Competitive Bidding for Mineral Resource Allocation - My article in the magazine 'Mining India'

Process of allocation of mineral resources must be a determinant of objectives of National Mineral Policy and the market dynamics. While the National Mineral Policy 2008 clearly identifies the objectives of enhancing investments in the sector, creating environment for innovation and new technology adoption, promotion of sustainable and scientific mining and of transparent process of mineral allocation, the objectives do not spell revenue maximization for state, which, of late, has become one of the concerns as a fall out of events in other sectors, telecom in particular.


While industry may aver with the intent to bring in transparency and systematic approach to allocation of mineral resource assets or blocks and may welcome the concept of competitive bidding for the same, there are concerns regarding the details of the procedure.

From the conceptual foundation, the process of mineral resource allocation must consider the questions of to whom, how much and when must the resources be allocated. In the context of power generation and Steel, the composition of raw materials in their total cost of production is high enough for these companies to seek backward integration. In such cases, they are likely to be viewed as eligible candidates for allocation. The clamor in the industry that competitive bidding process to allow only the captive mining requirements and to keep the independent mining companies out of the reckoning may be decided based on this criterion, as also on the depth of market. Independent mining companies may be allowed to operate alongside in order to widen the market participation. This, however, must also be subject to a preference to the consumers of the minerals or those who propose value addition. It makes business sense to add value to minerals through beneficiations or manufacturing rather than allowing such resources to be targeted at international markets in the raw form that fetches lower values for national resources. The bottom line is that the procedure must also allow for participation only the serious players. These can include reputed mining companies and consumer industry participants, who are direct stakeholders in the mining sector. Unrestricted participation is likely to result in cornering of precious resources and their opportunistic trading as when the market provides, and thus depriving the consumer industries the valuable input raw materials.

The question of how much is easy to address as the raw material security concerns will require the investors or project developers to look for size of resource that meets the lifetime requirement for their project.

The question of when to allocate resource assets is of significance. The industry believes that competitive bidding process must differentiate between the underlying asset which also determines the risk profile and the investment proposition. The prospecting and exploration assets have greater geo-technical risks than a proven reserve. These assets are expected to attract investors that have higher risk appetite and will make risk capital to be invested in the assets. For such assets, a framework that requires the investors to commit to a prospecting and exploration program is suggested, which also brings these in alignment with oil and gas sector which bears similar geo-technical risks. For the proven reserves, the process of competitive bidding can be adopted with certain preparatory works to package the assets for ready investment. The competitive bidding process with no such packaging will mean the project developer with already made investment to still bear the risks of technical and procedural risks such as delays in clearances and approvals, land acquisition and rehabilitation and resettlement. These risks are also expected to be reflected in the price or value discovered through the competitive bid and may not yield expected results. If packaged, the investors will be assured of readiness of the project and hence, are likely to be willing to commit their investment. This will also shorten the gestation period of mining projects and make the investments comparable to any alternative investment opportunities.

This competitive bidding is also likely to result in cash commitments from the investors at the start of the project. This will have to be looked at from the view that the cost components also have royalty elements that over the years has been based on ad valorem principles. In view of the initial pay outs that reflect the value of underlying natural resources, the royalty regime may be suitably modified. And like royalty, there are several other fiscal terms and conditions that apply on mineral assets and mining. For the competitive bidding process to be successful in meeting the objectives of the National Mineral Policy, the framework of fiscal measures must be stable. Radical changes in the middle of the project life cycle will cause the projects to suffer and the investor confidence to take a serious hit.

The mineral blocks that are competitively bid out to the winning bidders should not prohibit utilization of minerals for additional capacity additions in downstream processes, either within the same business group or even others, which also will be aligned to the stated objective of National Mineral Policy of judicious usage of mineral resources.

All these, however, may have serious implications for coal mining and power generation, which are connected sectors. The Electricity Act 2003 followed by the tariff policies provide for procurement of electricity by distribution companies only through competitive bidding. Case 1 and Case 2 bids as they are named through sections 62 and 63 of the Electricity Act have become the benchmark setters for electricity tariffs in India. The competitive bidding in coal sector for captive mining purposes cannot choose to ignore that a coal block bid may not remain separated from the bids for electricity that gets generated from this coal mined. It is easy to visualize the conflicting nature of these bidding processes. Bidding of coal mine is likely on the basis of maximum value ascribed to reserves while bidding of electricity is on the basis of lowest tariffs. Apart from these conflicts, the allocation of coal resources in whatsoever process is likely to create competitive distortions in electricity market. Considering these two factors, it may be best to package coal blocks with power projects, similar to the ultra mega power project (UMPP) initiatives that have been successful, and bid them together on tariff based competitive process.

