In the concluding part of the article which stated from the earlier month; Dr HR Dandi now covers the new act in detail, the bidding process and its impact on the cement industry.
The Mines and Minerals (Development and Regulation) Act, 1957 regulates the mining sector in India and specifies the requirement for obtaining and granting mining leases for mining operations.
Process in brief
Rule 6: Eligibility for Mining Lease (Net Worth of Company)
(i)Value of Mineral >25 cr: Net worth shall >4 per cent of value of estimated resources
(ii)Value of Mineral <25 cr: Net worth shall >2 per cent of value of estimated resources (not being a individual applicant)
(iii)Value of Mineral <25 cr: Net worth shall >1 per cent of value of estimated resources (individual applicant)
VR = Estimated quantity of resource (tonne), X average price (tonne)
(iv)State government may reserve a mine for cement.
Rule 7: Electronic Auction
(i)Auction shall only through an online electronic auction platform.
Rule 8: Bidding parameters
(i)Reserve price as specified by State Government in tender document shall be value of mineral dispatched (= Mineral dispatched X sale price of mineral as published by IBM
(ii)The bidders shall quote, a percentage of value of mineral dispatched equal to or above the reserve price and the successful bidder shall pay to the state government, an amount equal to the product of ? percentage so quoted; and value of mineral dispatched.
Rule 9: Bidding Process
(i)Auction shall be an ascending forward online electronic auction and shall comprise two round
First Round
(ii)Bidder shall submit Technical Bid (TB) and Initial Price Offer (IPO)
(iii)Initial price offer of Technically Qualified Bidder (TQB) shall be opened
(iv)The top 50 per cent of the of TQB or 5 TQB whichever is higher shall be declared as qualified bidder (QB)
2nd round
(v)QB may submit their final price offer which shall be a percentage of value of mineral dispatched and greater than the floor price:
(vi)Qualified bidder who submits the highest final price offer shall be declared as the ?preferred bidder? immediately on conclusion of the auction.
Rule 10: Grant of Mining Lease:
(i)The preferred bidder shall submit
(a)Ist installment -10 per cent of upfront payment (UP)
(UP= 0.50 per cent of Value of Mineral (VR),
VR = Estimated quantity of resource (tonne) X average price (tonne)
(ii)LOI shall be issued Upon receipt of the first instalment of the upfront payment,
(iii)The preferred bidder shall be considered to be the ?successful bidder? upon
(a)Payment of the second instalment being ten per cent. of the upfront payment;
(b)Furnishing performance security (0.50 per cent of Value of Mineral)
(iv)Mine Development and Production Agreement (MDPA) shall be signed on obtaining all consents, approvals, permits, no-objections and the like as may be required under applicable laws for commencement of mining operations and payment of the third installment (80 per cent of the upfront payment ) subsequent to execution of MDPA
(v)ML shall be granted to the successful bidder and Mining Lease Deed shall be executed by the State Government within 30 days
Grant of Composite Licence
(a)Rule 16: Prerequisites for auction of CL
(i)Approval of the state government (Limestone being notified mineral)
(ii)At least general exploration (G3) has been completed (800 mts for regular habit 400 mts for irregular habit)
(*)Net worth shall >1 per cent of Value of estimated Resources
(b)Rule 17: Electronic Auction/ Bidding Parameters/Bidding Process – Same as for ML
(i)Auction shall only through an online electronic auction platform (c)Rule 18. Grant of CL:
(i)Upon completion of auction the preferred bidder shall submit performance security (0.25 per cent of Value of Mineral)
(ii) LOI shall be issued upon receipt of performance security
(iii) The preferred bidder shall be considered to be the ?successful bidder? upon (a)obtaining all consents, approvals, permits, no-objections and the like as may be required under applicable laws for commencement of prospecting operations; and submitting the scheme of prospecting.
