalty would range between Rs 280 to Rs 380 per tonne…that’s over a ten fold jump from the earlier Policy basis  

Should we be worried ?…Madhu and Jain queried for my comments….well it will surely affect export competitiveness

Sesa Goa sold over 15 million last last year and has ambitious plans for volumes ahead…50 million tonnes in three years….so we can estimate that incremental  Royalty payments for Sesa Goa will start to be in excess of Rs 400 crs….Though Iron Ore Prices are again rising,the exports market remains competitive and the risk is that Sesa Goa may not be able to pass on the entire incremental to China,it’s major market…Sesa Goa earned  a shade under Rs 2000 crs PAT in FY 09…thus the immdiate impact looks to be 20% of profits

Having said this,Sesa Goa could absorb this on rising volumes and rising Iron Ore Prices read more