One of the most interesting investment opportunities in Iran is metal and iron ore industry based on my previous article in this website. Mining patent and royalty cost play important roles in company valuation of this industry. As a result, it would be interesting to know their historical background and how to value their effects.
In this paper, I use the term royalty patent to show mining patent as well as royalty cost.
IMIDRO – Iranian Mines and Mining Industries Development and Renovation Organization is a holding company in the mining sector in Iran that is registered in 2000 in order to assess and determine the overall strategies and policies and projects relating to construction and modernization of metal related industries, extraction and processing of mineral products as well as executing exploration projects. Its mission lies on steering development and allocation of mines and mining industry in field of steel, aluminum, copper, iron ore and other mineral and also converting its resources and products to an efficient way which can lead to persistent wealth for Iran. IMIDRO has leased its sources and mines to mining companies such as Chadormalu and Gol Gohar since 2012-2013 in order to reduce governmental ownership and also follow the constitutional law of Iran. For this purpose, it would be necessary to explain more about the concepts of mining patent and royalty cost. In fact, the mines in Iran are national wealth and belong to the government of Iran, therefore it would be necessary that the companies which are active in this industry to have mining patent as a governmental license in order to extract mines as well as to pay rent as a tax on their consumption and also their sale that it is recognized as a royalty patent.
Chadormalu and Gol Gohar extract mines to produce iron ore, lead and zinc concentrate; they did not pay anything for their extraction and also consumed materials till 2012 which was pivotal for them, as a result, their net profit margin was around 0.7 in 2010, 2011 and 2012, more than other companies comparing to other sectors. But after 2012, the critical year that IMIDRO forced the royalty patent law, their net profit margin decreased to 0.4 in recent years, also note these companies have been struck not only by this law, but also by the decrement of steel price. As it is shown in the chart below, the rate of price increment by leveraging dividend and capital of companies such as Chadormalu and Gol Gohar jumped not only more than rather similar companies like Isfahan’s Foolad Mobarake and Calcimin but also more than TEDPIX (Tehran Exchange Dividend and Price Index) and this matter had its roots in the lack of royalty patent law. In addition, mostly mining patent duration is 25 years.
It worths to mention that Calcimin and Isfahan’s Foolad Mobarakeh are active in the field of concentrate (zinc and lead) and steel products respectively.
Also the reason that some companies such as Calcimin has not used their mineral efficiently and now has three million tons of zinc and lead soil depot has been because of accessing to cheap material. Other foreign companies such as Chinese ones produce various concentrate from low karat soil, but our companies were not as efficient as them and it was mostly because of the lack of royalty patent, they did not consider to use their mineral as efficient as possible. Then it would be necessary to levy a tax as the royalty patent for these companies. The mentioned issue above, shows the importance of this legislation.
That sounds interesting, according to IRNA, Iran’s rank is 10th and 15th in variety of minerals and exploration reserves respectively. Furthermore, mining patent has been increased 77.5% from Jun to July 2016 in Iran. Iran has 5,400 active mines and 400 million tons had been extracted in 2015.
There are some different methods to calculate taxes for the mining sector in the world. Generally various companies in the world take the various forms in order to calculate the mentioned tax. Some of these methods are based on units sold (volume or weight), or on profit or ad valorem system and etc.
Royalty patent in Iran has been experienced different situation and the previous one is as below:
- 25% of sale of raw and granulated iron ore
- 21.5% of sale of concentrate
- 18% of consumed concentrate for producing Pelletizing
- 15% of consumed concentrate for producing Spongy Iron
By this way, IMIDRO encourages corporates to complete producing cycle. Also, if these companies invest in downstream industries from their profit part, they will have a 10% of their investment as a discount on their royalty patent.
During the current year, the IMIDRO has changed its calculation of royalty patent to the following method and in fact, it has decreased the rate royalty patent by around 25%:
- 20% of sale of raw and granulated iron ore
- 16.5% of sale of concentrate
- 13% of consumed concentrate for producing Pelletizing
- 10% of consumed concentrate for producing Spongy Iron
As a result, their cost of sold goods will be decreased.
All in all, with taken into account all the mentioned issues above, it’s crystal clear that the revenues of these companies will be improved thanks to the reduction of royalty patent’s rate which is around 25% as well as the increment of metals price in recent months. By this way, it would be probable that the sun will soon rise again in this industry.