(iv)Composite Licence shall be grated to successful bidder
(v)Licence so as to ascertain evidence of mineral contents as per minerals (Evidence of Mineral Contents) Rules, 2015,
(vi)LOI for ML shall be issued a application of mining lease and 10 per cent of Upfront Payment
(vii) Mine Development and Production Agreement (MDPA) shall be signed on obtaining all consents, approvals, permits, no-objections and the like as may be required under applicable laws for commencement of mining operations and payment of the 2nd installment (10 per cent of the upfront payment)
(viii)Subsequent to execution of the MDPA, ML shall be granted to the successful bidder and Mining Lease Deed shall be signed upon payment of 3rd installment, i.e 80 per cent of upfront payment.
Dilution of regulatory objective – Execution delays on the cards
A significant dilution in achieving the objectives of framing of the law may be observed in the final enactment of the MMDR 2015. The draft rule 6 which formed part of the draft Act published in April 2014 did not see the light of the day upon enactment. Rule 6 states:
?…prior to notification for auction the Government shall (b) obtain conditional clearance on the basis of recommendation of the committee constituted for the purposes of forest clearance under the Forest (Conservation) Act, 1980 and wildlife clearance under the Wild Life (Protection) Act, 1972 or any other law for the time being in force, so as to enable commencement of operations; and (c) obtain all necessary permissions from the owners of the land and those having occupation rights?
Realising the complications in getting NOC from the land owners and various other agencies all state governments opposed this clause. Deletion of this clause has made the new Act at par with old act while it has retained the objective of fetching high revenues for the state. Auction is expected to remain limited to the bidding for the mineral wealth with certain level of exploration on geological axis of UNFC with uncertainty on feasibility or economic axis due to inherent complex nature of land acquisition and approvals for converting them to 111, 112, 221 or 222 level of UNFC.
Poor exploration quality coupled with regional variation – leading to valuation risks of the mineral reserve
Consistency in ROM limestone is depends upon accuracy of limestone evaluation through geological model representing the grade at particular place. Less core recovery coupled with structural complexities induces problems in deciphering the litho-logical boundaries and their grade behavior. In limestone there are many mechanical and geological factors in drilling which can result in poor core recovery, like structural disturbance, discontinuities, clay band, chemical composition, topographic placement, inappropriate drill size, improper anchoring of rigs, high rotation speed. A conservative approach for reserve quantification due to than a specified percentage recovery has both upside and down side effect on the evaluation of limestone, particularly when good limestone deposit is depleting. .
The limestone block which shall come for auction may not have quality drilling. Understanding of core loss, require not only the drilling data but complete structural/ depositional behavior of limestone in that particular basin. While correlating core loss of limestone in various basins, the author has experienced a very complex behavior of limestone not even to basin level, but within sub- basin and semi-basins also. Is not always clay or karst or cavity or structural unconformity but the genesis of secondary or tertiary calcite cementation or crystallisation has also equal impact on core recovery. The description of the same shall be missing in exploration data. The Model Tender document uploaded on Ministry of Mines para 1.5 provide that "The State Government, its employees and advisors have no liability on account to accuracy, adequacy, correctness, completeness or reliability of the Tender Document and any assessment, assumption, statement or information contained therein or deemed to form part of this Tender Document or arising in any way from participation in this tender process." .
This rests the accountability and risks of error in estimates and hence valuation of a reserve on the participating bidder. While this will enhance the number of reserve put under auction earlier than later – utilisation of these reserves or optimization usage remains uncertain..
Stiff competition with other end users – non captive bidder for limestone mines Cement Industry has to compete with different categories of bidder with varied perception, and risk apatite. While a category may be maximum revenue fetcher by adopting selective mining and least concerned for mineral conservation other delivering the best use of mineral a low revenue generator..
First time for cement industry
Grant of ML: Two options, 1. Cement End Use 2. No End use (i)End Use: Cement may have to competitors
(a)Green field ? New projects
(b)Brown field – Expansion of existing capacity
(ii)No End Use (ML/CL) may have following competitors for same block Cement industry
(a)Green field
(b)Brown field expansion
(c)Resource augmentation
(d)Resource optimisation
(corrective)
Chemical / lime industry
(a)100 per cent captive consumption v (b)High grade for captive and low grade for open market sale
(c)Undersize high grade be sold to cement plant as corrective
Steel industry
(a)Other industries
(b)Selective mining for a selective market
(c)Selective mining based on day to day demand
(d)Semi-mechanised for multiple product
(e)Others
Equal participation of all interested parties under the new Act in the auction for limestone reserves calls for the cement companies to build their war chest for some stiff competition from other industries. While the usage of limestone in the non cement manufacturing sector is limited and categorical – valuation of the limestone mines may vary significantly when compared across industries and methodology of mining.
