New regulations calling for an overhaul in mining

September 24, 2015

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Bangalore, September 24, 2015: The EY-FIMI (Federation of Indian Mineral Industries) report titled Mineral Concessions Framework: Imperatives for success recommends that mineral auction bidders have a 360o assessment and comprehensive strategy for success. The report also highlights the collaborative role that the State governments must play for the overall growth of the industry.

States in India have different resource endowments, varied levels of economic development, demography, income profile and long-term development goals. All stakeholders, including the Government must acknowledge the risks related to mining ventures and collaborate towards the development and implementation of their mitigation strategies. The rights, obligations, roles and responsibilities must be equitably balanced with their risks and benefits for diverse stakeholders, to optimize bid outcomes and ensure long-term sustainable success.

The report outlines the different areas the government should consider before auction of mining licenses, as also the strategies bidders could look at while bidding for mines. The report also analyses the current policy framework, and suggests areas that need reconsideration by the Government, and help achieve the objectives of socio-economic growth using the mining industry as a lever.

Speaking at the launch of the report, Anjani Kumar Agrawal, Partner and Leader – Metals and Mining, EY, said, “The new set of regulations introduced by the government, including the MMRD Act, Coal Mines (Special Provisions) Act and the Mineral Auction Rules 2015, coupled with a transparent, non-discriminatory process for auctions is expected to shape the industry for the next half a century. It is therefore imperative to look at the mining ecosystem as a whole, and ensure that the government and industry work together to ensure a steady and robust future for the industry.”

The recently introduced regulations intend to provide an auction based fair, transparent and non-discriminatory process for awarding mining concessions. These policies empower the states in several ways. With this, royalty contribution from the mining industry is expected to shoot up to INR133 billion in FY16, an increase of 50% from FY12 as per a Ministry of Mines report.

The newly introduced revenue-share-based auction model makes the state (and all its arms, representatives) a true partner over the life of the concession and hence, calls for a fundamental shift to a mind-set of a collaborating partner. Some of the strategic issues the government should pay attention to, include, a synergy between industrialization goals, minerals strategy and end-use conditions, balancing captive and merchant mining, reservations for government companies, and above all capacity building at the state level for successful auctions, to name a few. These measures will go a long way in attracting serious bidders which are critical to optimize bid outcomes and long-term sustainable success for all stakeholders involved.

Bidders, on the other hand, will need to draw out a comprehensive risk assessment and mitigation plan, such as evaluation of alternate assets and consider the taxes and levies by State Governments. They will also need to look at the competitive intensity of the target mine, and conduct adequate due-diligence across technical, legal and financial factors while planning their bid strategy.

As for mineral auctions, a model similar to the coal block auction has been proposed. That said, the bidding environment for them will be quite different, particularly in the context of their value chains, industry structure, demand-supply situations, level of exploration, asset sizes and several other techno-economic parameters, notes the report.

In order to ensure a smooth and successful auction process for other minerals apart from coal, the report suggests attending to matters such as end-use and disposal, the mining lease periods for PSUs, merchant miners’ participation, and the non-exclusive reconnaissance permits (NERP), amongst others. In the current form NERP may not attract interest as the NERP bidders are exposed to risk of the area being notified for ML. Also while they take the risk there is no follow through right for PL/ML.

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