Russian Mineral Tax Increase Advances; P&K Output, Economics Jeopardized
Russia’s Finance Ministry has told mining companies that a plan to more than triple mineral-extraction taxes (MET) next year is “a done deal,” according to a Bloomberg report early this week, citing sources familiar with the discussions. If implemented, Russia’s fertilizer producers that mine potassium salts, apatite-nepheline, apatite, and phosphate ores will take a hit.
The ministry was reported earlier this month to be considering such a move as part of a package of measures to reduce the government’s budget deficit (GM Sept. 18, p. 32).
The draft amendments to the MET code prepared by the Finance Ministry, as cited by an Interfax report, introduce increasing the “rental coefficient” of 3.5 to the MET rate for most types of solid minerals, including potassium salts, and apatite-nepheline, apatite, and phosphate ores, and proposed to be effective from Jan. 1, 2021. The current MET rate for potassium salts is 3.8 percent, and 4 percent for apatite-nepheline, apatite, and phosphate ores.
Coal, gold, and silver are understood to be excluded from the measure, while a separate bill is being prepared for diamonds.
Lawmakers in the State Duma, the lower house of the country’s parliament, approved the plan at its first reading on Sept. 22, a day after it received approval from the chamber’s budget and tax committee, according to Bloomberg.
The country’s Finance Minister, Anton Siluanov, said mining companies currently have some of the lowest levels of taxation, and the ministry has estimated the measure should bring in as much as RUB56 billion (approximately $774 million at current exchange rates).
Russia’s mining companies are understandably opposed to the tax increase, arguing they already are suffering as a result of the COVID-19 crisis and that increased taxes could also hit their investment plans.
Some mining companies have asked for an exemption from the increased coefficent, in particular for projects in Russia’s Arctic zone, where all of the country’s phosphate production is concentrated, according to an Interfax report, citing government sources. However, this proposal is reported not to have found support within the government.
However, there is reported to be some agreement to look at protecting new mining projects from the proposed increase by making changes to special investment contracts (SPIC) and designing agreements to protect and encourage investment.
Furthermore, the government and the Finance Ministry are reported to be open to discussing the differentiation of the rental coefficient from 2022, provided the budget revenues remain at about RUB56 billion, according to the Interfax report.
Fertilizer producers estimate the additional costs of the proposed MET increase at RUB6 billion (approximately $78.3 million at current exchange rates) starting in 2021, according to the report, citing an unnamed source citing government documents. The industry paid a reported RUB2.4 billion in MET last year.
Among the fertilizer companies, Acron and PhosAgro could be the most affected given their respective apatite-nepheline and apatite mining operations. EuroChem Group AG, which operates the Kovdorskiy GOK phosphate mine, as well as the Usolskiy potash mine, with a further potash mining operation – Volgakaliy – under development, would also be impacted by the proposed MET increase, as well as potash producer Uralkali.
Acron Group has said it could be forced to cut phosphate production at its Oleniy Ruchey apatite mines in the Murmansk region in Russia’s northwest if the increase in MET goes ahead next year, and that it may partially switch to importing phosphate rock from Morocco, according to an Interfax report, citing Acron Group chairman Alexander Popov.
Oleniy Ruchey, which produced 1.084 million mt of apatite concentrate last year, already is operating with negative margins (-14 percent) given current low fertilizer prices. If MET is increased 3.5 times, then profitability at the apatite operation will fall to -30 percent, leading to a likely production reduction, according to Popov.
Acron estimates the additional MET costs in 2021 at RUB600 million (approximately at $7.8 million at current exchange rates), which is approximately $8+/mt to the cost of a ton of apatite concentrate, according to the report.
Most of the apatite concentrate produced at Oleniy Ruchey is used in its own operations (some 792,000 mt), but Acron also has an export contract with Prayon in Belgium, according to the report. That contract, according to the report, has another year to run, which Popov said the group will fulfil. According to its own reports, Acron in 2019 had 292,000 mt of apatite concentrate classed as “commercial output,” distinct from output “consumed in-house.”
Acron is also developing the Talitsky potash project in Russia’s Perm region, and according to the report, a rental coefficient of 3.5, given the current low level of global potash prices, will make it difficult to convince banks to sign project financing for completing the project, if new projects are not protected from the increase in MET, Popov said. The Acron chief executive said production start at Talitsky may be pushed to 2026.
However, according to a Fitch Ratings report in late June, the Russian fertilizer group already was pushing back construction at Talitsky, with initial production likely to be shifted to 2025.
Unnamed analysts, cited by the Interfax report, estimated that for PhosAgro alone, the additional MET costs could amount to between $32-$37 million next year.
Acron Group, PhosAgro, nor EuroChem had responded to Green Markets’ inquiries for direct comment by press time.