Metals & Mining Sector Update :: ICICI Sec

Royalty rates revised upwards…
According to media reports, the government has given its approval to
increase royalty rates on minerals. Almost all minerals, including iron ore,
bauxite, zinc, lead, etc would be impacted by new royalty rates. However,
it excludes coal, lignite and sand for stowing whose royalty rates have
been kept unchanged. Royalty rates are charged on an ad-valorem basis.
A few media reports indicate that approval has been based on the
recommendation of a study group. The study group had recommended a
hike in royalty rates of (a) iron ore: 15% from 10% earlier, (b) zinc (metal
in concentrate): 10% from 8.4% earlier, (c) lead (metal in concentrate):
12.7% from 14.5% earlier and (d) bauxite: 0.6% from 0.5% earlier. The
final rates are yet to be publicly notified.

Our view
ƒ The increase in royalty rates will boost the revenues of mineral
rich states, including Odisha, Goa, Karnataka and Chhattisgarh
among others
ƒ The increase in royalty rates will lead to an increase in cost of
production of companies. However, we believe metal companies
will largely be able to pass on the recent hike in royalty rate.
Hence, we have maintained our rating and estimates

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Link : http://content.icicidirect.com/mailimages/IDirect_MetalsMining_SectorUpdate_QC_Aug2014.pdf