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.
By Saurabh Bhatnagar
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 the country’s GDP, creating new jobs, and enabling 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 1,181 kWh (source: Power sector analysis by Central Electricity Authority, GoI), increasing year-on-year at the rate of 12.23%. Despite all such achievements, the current government thought it to be wise to make several changes in the way 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 the new economics of future cash generation for state and bid winner (related to pricing, revenue sharing, market access and stamp duty payment, incentivising output and productivity of mining operations). The reforms also envision an investment of Rs 20,000 crore for building the necessary infrastructure that can further enhance the mined outputs. 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 the exploration and production process, and it will also bring in other digital interventions for enhancing rates of pit head evacuation.
As we move from the ‘Now’ to the ‘Next’ and the ‘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 the economics of the mine through its life including costs of ‘flipping’ or ‘mine closure’. Miners should choose mine blocks with an 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 risks, and that which 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 specialised science; the need for specialised engineering, technological and digital investments for meeting the assumed costs and revenue profile, and, hence, the ROI of the mine, should not be underestimated. Miners need to further ensure that there is a demand-side lock-in for at least 60-65% of the output of the scheduled mine plan, and look for hidden risks/costs of operationalising 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 winner’s 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 operationalisation. This, in turn, is a function of time taken for clearances, land acquisition and availability of accurate data on the 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.
The author is Partner and National Leader, Metals & Mining, EY India. Views are personal