6 minute read 24 Aug 2020
Unshackling of the Indian mining industry

Unshackling of the Indian mining industry

By EY India

Multidisciplinary professional services organization

6 minute read 24 Aug 2020
Related topics Mining and metals

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By opening up the sector to encourage more private players for commercial mining and revenue sharing, the measure of mining efficiency will shift from total tonnage of mined coal to profit/hour of mining outputs.

For many years, the Indian policy structure on mining industry has largely been driven to ensure adequate checks and balances to prevent misuse of precious mineral deposits, reckless land acquisition and deforestation. A right policy framework would encourage sustainable environmental balance, being fair in handing over mining leases to the right businesses with the objective of maximising GDP of the country, create new jobs and enable the government to earn precious revenue through ad-valorem royalties on mined outputs. The policies have evolved over the years, more so in the line to keep certain sectors globally competitive, such as manufacturing, power, cement, steel, aluminium, among others.

As a result, there has been an improvement in the performance of the associated sectors over the last few years. India is one of the top five global miners in the world and is one of the largest producers of coal, steel, aluminium and zinc. Today, the country is producing more power than what it is consuming and has a per capita power consumption of 1181 kWh1, increasing year-on-year at the rate of 12.23%. Despite all such achievements, the current government thought it wise to make several changes in the way the mining gets governed and managed in the country. 

The latest reforms in the mining sector essentially cover the rules of bidding for mining rights (i.e. participation and process, permitting commercial mining, etc.) and new economics of future cash generation for State and bid winner (related to pricing, revenue sharing, market access and stamp duty payment, incentivizing output and productivity of mining operations). The reforms also envision an investment of INR 20000crs for building the necessary infrastructure that can further enhance the mined outputs.

The mining sector contributes about 3-4% of the GDP of the nation. Hence, this sector is of strategic importance to India with the sheer impact it can have on the overall GDP, foreign exchange earnings and its capacity to create a competitive leverage for other vital sectors such as power, construction, infrastructure, and consumer durables for securing their key raw materials at competitive rates. India holds large reserves (more than 9% of world total) of coal and iron ores, the value of which is slowly getting eroded as global utilities, and hence, the market value of coal and iron ore will drop in the coming years on account of increasing global emphasis on de-carbonization of power and metals value chains, investments in renewables and adoption of recycled steel/metal as a preferred, cost-effective and environment-friendly route to manufacturing. By opening-up the sector to encourage more private players for commercial mining and revenue sharing, the measure of mining efficiency will shift focus from total tonnage of mined coal to profit/hour of mining outputs. This in turn will attract investments for latest technology adoption, particularly in exploration and production process and it will also bring in other digital interventions for enhancing rates of pit head evacuation.

India’s past experience in dealing with such reforms and institutional changes have happened in sectors such as airlines, banking, telecom, power, infrastructure to name a few, and it has particularly taken place when the government realized that their capacity to rapidly invest capital and to scale operations efficiently were in the way of the expected demand, set by the GDP growth of the country. The results are for everyone to see. Calibrated experiments for commercialization of Indian railways, oil and gas sector and some other key sectors is also on-going. We will have to wait and see how these shapes up in the near future. Having said that, there is lot to learn from the mining reforms in countries like Russia, Australia, US, Indonesia - the other large coal mining countries in the world. What we can learn from these countries are the different reform processes, the execution procedure and the end-results. Overall, without going into the fine print, directionally, the governance framework of mining in such countries are in the lines of building speed, efficiency and productivity, which are closer to what have been proposed for India now.

As we move from the ‘Now’ to the ‘Next’ and ‘Beyond’ phase, the need for mining is not going anywhere. Some of the key points that the miners need to keep in mind when they bid, include – having a clear medium to long term strategic intent, getting as much data as possible on the mine that they bid for, and having a deep understanding of economics of the mine through its life including costs of ‘flipping’ or ‘mine closure’. Miners should choose mine blocks with appropriate size, relevant quality, considering the stage of development, ensuring that the statutory clearances are approved, which fits their pocket size, and most importantly understanding the underlying risk and that rightly fits in the existing portfolio of the miner’s business. However, there will be trade-offs to make on each mine block on several parameters of return-on-investment (ROI). Mining management is a specialized science, the need for specialized engineering, technological and digital investments for meeting the assumed costs and revenue profile and hence the ROI of the mine, should not underestimated. Miners need to further ensure that there is a demand side lock-in for at least 60% - 65% of the output of scheduled mine plan and look for hidden risks/costs of operationalizing the block (i.e. land availability, impact on the hydrological cycle, labour availability and productivity in the region, forest approvals, among others. Last but not least, avoid the winners curse and hubris on the auction. There are penalties for the miners if they are unable to meet a threshold requirement of coal outputs from their respective reserves. For seasoned miners, seeking to build additional security of supply, these enclosed points may not be new but for the first time commercial miners, they will need to plan diligently and have clarity on these aspects before they bid for mines.

Given the prior experience of this country with regard to mining, the key concerns of commercial miners will largely stem from the uncertainty involved in such projects/investments from the time of acquisition to the date of operationalization. This in turn is a function of time taken for clearances, land acquisition and availability of accurate data on exploration and mine plans. The government has to work overtime to eliminate such hitches. The experience of the private mining community in the first auction of 41 blocks of mines is going to be crucial to determine the valuation of the remaining 400 odd blocks for coal. We are only three weeks away.

[1]. Source: Power sector analysis by Central Electricity Authority, Government of India

(The article first appeared in The Financial Express on 2 July 2020.)

Summary

The reforms also envision an investment of INR 20,000 crore for building the necessary infrastructure that can further enhance the mined outputs.

About this article

By EY India

Multidisciplinary professional services organization

Related topics Mining and metals