Minerals: A Backbone Industry
As India races to achieve the target of a US$5 trillion economy by 2024-25, the minerals and mining industry (referred to as the ‘minerals industry’ hereinafter), which serves as the basis for nearly all manufacturing sectors, will be a critical growth driver. Despite its obvious importance, the mineral industry has remained fledgling, contributing around 2.2 per cent of GDP in 2018-19, down from 3 per cent in 2011-12. Given India’s rich mineral reserves, clearly, there is significant potential for growth.
Exploration, the process of locating a commercially viable concentration of minerals, is the first, and probably most difficult stage of the mining value chain. Also, an element in which India lags significantly. One estimate suggests that currently only 10 per cent of the country’s area is explored. Further, tapping into domestic reserves would also help reduce imports; the trade deficit due to minerals was around Rs 1.3 trillion in 2016-17.
Exploration, particularly by the private sector, has come to a near stand-still in the last few years on account of three major reasons: inadequate incentives, unavailability of financing and limited technology and skills for certain types of exploration.
Exploration is an expensive and high-risk activity. The success rate is extremely low. Typically, out of one to two hundred prospects explored, only one turns out successful. By implication, the financial returns from this one successful find, must compensate for the expenditure incurred on the failed attempts. While both, the National Mining Policy 2019 and the National Mineral Exploration Policy 2016, recognise the importance of attracting the private sector in exploration, the incentives for the private sector to undertake exploration are unattractive.
Under the current policy, all exploration for new deposits is undertaken by government agencies such as the Geological Survey of India and Mineral Exploration Corporation. When the exploration is successful and reaches a key level (referred to as G2, G3, G4 levels), the deposit area is auctioned as either a Composite Licence (CL) or Mining Licence (ML). Composite Licences have lower levels of exploration (G3) when compared to Mining licences (G2) and only a handful of CLs have been auctioned over the past 4 years.
Exploration for new deposits by private companies can only be undertaken through a Non-Exclusive Reconnaissance Permit (NERP) where the holder is required to share the findings of the exploration with the government. If the government deems the find worthy of mining, the block is put up for auction, with the NERP holder free to participate in the auction process. In other words, the NERP holder that takes the risk and spends money to explore and then makes a new discovery does not receive any preferential treatment with regard to allotment of the Mining Lease and yet mining is the key way that the company can get a return following its high risk investment in exploration.
The NERP holder, though, is eligible for a share of the royalty received by the government from the Mining Lease holder, on commencement of mining activities. From a practical perspective, the process of auctioning, the time lag between winning the mining auction and receiving clearances (such as environment and forest clearances) and the actual start of operations is typically upwards of 3 – 5 years from the time the block is put up for auction. Further, the NERP holder receives payments from the government over the period of the Mining Lease, which is currently 50 years. The financial returns, therefore, in addition to being protracted are also inadequate.
In other key mining geographies such as Australia, Canada, Brazil, South Africa and the USA, the government offers a seamless licencing regime from exploration to mining, with a transfer option. This allows the concessionaire to undertake select exploration activities and progress to mining if successful or thereafter sell the lease, at any time, to another party. Consequently, countries such as Australia and Canada have seen the emergence of ‘junior explorers’ – specialist companies with high risk appetites and expertise in exploration. On hitting upon a successful find, the junior explorers can sell their data and mining rights (extraction) to a large mining company, at a significant premium. The sale price and payment structure (upfront lumpsum vs. spread over a time period vs. a combination of the two) is a matter of private negotiation between the junior explorer and the buyer. The sale proceeds are typically used by the junior to identify and explore new projects thereby ensuring that the country maintains a pipeline of new mine developments.
India, too, must allow seamless transition from exploration to mining for private companies, that is, grant larger area consolidated prospecting cum mining leases such as composite licences to enable companies to explore and mine their discoveries. Concessionaires must also be permitted sale of license at any stage. The government could introduce an escalating scale of annual exploration expenditure commitments and periodic licence area reductions to deter ‘hoarding of mine-able land’ and also to ensure that the areas are genuinely explored.
Unavailability of Financing
Related to the issue of attractive incentives is ensuring adequate financing for exploration. As mentioned earlier, exploration is a high-risk activity and not many investors have appetite to such levels of risk. Further, junior explorers lack tangible assets or cash flows, thus, restricting their fund-raising options.
Internationally, junior explorers raise money from the market. Recognising the inherent risk profile and nature of such companies, exchanges such as the Australian Stock Exchange, Toronto Venture Exchange and Alternative Investment Market provide special dispensation for prospecting companies. The rationale is that early stage companies, including junior explorers, cannot adhere to the listing norms specified for established larger players.
Junior explorers, on a successful find, thus, not only obtain a premium from sale of the rights but also witness huge capital gains on the stock market. India, too, must adopt these practises if it is to boost exploration. SEBI could be directed to examine providing special dispensation for listing of high-risk prospecting companies.
Encouraging the concept of junior explorers in India could also have a positive impact on effective utilisation of government funds. As more private sector players enter the high-risk exploration space, the government can leverage funds from the National Mineral Exploration Trust only for select strategic exploration.
Limited Technology and Skills
India must focus on using state-of-the-art technologies and upgrading skills, if it is to be a minerals powerhouse. Deep-seated exploration, for valuable minerals such as gold, diamonds, lead, zinc, copper, etc. requires high-end skills, which are inadequately available in India (even in public sector organisations such as the Geological Survey of India). Further, this type of exploration is also expensive. While the above-mentioned interventions could encourage players to invest capital, ensuring an adequate supply of appropriately skilled human resources is key.
Both, the government and industry must collaborate to upskill technical talent. Further, the government must encourage and incentivise use of state-of-the-art technology in exploration. This will not only take India up the value chain, but also have a positive impact on the environment and result in lesser disruption to local communities.
Spurring exploration through enabling private sector companies is one of the interventions, albeit an important one, required to drive growth in the minerals industry. We are hopeful that the government will give greater focus to this ‘unglamorous’ but vital sector.
Chairman, CII National Committee on Mining and CEO, Hindustan Zinc Ltd