Safety Culture in Mining - My article posted on Novamining blog

Events of the last weeks have shown that mining accidents have an uncanny ability to return. Thus far Chinese mines were the ones to receive notorious distinction in terms of the number of fatalities. More than 2000 deaths were reported in the last year, and these numbers are expected to be higher given the kind of control government agencies have on the local newspapers. The last month’s event of 153 miners trapped in flooded workings didn’t help the image of the Chinese mines, even though more than a hundred were saved and the local media went on to describe the incident as a miracle rather than a disaster. It was indeed miraculous that miners trapped underground in flooded shaft were rescued, but it was nonetheless a disaster of significant magnitude, which took lives of more than 25 people. However, more alarming was the news of explosion in the US coal mine killing 29 miners. When it comes to discussing mine accidents in the US, it is generally taken to be something that happens only in the underdeveloped countries. This accident in the Upper Big Branch mine is likely to change that assumption.

Now whether economics played a role in compromising on safety standards at this mine can be established only after a thorough investigation. If it did, then that certainly is criminal. Fatalities in mines are not about statistics, there are people and their families behind. Hence, an intentional compromise to save a few dollars has to be treated strictly.

Going back to the issue of safety in mines, it can be concluded that leadership team is ultimately responsible for provision of systems and processes, as also encouragement to safety culture in an organization. Strong and consistent leadership – one that means and does safe working and zero fatalities – can create continuous improvement in safety procedures and lead to fatality-free production.

Investigations in mine accidents have time and again proven that complacency built on the past success in arresting rise mine accidents are one of the key reasons that can create blind spots for management. The leadership and management team need to maintain a sense of vulnerability at the mine workings. Best practices in safety management need to be adopted whole-heartedly rather than scornfully as waste of time and effort. Safety culture needs to be imbibed with every member of the organization working towards elimination of fatalities. Safety needs to be the top priority. People need to be trained to have an eye for spotting unsafe practices and rebuke behaviours even bordering on such practices.

Generally accepted elements of safety risk management in mining are:

1. Strategic vision
2. Risk identification
3. Analysis and evaluation
4. Mitigation mechanisms
5. Communication
6. Review and improvement

Strategic vision is set by the leadership team to establish priorities for safety and following up with appointing right people for the jobs – those who have capability, skills and attitude for working and working safely. Risk identification is the process of keeping an eye for practices and behaviours that may compromise on safety, and then classify them appropriately for analysis and evaluation. Analysis and evaluation have to lead to the reasons for such practices and behaviours, their frequency of occurrence, and impacts. Then the mitigation mechanisms need to be derived, which may involve process re-design and re-engineering. These elements then need to be communicated to all stakeholders for their information, comments, feedback and acceptance. Upon implementation of the measures, the processes need to be reviewed and improved continuously. It may be noted here that the elements of safety form a continuum and are not just one time affair. The adoption of safety culture essentially means doing these elements of safety again and again without taking a pause, even when fatalities have been eliminated for years.

Trust the leaders in the mining industry will heed to call for safety and the sector will not have fatalities when there is so much need for growth.

Coal India FY10 net up 300%, works at IPO - Quoted in the Mint

State-run Coal India Ltd on Monday reported a four-fold jump in profits for 2009-10 compared with the previous fiscal year, thanks to increased output, better coal prices and reduced production costs.

The earnings will boost India’s largest coal miner’s efforts to attract international buyers when the Union government sells a 10% stake in the firm in an initial public offering (IPO) later this year.

On Monday, CIL reported a net profit of Rs8,312.40 crore for the year ended 31 March, against Rs2,078.70 crore for the previous fiscal, when its margins were hampered by a payment of Rs3,216.50 crore as arrear wages after a pay revision.

The company reported a revenue of Rs52,088 crore, a 13.74% increase over Rs45,797 crore generated in 2008-09. It will update the provisional numbers with audited earnings later.
Coal prices went up from Rs927 to Rs1,000 a tonne during the year, while the cost of production fell from Rs791 to Rs780 a tonne, said director, finance, A.K. Sinha.

