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Risk capital, viable exit important for mineral exploration policy: E&Y

Government's focus on increasing potential of country's mining sector by encouraging exploration also depends on factors such as availability of risk capital, viable exit strategy and participation of private players, consultancy firm E&Y has said.

By: | New Delhi | Published: September 15, 2016 5:25 PM
E&Y's report also reveals that global mining is undergoing a downturn with the major miners, who are still prime spenders off late, having cut their exploration budgets by more than half from USD 9.1 billion in 2012 to USD 4.3 billion in 2015. (Reuters)

E&Y’s report also reveals that global mining is undergoing a downturn with the major miners, who are still prime spenders off late, having cut their exploration budgets by more than half from USD 9.1 billion in 2012 to USD 4.3 billion in 2015. (Reuters)

Government’s focus on increasing potential of country’s mining sector by encouraging exploration also depends on factors such as availability of risk capital, viable exit strategy and participation of private players, consultancy firm E&Y has said.

Earlier this year, government came out with the National Mineral Exploration Policy (NMEP) that will help in attracting more foreign direct investment in the mining sector. It will now auction 100 prospective mineral blocks of 100 sq km area each by November this year for exploration.

According to a report by Ernst and Young’s (EY), only 10 per cent of the 8 lakh sq km potentially resource-bearing area in India has been explored, which presents a large opportunity for domestic as well as international players in the space.

The report also lists 15 factors critical for the success of exploration in the country.

These include the “availability of risk capital, a viable exit strategy for explorers, quality and availability of digital data and private sector participation,” the report said.

E&Y’s National Leader (Metals and Mining) Anjani Agarwal says that Indian mineral exploration sector presents a large opportunity for domestic and global explorers supported by the new policy framework.

Policy provisions such as competitive bidding, revenue sharing and cost reimbursement for unsuccessful explorers are “bold, innovative” and move away from the traditional path adopted by most other countries, he added.

“In addition to being an anchor investor, the government will also need to be a collaborative partner playing critical roles to achieve success in harnessing India’s mineral potential,” he said.

On risk capital, the report said mineral exploration (across scoping to feasibility stages) requires significant capital outlay not only for initial equipment investment, but also for labour and administrative activities.

As explorers lack certainty of revenue streams to finance debt, they are usually constrained to raise funds through equity, despite increased costs in comparison to cost of debt.

Furthermore, debt financing for exploration is also difficult to obtain because of lack of an asset as a collateral to the lender during times of distress. On the other hand, internal funds are more often than not unavailable due to absence of operating mines, the report revealed.

Besides, it said that for junior exploration firms, as observed in mature mining regions of Canada and Australia, one of the major incentives to undertake such a high risk activity is that the exploration firm can then sell the mining license at a premium to larger better capitalised company.

“Government’s stated philosophy now is to fund the exploration activity as a customer of exploration as a service. This is the most fundamental departure from most models that operate globally, but may alleviate the problem of uncertainty of revenue stream for a pure exploration activity,” the report said.

E&Y’s report also reveals that global mining is undergoing a downturn with the major miners, who are still prime spenders off late, having cut their exploration budgets by more than half from USD 9.1 billion in 2012 to USD 4.3 billion in 2015.

Juniors, which were at forefront of exploration activity before global financial crisis, have now significantly cut down spends by almost one-third to USD 2.6 billion in 2015 from USD 8.0 billion in 2012, it added.

“Volatile commodity prices and weak market sentiment towards mining, especially for junior miners, has been reflected in their capital market performance which has declined sharply compared to the broader index,” it said.

It notes that FDI in mining increased sharply in the last couple of years, from a very low base, on the back of reinvigorated mining sector regulations and activities.

“The current downturn in global exploration sector and risk aversion towards exploration companies provides an window of opportunity for India to attract and engage global explorers to accelerate exploration, which is at the source of value creation in mining,” Agrawal said.

Currently, India produces about 88 minerals — four fuel-related minerals, 10 metallic minerals, 50 non-metallic minerals and 24 minor minerals.

As on March 2016, the country had around 1,878 reporting mines, excluding mining areas for minor minerals, crude petroleum, natural gas and atomic minerals.

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