The Hindu Business Line : Why PE has taken little interest in the Indian mining sector

As the mining sector experiences an all-time high in demand and output prices, many mining assets in the country and overseas have become more viable than ever before.

MR KAMESWARA RAO, ENERGY, UTILITIES AND MINING LEADER, PRICEWATERHOUSECOOPERS.

The mining sector is experiencing tremendous demand, and prices of raw material are at an all-time high. Naturally, mining projects, both domestic and abroad, have become more viable than ever before, according to experts.

While new business models have evolved due to higher levels of liquidity and greater degree of participation from project financing companies, private equities and financial institutions, is financing easy? “Bringing new assets to stream remains replete with challenges and risks,” says Mr Kameswara Rao, PricewaterhouseCoopers’ India Energy, Utilities and Mining leader.

The mining industry contributes about 3 per cent to our GDP, and has a far greater implication on the economy, feeding a wide range of basic industries, including power generation, steel, metals, and cement. The industry is transforming, although in a gradual manner, and is attracting renewed attention of policymakers and investors. “The future of the industry depends on the investments it makes today, and in this regard India lags behind, even as we see innovative business models with the coming of new entrants. Further, Indian companies are active in scouting for resources overseas,” feels Mr Rao in an interaction with Business Line before embarking on the two-day conference on ‘Mining Projects Financing’ at Hyderabad.

Interesting times surely lie ahead for the industry that currently faces unrelenting demand and pressures on costs. Want to know more? Read on…

Excerpts of the email interaction:

Are policy aspects in sync with reality?

The mining industry in India is in a state of transition from state ownership to a more open industry with a growing degree of private sector participation. The policy and practices in coal and other sectors are going through incremental changes, but given the legacy constraints, this will take time.

For instance, private investment in coal mining is limited to captive users, and entry of private mining companies is pending legislative approval for over seven years now. Likewise, allocation of coal blocks through captive mining and Government dispensation routes is less than effective with barely 13 of all the coal blocks developed so far. We need a simpler, speedier, and more objective basis that will help attract new investment and modern technology and practices.

What are the key issues facing the industry?

The current challenges of the mining industry are the 3Ps, namely, people, power, and procurement. All these have already started to adversely impact the operations and push up costs.

We recently conducted a survey of graduating class of mining engineers from around 12 institutes in India; the results suggest that a majority of them are exploring alternative career options but would work in the mining industry if it improves compensation, work environment, and social life. These drawbacks can be mitigated in most cases with a little bit of imagination and spending.

Likewise, the rising cost of energy is a serious concern, and some are looking to develop or expand their captive generation. The most challenging concern remains procurement of capital equipment and spares, and shortages are limiting growth. For example, a survey conducted by our Australian colleagues shows that the lead time for dump truck tyres is as high as six months.

Has the rout on the global markets triggered by credit crunch made things difficult?

The demand in domestic markets for raw materials is likely to remain strong given that the infrastructure spending will continue. Our mining companies have strong cash reserves, so we do not expect to see a direct impact of credit market developments either. Of course, the slowdown in other user industries and in the global economy will impact demand and growth prospects of one part of our mining industry.

Does that explain why some Indian companies are acquiring resources outside India?

We are likely to see more Indian mining companies in quest for natural resource outside India. We have seen Indian companies acquiring coal, iron ore, copper and other base metal assets in Indonesia, Africa and Latin America; and we are likely to see more such acquisitions in specialised sectors such as uranium. The concerns of supply security and the current volatile prices are of course a reason, but companies also see this as necessary for scaling up in an industry that is fast consolidating.

But aren’t acquisitions overseas fraught with risks and challenges?

Yes, we cannot ignore that there are significant and upfront risks in such forays to acquire natural resources overseas. Investors must have an appetite for the risks and challenges involved.

The risks range from political and regulatory, geo-technical risks of reserve estimates, economical methods of excavation, and product quality, threat of local demand, linking infrastructure, social and environmental, and local skills and services.

In most cases, we can anticipate and address these issues through proper and diligent homework during the pre-acquisition processes. We do see that in their rush to conclude a deal or save on upfront costs, some Indian investors cut costs here, putting their investments in some jeopardy.

Instead of acquisitions, shouldn’t public-private partnerships in mining be encouraged?

As we know, the demand for mineral resources has dramatically increased just at a time when capital investments of our state-owned mining companies are flagging and their human resources, depleting. It will be a struggle to even meet current needs, let alone any growth. To keep pace with the demand, we need public-private partnerships.

The approach is not new as mining companies have outsourced excavation, transportation such other activities earlier too, but the projects now are of a larger scale, and we need new technology, modern practices, and capital investments to grow our mining industry. We do see state utilities taking to private partnerships more readily in developing their captive mines.

PwC is holding a two-day conference on ‘Mining Projects Financing.’ Have mining projects become feasible?

The imperatives of growth and security of supply have encouraged companies to seek mining assets overseas. As the mining sector experiences an all-time high in demand and output prices, a range of mining assets in the country and overseas have become more viable than ever before.

Still, bringing new assets to stream remains replete with challenges and risks. To address this, new business models have evolved, led by innovative investors, intermediaries and financial institutions.

This conference aims to bring these emerging developments in financing of the mining industry to all participants. We believe that the presentations and discussions of this conference will help the mining companies better assess the opportunities and risks and help them align their strategies.

There is a lot of interest being shown by private equity companies in India. Are they interested in mining also?

Private equity houses have taken little interest in the mining sector in India. Apart from the fact that the industry is not placed for a quick turnaround on account of tight controls, there are industry characteristics of cyclicality and unpredictable cash flows. However, this is now changing, and the new economics have caused financial investors to keep a watch for specific deals.

D. MURALI

KUMAR SHANKAR ROY

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