Exception to competitive bidding could be made for grant of right to first applicant in case of non-notified areas for small scale mining.

The industry also believes that there should be level playing field between the government-owned companies and the private enterprises in terms of access to coal resources and freedom to monetize their assets and mineral products. Reserving coal blocks or mineral resources for government owned companies should be discouraged. However, if the government-owned companies that have invested in detailed exploration and proving the reserves, they could be given a preference. In case of their inability to develop such mineral resources, they should be put on the list of blocks for competitive bidding open for the eligible investors. The costs of prospecting, exploration and investigations may be paid to such government-owned company from the proceeds of the competitive bid.

(Dipesh Dipu is director in mining and metals consulting practice of Deloitte Touche Tohmatsu India Pvt. Ltd. He can be reached at ddipu@deloitte.com. Views expressed in the article are personal and not necessarily reflect the views of the company)

Coal India rises to record highs after report says profit to rise 12% - Quoted on Bloomberg

Coal India Limited, the world’s biggest producer of the resource, climbed to a record in Mumbai after Daily News & Analysis said the company’s profit would rise 12% in the year ending March even as output declines.



Coal India gained as much as 7% to Rs 371.40 and was at Rs 357.85 at 10:43 a.m. local time. That’s the highest level since the stock started trading on Nov. 4.


Profit may rise to Rs 110 billion ($2.45 billion) after an increase in coal prices and savings from a reduction in staff, the newspaper reported, citing Chairman N.C. Jha. Production may decline to 430 million metric tons, a drop of 1 million tons from a year earlier, according to the report.

“The company has improved profitability through its pricing,” Dipesh Dipu, director energy and resources at Deloitte Touche Tohmatsu India Pvt., said in e-mailed comments. “These will certainly improve the margins. These improvements in margins may have been reflected in the market value of Coal India stocks.”

Two calls each made to the mobile phones of Jha and Finance Director A.K. Sinha seeking comment weren’t answered.

Coal India’s production would have been higher by 18 million tons this financial year if environmental restrictions aimed at curbing pollution hadn’t halted mining in some areas, Jha was cited as saying.

The increase in coal prices, effective Feb. 27, will boost revenue by about Rs 6.5 billion in the year ending March 31 and about Rs 62 billion in the next financial year, Kolkata- based Coal India said in a statement to the Bombay Stock Exchange, without giving details of the changes.

“Effective 2011, Coal India has revised the prices of coal 30% upward on average, while for higher grades of coal, this has been steep at nearly 200% to align the prices to import parity levels,” Dipu said.

NTPC likely to revise coal sourcing strategy - Quoted in the Mint

State-run NTPC Ltd, India’s biggest power generation utility, may be changing its strategy on securing critical fuel supplies by seeking long-term coal supply agreements instead of trying to buy overseas mines outright.


The rethink comes against the backdrop of NTPC’s failure to secure equity in coal mines in countries such as Australia, Indonesia and South Africa.

The strategy, as spelt out in the utility’s vision document, NTPC Corporate Plan 2032, was drawn up by consulting firm Bain and Co. India Pvt. Ltd.

“Bain’s advice to us is based on the principle that since coal is not NTPC’s core business, it doesn’t make sense to acquire overseas coal assets,” an NTPC executive aware of the revised strategy said on condition of anonymity. “Instead, they have advised us to enter into long-term coal supplies based on the Japanese model, where 100% coal is imported without holding any equity stakes overseas.”

NTPC will also try to take small stakes in overseas mines to ensure supply security, based on Bain’s advice, said the official cited above.

Another NTPC executive aware of the strategy said, “The corporate plan has been approved by our board. Normally, we will not try out any acquisition targets.” He declined to be named.

According to Japan’s ministry of economy, trade and industry, domestic coal accounts for just 0.7% of local consumption, forcing the country to import 180 million tonnes (mt) of coal a year through long-term supply agreements.

The NTPC plan has similarities with the Tata group’s strategy to acquire strategic stakes in overseas mining companies to secure supplies.

Tata Power Co. Ltd owns a 30% stake each in three Indonesian coal mining companies—PT Kaltim Prima Coal, PT Bumi Resources and PT Arutmin Indonesia. Tata Steel Ltd has a 27.1% holding in Australia’s Riversdale Mining Ltd, which is at the centre of an acquisition bid by Rio Tinto Plc.