Key decision making factors – Access to mineral may not add cement capacity Exploration Data may be just sufficient to take a mining decision, but will not be sufficient to take investment decision for cement plant. Decision for setting up a cement plant cannot be solely made based on quality and quantity of limestone but it should have a proper quality data, because a cement plant decision will require following minimum important key decision making factors:
(i)Topographic Factors: Plain, undulating, hilly, mountainous, slope, catchment, drainage etc
(ii)Infrastructural Factors: Road, rail, power, water pre project basic amenity etc
(iii)Deposit Factors: Exploration level, quality, quantity, quality of exploration, deposit type, deposit uniformity vertical/horizontal, unconformity, parting, dolomitisation, quality and quantity of overburden, interbred etc
(iv)Mining Factors: Topography, stripping ratio, selectivity, mining dilution, bench height, ultimate pit depth, drainage, geotechnical stability, habitation, infrastructure, drainage and even mine vastu
(v)Environmental Factors: Forest, wild life, sanctuary, eco-sensitive zone, water bodies, protected area, rehabilitation, dump management
(vi)Social Factors: Population, NGO, law and order, custom, land holding etc
(vii) Logistical factors: Transportation mode, connectivity requirement , source of power, fly ash, corrective, additive, competitors, market, etc.
Concluding Remarks
If anything significant that is expected of the MMDR 2015 is the transparency in the allocation of the mineral reserves based on measurable quantitative parameters, participation of the serious end-users with sufficient financial capacity to mobilise resources for putting the natural resources to use, and time bound defined utilisation of the reserves where sufficient and reliable geological data is available for evaluation. Hoarding of reserves is expected to significantly lower.
Cost of acquisition of the mineral reserve for the cement manufacturing companies as well as the ROM cost of the mineral mines is expected to rise moderately if not significantly and hence incremental burden on the end consumer of the cement. The Act ensures government exchequer to get the fair valuation of the reserve while shedding any liability towards the extant of reserve available or accountability towards the expeditious utilisation of the reserve. It also strips the state government of its liberty to prioritise or promote any industry by discretionary allocation of the mineral blocks.
References
i. Working Group on Cement Industry for the Twelfth Five Year Plan
ii.Mines and Minerals (Development and Regulation) Amendment Act, 2015
iii.Minerals (Evidence of Mineral Contents) Rules, 2015
iv.Mineral (Auction) Rules, 2015
v.Mineral ( Non -Excusive Reconnaissance Permit) Rules , 2015
vi.National Mineral Policy -2006
vii.Theory of Auctions and Competitive Bidding- Paul R. Milgrom; Robert J. Weber
viii.Four Issues in Auctions and Market Design – R. Preston McAfee
ix.Economic Comparison of Mineral Exploration and Acquisition Strategies to Obtain Ore Reserves- R.L. Robinson and B.W. Mackenzie
x.Performance of Indian Cement Industry – L. G. Burange and Shruti Yamini
xi.Indian Minerals Yearbook – 2013
HIGHLIGHTS
Due to MMDR 2015, the transparency in allocation process is going to significantly increase.
Cost of acquisition of the mineral reserve is going to rise moderately if not significantly.
The Act ensures government exchequer to get the fair valuation of the reserve. It also strips the State Government of its liberty to prioritize any industry by discretionary allocation of the mineral blocks.
Dr Dandi is Vice President, Head – Business Development & Raw Materials, Reliance Cement.
Co-authored by SK Das, Vice President, Head – Mining & Geology and Tamal Pal, GM, Business Development, Reliance Cement.
… this article is continued from the previous issue of ICR