The company also raised production by 7% to 431.27 million tonnes (mt) over 2008-09.
It has now set a production target of 462 mt for the current fiscal year.

“The performance of Coal India should be good news for the sector, particularly when considered (in the light) that the prices have been discounted compared with internationally traded coal,” said Dipesh Dipu, a coal mining expert.

The company plans to launch its IPO in July and list shares in August. The government is looking to dispose of 630 million shares, and CIL has been busy persuading international miners such as Rio Tinto Group and Peabody Energy Corp. to buy stakes, chairman Partha S. Bhattacharya said.

“We have already started communicating with key international miners,” Bhattacharya said. “In the past six months, I have made presentations in the US and Singapore.”

The company has also set aside Rs6,000 crore for acquisitions this year, and is evaluating 10 proposals from Peabody and other firms to buy overseas coal assets and development and operation of coal mines.

Due to problems in transporting coal from its mines, Coal India also plans to enter the power sector and set up projects with utilities such as Orissa Power Generation Corp., Chhattisgarh State Electricity Board, NTPC Ltd and Neyveli Lignite Corp. Ltd through its subsidiaries.
Its current stock of 62 mt can support power generation of around 12,000MW for a year, but the mined coal cannot be transported on account of transportation glitches such as limited availability of wagons.

“The (power) projects are under consideration. We will think of more such projects as evacuation (transportation) is increasingly becoming a problem,” Bhattacharyya said.

Dipu said this was a good idea as power generated from such projects could be competitively priced.

“With large cash pool, access to fuel and access to technical support from other government-owned entities, Coal India may be relatively better placed to enter the power generation sector,” he said.

The company also plans to reduce its workforce—one of India’s largest—from 398,368 to 300,000 by 2020. It retrenched 13,982 employees in the first 11 months of the last fiscal year.

NTPC to form joint venture with CIL for importing coal - Quoted in the Mint

India’s largest power generation utility, NTPC Ltd, will directly import the coal it needs, instead of asking state-owned trading firms such as MMTC Ltd and State Trading Corp. of India Ltd (STC) to import the fuel to meet its requirements.

The decision is in line with a new coal import policy approved by NTPC’s board last month, a top company executive said.

According to the policy that will affect revenue from coal imports at the state-owned trading firms, NTPC will source coal through a combination of direct imports and purchases through state-run Coal India Ltd (CIL). It may import small quantities through traders during exigencies.

Mint had on 5 August reported on the proposal for direct coal imports, which is a fallout of a controversy surrounding MMTC’s execution of an order to import a record 12.5 million tonnes (mt) of coal valued at Rs6,000 crore for NTPC.

“We have already made a presentation to the power ministry about the same. NTPC and CIL will form a consortium which will be later translated into a joint venture (JV). Once the joint venture is established then all coal import jobs will be given to the JV,” said R.S. Sharma, chairman and managing director of NTPC.

The utility’s earlier coal import policy required NTPC to import coal through state trading firms such as MMTC and STC. NTPC can now reduce its coal import bill through direct imports that do not involve paying a commission to a trader. This could mean proportionately lower power-generation costs and, consequently, lower tariffs.

H.S. Mann, director, marketing, at MMTC and an MMTC spokesperson, declined comment for this story.

Given the country’s growing dependence on imported coal, partnering with CIL will facilitate the negotiation of better rates due to large quantities being procured.

“The coal import plans have been under discussion as we also want to get into coal import. Once NTPC forwards it to us, we will take it up at our board level,” said CIL chairman P.S. Bhattacharyya.

Coal is critical for NTPC as at least 80% of its installed capacity of 31,134MW is coal-based. The utility has a requirement of around 160 million tonnes per annum (mtpa) and imports around 10%, or 16 mtpa, to meet the shortfall. Domestic coal is priced around 30-40% cheaper than imports, depending on the quality.

