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.