Miners sore over skewed royalty formula

The friction between mine owners and the state government has renewed over computation of royalty fees for iron ore.

The mine owners are protesting collection of royalty by the government at a uniform rate regardless of the grade of ore. They feel this would render mining business unviable, especially after the constituion of proposed District Mineral Fund (DMF) where miners need to contribute an amount equal to the royalty.

The Federation of Indian Mineral Industries (Fimi), meanwhile, has moved the Union mines ministry on the issue.

"Despite directions by the Government of India and several judgements by the Supreme Court, the state government continues to defy and charge royalty for fines at the highest rate meant for 65 per cent garde iron ore whose production in the state may not be more than 15 per cent. In other words, the royalty at uniform rate of Rs 620 per tonne is being charged for fines as well as lower grades of lump ore. We would be grateful if you can take up the issue with the state government to charge the royalty on different grades of iron ore lumps and fines as per rate applicable to the respective grade," Fimi's secretary general R K Sharma said in a letter to Union mines secretary.

"There is chaos in Odisha. The government there is defying orders of the central government and the courts. As a result, the miners are suffering," Sharma told Business Standard.

According to Section 9 of Mines and Minerals (Development & Regulation) MMDR Act and Rule 64 B of Mineral Concession Rules (MCR), the same royalty rate cannot be computed for different grades of ore. But the state government via a circular in September 2010 was charging royalty uniformly in violation of mining laws.

The government, citing an observation in the report of the Comptroller & Auditor General of India (CAG), said royalty cannot be charged differentially unless the various grades of ore are stacked up separately. The government's circular was challenged by merchant miner R P Sao in the Revision Authority (RA) under Union mines ministry. The Authority, in its final order in March this year, quashed the state government's circular, asking it to realise royalty as per Section 9 of MMDR Act read with Rule 64 B of MCR.

"The state government has insisted that royalty cannot be charged differentially unless the ores of different grades are stacked up separately. Regarding the Revision Authority order, we have referred the case to the law department and awaiting its view," said a government official.

"Non compliance of the RA order by the state government has hurt the margins of iron ore miners. The same royalty rate for different grades of ore as fixed by the state government defies logic. The introduction of DMF will only add to the woes of miners," said a senior official of a large standalone miner.

Presently, the royalty rate for iron ore lumps and fines (with 62-65 per cent Fe content) stands at around Rs 600 a tonne in Odisha and the same rate is applied even to lower grade ore. Rationalisation of royalty would slash rates to Rs 539, Rs 463 and Rs 456 a tonne for 62-65 per cent, 60-62 per cent and 58-60 per cent Fe grade lumps respectively.

Similarly, post rationalisation, the royalty rates are expected to fall to Rs 274, Rs 203 and Rs 203 for comparable grades of fines.

"The Odisha government needs to wake up to market dynamics on royalty fixation issue. Iron ore prices have crashed in recent months. Charging the highest rate of royalty may trigger mines closure and lead to unemployment especially after introduction of DMF," said Giriraj Daga, portfolio manager, SKS Capital & Research Pvt Ltd.

Not only miners, end use industries like steel firms and pellet producers have also been hit hard by the state's royalty pricing formula.

"Though Odisha has the highest pellet making capacity in the country at 32 million tonne, hardly 30 per cent capacity is used as of now," said an industry source.

Steel makers having invested Rs 1.2 lakh crore on their projects, were passing through a rough patch, due to high ore prices and steep freight costs.