India state may cancel NMDC's Donimalai mine lease in levy dispute

* State govt demands higher share from sale of ore by NMDC

* State govt may auction mine if NMDC refuses – state mining secy

* NMDC shares mark biggest single-day fall since Aug. 9

NEW DELHI – The government of India's Karnataka state on Friday warned NMDC Ltd that it will cancel the lease of its Donimalai iron ore mine if the state-owned miner refuses to pay an additional levy on the sale of its ore.

Karnataka's threat to cancel the lease stems from a dispute between NDMC, India's biggest iron ore miner, and the state government over its decision to impose an 80 percent premium on ore sales from Donimalai.

This mine roughly produces 6 million tonnes per annum and so every year the loss to the state government would be 20 billion rupees

Karnataka levied the premium when it renewed NDMC's license for Donimalai on Nov. 2. NMDC contested the 80 percent premium in a Nov. 1 letter to the Karnataka government that was reviewed by Reuters. The company's earlier license did not include the premium.

Rajender Kataria, the state mining secretary, told Reuters of the warning to NMDC of the cancellation when he was contacted for a response to the company's letter.

"This mine roughly produces 6 million tonnes per annum and so every year the loss to the state government would be 20 billion rupees," Karnataka mining secretary told Reuters over the phone.

"State resources cannot be distributed just like that," Kataria said.

Following the news, NMDC shares fell as much as 7.4 percent to 99.20 rupees, their lowest since July 25, marking their biggest single-day fall since Aug. 9.

NMDC will lose as much as 10 billion rupees ($139.07 million), or almost 10 percent of its annual revenues, if the state government does not reverse its decision to charge the premium, the company said in the letter to the state government.

NMDC did not respond to an email from Reuters seeking comment.

"The Karnataka government had said they will reconsider the whole thing but as of now we have not received any communication from anywhere else," NMDC Chairman Baijendra Kumar told news channel ET Now.

The mine primarily supplies ore to India's biggest domestic steelmaker JSW Steel Ltd, whose shares also fell 3.5 percent after the news.

"NMDC, being a government of India company cannot sustain such huge losses as the operation of the mine becomes unviable and ultimately the closure of operations will become inevitable," NMDC said in the letter, a copy of which was reviewed by Reuters.

($1 = 71.9050 Indian rupees)

(By Neha Dasgupta; Editing by Sunil Nair and Christian Schmollinger)