Coal is critical for NTPC as at least 80% of its installed capacity runs on the fuel. The firm, which has a power generation capacity of 33,194MW, plans to increase its installed capacity to 75,000MW by 2017 and to 128,000MW by 2032. The utility needs 160 mt of coal in fiscal 2012, of which around 16 mt will be imported.

Operations are yet to start at a number of captive coal mines that the Indian government allocated to various firms till date. Only 26 captive blocks of 208 are in operation in the country.

A spokesperson for Bain and Co. declined to comment.

“If we get coal at a viable price, which makes my cost of power saleable, then I am open to any mode such as long-term overseas coal supplies, acquiring a mine or a stake in it or through (state-run) Coal India Ltd (CIL),” NTPC chairman and managing director Arup Roy Choudhury said.

“A corporate plan is a vision statement for an organization for the future for macromanagement,” he said. “The micromanagement is to be within those parameters from time to time by the management because it is a dynamic environment.”

CIL, which has an 82% share of the country’s coal production, has been unable to keep pace with rising demand. It produced 431.27 mt in 2009-10 against a target of 435 mt. The company is to supply NTPC with 144 mt in the next fiscal year.

NTPC has already placed orders for 12 mt of imported coal for the next fiscal.

The new strategy may leave companies exposed to supply risks, said Dipesh Dipu, director (consulting, energy and resources, mining), Deloitte Touche Tohmatsu India Pvt. Ltd. The earlier overseas acquisition model was aimed at ensuring supplies and curbing price volatility, he said.

“Miners have of late moved from annual contracts to quarterly and now are seen to further shift to monthly contracts. Many have tilted in favour of larger quantum of sales through spot markets,” he said. “These developments have seen large fluctuations in pricing. These risks may adversely affect the generation companies.”

According to the Economic Survey 2010-11, growth in India’s power generation slowed to 4.5% between April and December from an expansion of 6.17% in the same period in the previous year, with the shortage of coal being one reason for this.

ICVL bids for 12% stake in Grosvenor mine - Quoted in the Mint

State-run International Coal Ventures Pvt. Ltd (ICVL) has submitted a bid valued at about $200 million (Rs. 900 crore) for a 12% holding in Anglo American Plc’s Grosvenor mine in Australia, putting it in competition with at least three other companies, including Chinese firms, for the stake.


Grosvenor is a greenfield mine with production expected to increase by 4.3 million tonnes per annum (mtpa) till it reaches full production in 2016.

ICVL’s bid values the mine owned by one of the world’s top 10 mining companies at around $1.6 billion.

“We had cleared the first round and in the second phase placed the price bids (for the coking coal mine),” said a top ICVL executive, who did not want to be identified.

Anglo American declined to comment on investor interest in the project or any bids it may have received for it.

“Our only asset actively on the market in Australia is our Callide thermal coal mine, though we do regularly hold discussions with steel customers to explore ways in which they might add value to projects,” the firm’s spokesperson said in an email.

ICVL was set up by five state-owned firms—NTPC Ltd, Steel Authority of India Ltd, Coal India Ltd, Rashtriya Ispat Nigam Ltd and NMDC Ltd—to secure coal assets overseas and has been competing with leading Chinese coal miners such as China Shenhua Energy Co. Ltd and Yanzhou Coal Mining Co. Ltd, which are actively engaged in acquiring mining concessions overseas.

A second ICVL executive said the bid was placed 1 February.

India does not have substantial good quality metallurgical coal reserves. Demand for the fuel in 2009-10 was 40 million tonnes (mt), of which 23 mt was imported. Demand is expected to rise to nearly 90 mt by 2020.

Australia, emerging as a major source of India’s mineral imports, is the largest exporter of metallurgical coal and the second largest exporter of thermal coal in the world.

“The demand for metallurgical coal will continue to rise in light of growth expected in the steel sector, which will widen the gap from domestic supply and enhance import dependence,” said Dipesh Dipu, director (consulting, energy and resources, mining) at Deloitte Touche Tohmatsu India Pvt. Ltd.

“This, along with the stiffening of prices, and more so their volatility, have compelled steel companies to grab resources wherever they occur. Investments, even in minority stakes, may provide supply securities although price preferences may be elusive in such cases,” he added.

Bids by Indian miners tend to be relatively uncompetitive, analysts say. That’s because most Indian companies seek the coal for their own end-use projects, while rival bidders may have higher-margin alternative plans.

“Strategy of backward integration may be justified as costs of raw materials now account for close to 65-70% of the total cost of production of crude steel,” Dipu said. “Therefore, competition to acquire metallurgical coal assets has been heating up.”

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