What an investor really cares about is predictability of tax policy rather than rental rate

To facilitate investments in the mining & metals sector, tax policy should enable cost planning with a time horizon of 8–10 years at least

The government has recently revised approaches to tax policy in the area of subsoil use and iron ore mining. A new version of the draft Law amending the Tax Code provides for reduction of rental rates in case iron ore prices are low, and higher rental rates, compared to today’s benchmark, in case the prices are high and companies can afford such payments.

A logic behind the change in rates is not a bad signal for foreign investors. But what is much more important is stability and predictability of tax climate. Indeed, over the last seven years, the conditions have already changed twice. However, to enable investments of hundreds of millions of US dollars in the mining & metals sector, tax policy should first enable cost planning with a time horizon of at least 8–10 years.

Black Iron is running a greenfield project in the mining & metals sector, which is the first project of the kind in the history of independent Ukraine which is not based on the Soviet industrial heritage. All our estimations, from prospecting to sales markets, are based solely on the current objective market conditions and forecasts of the world’s leading think tanks as regards the future demand for and supply of high-quality iron ore. That is why sustainable tax policy in Ukraine is one of the key factors of successful implementation of the Shymanivske iron ore project.

The current sky-high prices for iron ore at the rate of $200–230 per ton surely afford ground for talks about iron ore producers’ super profits. But three or four years down the road, as analysts forecast, the prices are likely to return to the levels of $70–80/t — typical for the period of 2014–2018. Even so, it remains to be seen whether budget will lose or benefit from such adjustment.

As soon as negotiations started in Ukraine as regards revision of rental rates and the principles of charging those (it is suggested targeting global prices instead of primary costs), we assessed the impact it will have on the implementation of our project. We estimated our possible savings at $170 million, since those negotiations paralleled discussions of a draft Law on support of foreign investment in the media space. The draft Law proposed the prospect for reducing the tax burden (income tax in particular) during the first five years of operations, which are the most critical for investors and during which debts are mainly repaid. But now that the iron ore sector is excluded from the final version of the draft Law, there is no more talk about the savings.

We haven’t revised the final project budget of $1.1 billion so far. We use the same parameters to negotiate our obligations to our partners, particularly Cargill Steel division of Cargill Corporation. We chose it as a financial partner with a contribution of $75 million in exchange of the right to purchase the first 4 million tons of mined raw material within the first 10 years. Another $100 million will be provided as royalty by the family office of one of the richest people in America. Moreover, leading European banks will provide $260–300 million as loans secured by guarantees of a large export credit agency.

As for tax payments, according to conservative estimates, over the 20 years after the launch of the project, Black Iron will pay more than $2.2 billion to Ukraine’s budgets of all levels. Given the expected fluctuations in iron ore prices, the increase in rent payments today will have a negligible impact on the above figure in the long run.

It is not so much the size but predictability of tax changes that is a key factor for us, and also, government policy towards investors in heavy industry in general. We often hear that new approaches to taxation of subsoil use may have political implications. As a foreign investor, we are not a subject of Ukrainian politics and accept the rules established in this country.

But negotiating with the partners or banks, planning our debt obligations would be much easier if we understood that such decisions have an economic justification. Add to this knowing that the change in the political situation next day would not lead to a revision of rent payments or other taxes, or the principles of the permit system or land allocation.

In addition, it is also important for investors to understand that promises to help resolve land issues, facilitate cooperation with local authorities and other signs of interest in obtaining investments worth billions of dollars are also actually fulfilled rather than remain mere promises.