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Mineral producers are facing a margin squeeze in the upstream value chain. Gold is the only exception that bucks this trend, with lifetime high prices.
“The margin squeeze is due to exploration and mining having borne the brunt of global economic uncertainty. This has also led to prices of commodities being volatile and under pressure,” said Anjani Agrawal, Partner and Sector Leader - Metals & Mining, Ernst & Young India.
“As a result of economic uncertainty, corporate majors, although well-funded, have been cutting spends on exploration,” he added.
Global expenditure on exploration of non-ferrous metals witnessed a huge jump from $10.68 billion in 2010 to $18.2 billion in 2011. In continuation with last year’s trend, gold attracted the largest share of the exploration budget in 2011.
For India, gold import is one of the biggest drains on forex reserve — its reserve/production ratio of 37 suggests a great opportunity for exploration, which may help alleviate balance of payments situation, said Agrawal.
Gold
Though primary gold metal production in India remained constant, at 2–3 tonnes during the last five years, imports had risen to 970 tonnes in FY11, against 716 tonnes in FY07. The current production of gold ore in the country is around 0.5 million tonnes which is merely 0.5 per cent of annual gold consumption.
Resource nationalism
Ernst & Young, in its report ‘Mining in India: Drivers for growth’, said despite such a gloomy economic scenario, resource nationalism has added to the growing list of concerns the world over, reshaping policy formulation and posing additional challenges for businesses to address.
While exploration budgets globally are at an all-time high, despite economic uncertainty, exploration investment in India continues to be at low ebb.
“India’s exploration budget continues to be negligible and has no significant impact on expansion of its resource base; exploration continues to be under-leveraged. We need to develop an eco-system to support exploration, enable and attract competent exploration players to expand the reserve base,” Agrawal said.
“Here we should be open to metal streaming, royalties and other emerging financing methods by majors,” he added.
Mining in resource-rich States such as Karnataka, Goa and Odisha has attracted the attention of regulators, but activity in the sector has slowed down because of issues pertaining to clearance in several other States.
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