Economy, Business And Markets

The Unending Saga of Mining Royalties

The Unending Saga  of Mining RoyaltiesThe Unending Saga  of Mining Royalties

For more than two years now the issue of ‘mining royalties’ has been in the limelight amid heated debates between the government and two major iron ore mines namely Golgohar, in the southeastern Kerman province, and Chadormalu, in the central province of Yazd.

Last Iranian calendar year (ended March 20), the parliament passed a law based on which the two mines have had to pay 25% of their mining revenues to the Iranian Mines and Mining Industries Development and Renovation Organization (IMIDRO), which is a major state-owned holding company active in the mining sector. In response, the two iron ore mines, known as ‘twins’, started to protest. Prior to the parliamentary decision, the IMIDRO had withdrawn the exploitation concessions of both mines in its own favor – a move branded by many mining experts and equity market analysts as “illegal”. Previously, the ‘twins’, like almost all other mines in the country, used to pay 2% of the value of their production as royalty.

In a bid to get to the bottom of the issue, the Financial Tribune conducted an exclusive interview with director of issuance department at Tehran Stock Exchange (TSE), Rouhollah Hosseini Moqaddam. According to Hosseini, ‘royalty’ is defined as “a percentage paid in return for exploiting the resources that rightfully belong to the government or the owner (such as a mine) or for exploiting a copyright, trademark, or technical and technological know-how.” Meanwhile, he defines ‘state right’ as “an amount the holder or owner of exploitation concession is required to pay to the ministry of industry, mine, and trade as a percentage of the price for the recovered or processed minerals.” The TSE official also referred to ‘mining usufruct’, which is widely mistaken for royalty. “Mining usufruct is a right awarded to the holder of the exploitation concession. So far, such a right has been given only to mines whose exploitation concessions were owned by the IMIDRO”, Hosseini clarified.  

Based on these definitions, the two disputed iron ore mines used to pay only 2% in royalty, while the state rights had been set at 10% of the price of minerals; and the government, through the industry ministry, was allowed to charge every mine for the state rights. But when the IMIDRO denied to extend the exploitation concessions for Golgohar and Chadormalu, there was a different story as the IMIDRO was then the holder of the mining usufruct and could ask for large amounts referred to as mining usufruct fees, which were proposed by the administration to be at 30%, but the percentage was later set at 25% by the parliament.

  Blow to Twins’ Shares

Back in January, Minister of Economic Affairs and Finance, Ali Tayebnia, wrote a letter to First Vice President, Es’haq Jahangiri, asking him to order IMIDRO to return the possession of the exploitation concession for the two disputed mines to the private sector owners. The minister argued that after the Privatization Law was enforced based on Article 44 of the Constitution, Golgohar and Chadormalu companies were listed in TSE. When their shares were offered, the ‘twins’ were the holder and owner of the exploitation concessions and people bought their shares based on the intangible assets. Tayebnia asserted that what IMIDRO had done was illegal because based on a resolution passed by the Supreme Council of Bourse, no authority or party is allowed to transfer the assets and operation as well as exploitation concessions of the companies listed in TSE. The dispute combined with IMIDRO’s move to withdraw the exploitation concessions caused the two companies’ shares to dramatically lose their value. The big losers were, therefore, the individual and legal shareholders, which accounted for 14.6% and 85% of Chadormalu shares respectively. “The metallic mining firms account for 7% of the TSE. Besides, many investment and holding companies are active in the mining sector, which are categorized as multidisciplinary firms. The dispute has hurt the mining firms’ shares and consequently the equity market is suffering from the blow”, Hosseini told the Financial Tribune.

  Parliament’s Justification

Currently, all the mining firms, including the National Iranian Copper Industries Company and Iran Zinc Mines Development Company, are either paying the 2% royalty or the state rights, which is up to 10%. Only Chadormalu and Golgohar, out of many iron ore mines, have to pay mining usufructs fees of up to 25%. IMIDRO says the two firms are required to pay 13 trillion rials ($458.2 million based on official currency exchange rate) for the past two years during which the two were not the owners of the exploitation concessions.

On the other hand, lawmakers in the parliament argue the decision has been made with the aim of preventing the sales and exports of unprocessed or raw minerals, although the definition of “raw minerals” itself is disputed. The parliament says not all mines are required to pay a 25% in mining usufruct fee, as they can benefit from specific exemptions. The parliament upholds that the mining usufruct fee will decrease to 21.5% if the iron ore producer processes iron ore into concentrate, while the figure will further decrease to 18% if the concentrate is processed further and is turned into iron ore pellet. The parliament has also allowed the mining firms to pay only a 15% in mining usufruct fee if they continue the process and produce sponge iron – the input for a steel plant. The MPs deem the percentages to be reasonable provided the mining companies immediately move towards establishing processing facilities instead of haggling with the administration.

Hosseini supports the lawmakers’ view, saying the decision has been made based on an amendment to the Mining Act. “According to the amendment and the budget bill for the Iranian year 1393 (ended March 20), all iron ore companies whose exploitation concessions belong to IMIDRO are required to pay the mining usufruct fees,” Hosseini told the Financial Tribune, adding that other mineral sectors such as copper and zinc are excluded since their exploitation concessions were  issued indefinitely.

  Facing Reality

The TSE official stressed that even if the two mining companies succeed in getting back their exploitation concessions, the administration will still be able to make them pay up to 30% of their recovered minerals either as state right or royalty. “The two iron ore producers had better concentrate their efforts on developing new processing facilities and try to avoid the 25% usufruct fees by creating value added and producing iron ore pellets and sponge iron”, Hosseini said. Based on the National 2025 Vision Plan, the steel sector is required to produce at least 55 million tons of crude steel within the next ten years. Therefore, Hosseini said, iron ore mining companies should be encouraged to increase processing and help complete the steel production chain.

Meanwhile, the development of a processing sector needs huge financial resources. However mining firms are currently unable to provide enough funds as global iron ore prices have experienced a remarkable decline and many small and medium iron ore mines, in particular in the northern regions of the country, have been closed.