The Hindu Business Line : Regulatory terrain uneven in Indian mining

Logistics is a big problem faced by the mining industry in India. To say that there are infrastructure issues would be an understatement; there is a crying need for rail, port and road linkages to make mining an economically feasible activity.

Ms Asha Katyal, Associate Director (Transaction Advisory Services), Ernst & Young.

Australia's construction and contract mining group Leighton Holdings recently bagged two contracts worth one billion (Australian) dollars for developing and operating a coal mine project in Jharkhand. London-based Vedanta Resources is reportedly looking to invest billions in the Indian mining sector. Given the reserves India has in thermal coal, iron ore, gold, etc., and their strategic locations, it is quite understandable that foreign companies have queued up with great expectations. But there is a twist in the story.

"The (Indian) mining sector today faces two major issues - lack of technical knowhow and logistics, apart from the present regulatory environment," warns Ms Asha Katyal, Associate Director (Transaction Advisory Services), Ernst & Young.

Given the problems, no doubt more and more Indian companies are acquiring mining assets abroad. But is there a solution in sight? With about 10 years of experience in advising Indian and international companies in M&A, PE funding and restructuring in infrastructure, metals and mining and FMCG sectors, Ms Katyal reveals her answers in an exclusive interaction with Business Line over the e-mail.

Excerpts from the interview:

What's your take on the regulatory environment for mining in India?

The present regulatory environment can be best described as being more subjective than objective in the grant and administration of mining licence in India. In spite of best efforts to maintain a degree of uniformity in licensing norms across States, many inconsistencies still exist. For example, some States like Jharkhand and Chhattisgarh primarily allot leases for captive mining while others like Goa, Karnataka, Orissa and Maharashtra primarily grant leases for merchant mining.

The present regulations do not provide for automatic conversion of reconnaissance permit to prospecting licence to mining lease. Besides, even after the grant of a mining lease, most State Governments hold discretionary powers to terminate a mining lease or take over a mine on grounds of non-performance, environmental hazard or labour-related issues.

Given such a landscape, do you think international firms are still finding some compelling value? We have heard Mittals, BHPs are making a beeline.

The uneven regulatory terrain makes international companies or investors wanting to enter this sector on their own think twice.

However, given the reserves India has in thermal coal, iron ore, gold, etc., and its strategic location on the global map, most players would participate than giving it a miss, opting to enter into alliances and joint ventures with local players. For example, BHP has an alliance with Usha Martin for exploration and mining activities in Jharkhand.

What are the key stumbling blocks to making mining a successful industry in India?

Other than the overhaul of the present regulatory environment, the two key issues the mining sector faces today are, lack of technical knowhow and logistics.

A significant proportion of mine lease owners do not have the technical capability of working the mines, consequently a lot of mines which have been allotted will either lie idle or not be optimally extracted. There is a huge business potential for mining contractors here. It is advised that mine lease owners become familiar with the international process and terms of appointment of mining contractors so as to get maximum benefit from the same.

You were talking about the logistics problem...

Yes, logistics is a big problem faced by the mining industry in India. To say that there are infrastructure issues would be an understatement; there is a crying need for rail, port and road linkages to make mining an economically feasible activity.

It is sometimes more viable for companies which are located in the vicinity of ports to import ore, rather than source the same domestically because of the high inland transportation costs.

Which, perhaps, explains why Indian companies are acquiring mines overseas. What could be the other reasons?

The popular geographies on the radar of Indian companies are Africa, Indonesia, Vietnam, Australia and Latin America. The assets being targeted are coal (thermal and metcoke), iron ore, copper and uranium to name a few.

Ownership of global mining assets is useful for commodity hedging via barter. It opens up a whole new avenue for fund raising through private placement with private equity funds or listing on international exchanges such as London's Alternative Investment Market (AIM) and Toronto Stock Exchange (TSX).

Do you see the profile of Indian companies looking to acquire mines abroad changing?

Yes. Surprisingly, it's not just the obvious Indian steel or power companies, construction and infrastructure players are increasingly getting into the act. More and more companies are looking to unlock value by creating mining verticals and generating substantial cash flows from this business.

We keep hearing about this unlocking. How do you unlock value from mining assets?

Innovative structuring, which can set the base for raising funds against mining assets primarily, drives value unlocking. Mining assets that are underpinned by a strong end-product demand go up in value. For example, the growth story of power gets reflected in the valuations of thermal coal.

A mining asset becomes a relatively low-risk profile asset once it gets to a production stage since the cash flows can be de-risked and made extremely predictable by securing long-term supply contracts with deterrents built in to avoid contract termination. The benefit of leveraging can enhance equity returns.

Is the market environment attractive for M&A and private equity?

With iron ore, coal and gold prices firming up, underpinned by strong global demand, most commodities are beating past commodity cycle pricing trends. Mining transactions have seen a sharp pick-up since 2005, with global merger and acquisitions (M&A) deals spiking from $16 billion in 2004 to $54 billion and $68 billion in 2005 and 2006 respectively.

Mining companies are changing from being `price takers' to `price makers'. Consequently, private equity (PE) players are becoming increasingly attracted to the large amount of short-term cash being generated by mining companies. With mining costs being high in developed countries like Canada and the US, assets in Africa, China, India, East Asia offer an attractive return profile.

Last question. Where do you see Indian mining sector in 2012?

With specific reference to the Indian market, in the next 2-4 years, the sector will witness a lot of mining-centric M&A and fund-raising activities. Mining contractors would be looking at raising funds and joint ventures to gear up and take on large mining projects. Joint ventures and alliances would get forged between mine lease owners and mining contractors.

There will be finite opportunities for PE, in funding the capital expenditure or acquisitions of new iron ore and coal mines, provided the PE investors have a high-risk appetite. Private equity investors would surely not like to let this opportunity go by.

D. MURALI
KUMAR SHANKAR ROY

www.InterviewInsights.blogspot.com

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