“The market for thermal coal has turned into a sellers’ market and is likely to remain so in light of the expected severe demand-and-supply gap in India. In such circumstance, consolidation of demand for internationally traded coal may enhance bargaining power and may extract price preferences,” said Dipesh Dipu, an expert on the mining sector.

“The transaction mechanism then becomes the key differentiator, and it may be inferred from the trends thus far that the tendering process adopted by Indian state utilities may have not yielded the best results,” Dipu said.

According to the Union power ministry, the power sector is facing a coal shortage of around 105 mtpa, which is expected to rise to 225 mtpa by 2012. The size of the market for imported coal that goes into power generation in India is around 50 mt a year, and is expected to double by 2012 as more thermal power projects come up.

Coal demand in the country is around 600 mt and is set to touch 2,340 mt per annum by 2030.
India has a known coal resource base of 264,000 mt, the fourth largest in the world, of which proven reserves are around 101,000 mt.

Financing Indian Mining Projects - My article on the Novamining Blog

Financing Indian mining projects has remained challenging. Not the least because the sector is dominated by the government-owned companies who have always looked at only equity as the financing option for projects. I remember discussing with the Chairman and Managing Director of a large Indian government-owned mining company the concept of opportunity cost, when he was comparing the cost of debt with the earnings he received from his bank deposits. It would be easy to visualize that the similar comparison helps banks set their spread for lending and deposits, and if the same yard stick is used for arriving at opportunity cost of funds, it would completely distort decision-making. But such is the state of affairs with our mining companies.

If the concept of leverage was well understood, with cash reserves of close to Rupees 40,000 crores with just Coal India Limited and NMDC Limited, a targeted debt to equity ratio of even 1:1 would have gotten these companies access to another Rupees 40,000 crores. With this kitty of Rupees 80,000 crores, these companies could have financed scores of projects in India and would have become formidable force in the international mergers & acquisition markets.
Although, the international acquisition do not depend on availability of cash alone and it requires risk-taking abilities, easy access to fund can easily get the companies access to good resources and assets abroad, more so, when the global liquidity crises had sent tremors to the markets.

Conceptually, mining ventures can be financed on project basis, without having to take recourse to the balance sheet of the developer, given that the risks are manageable at project levels and there is a certain degree of confidence in the revenue generation from the project. The heavy earth moving equipment can be leased or the operations can be outsourced to contract miners, to reduce capital expenses and link the operating expenses directly to revenue generations from sales. A major component of project costs, that for land acquisition and rehabilitation & resettlement of project-affected-people may, however, need to be financed from equity contribution. This due to the higher risks involved in the process as much as also for the fact that the land degrades in value with progressive mining.

Contract mining has been catching up in India. There are certain legal and regulatory hurdles in the development of this business but they have already proved their utility for several companies that have been allocated coal blocks but have had no expertise or experience of mining. There may be several business models for contract mining, and each may have their own financing implications, but the common business model applied in India requires the contract miners to invest in equipment and brings down the capital expenses of the owners. These contract miners with years of experience can in turn avail the funds from bankers, financial institutions, equipment manufacturers or their lending arms, and even private equity, which may not have been accessible to the owners themselves in many cases.

In the Indian context, where there are gaps in demand and supply of minerals and ores, the mines can be financed even from the contributions of the consumers of mining products. As of now, these consumers as also the vendors of consumables and other supplies seem to figure only in working capital management cycles. Consumers have been willing to invest in upstream processes, as is evident from the recent trends of Indian companies trying to secure foreign assets. There is no reason why they would not be willing to contribute to development of projects in India, either through minority stakes in equity or debts or even convertible debentures, if they are provided with security of supplies from the mining projects.

The bottom line is that financing mining projects in India may be challenging but an innovative approach with risk allocation between several stakeholders can provide access to much needed funds. There is a need to think out of the box and go beyond the obvious. The enabling requirements for these may be well documented contracts, well established reserves, well secured supply contracts, prudent employment terms, good pool of human resources at the senior management level, and such others. Well, these may be needed not just for funding but even for a successful business operation. So, mining companies need to tidy up there projects and be little innovative at the business plan drawing board.