India Mining Report Q1 2013

India hosts a wide range of globally significant mineral resources, ranking among the worlds top five nations for its core competency commodity reserves of coal and iron ore. Iron ore reserves are estimated in the region of 23bnt (billion tonnes) and account for 6% of global reserves, while coal reserves are reported to be around 255bnt. India is the worlds third largest producer of coal, fourth largest producer of iron ore and the fifth largest producer of bauxite. However, only 10% of the countrys landmass has been explored, due primarily to significant regulatory and bureaucratic hurdles.

We expect Indias mining industry value to reach US$57.2bn by 2017, marking an annual average growth rate of 4.8% from 2011 levels. Growth will continue to be curtailed by Indias poor operating environment. A bright spot, however, is the increasing number of Indian companies venturing overseas to secure stable, long-term supplies of minerals such as coal and iron ore in a bid to meet fast-rising domestic demand.

Despite the potential passage of the 2011 Mines and Mineral Development and Regulation (MMDR) Bill on the horizon, which seeks to improve transparency and introduce better legislative environment for attracting mining investment, we remain wary of calling for a sea change in the countrys mining industry.

The pervasiveness of corruption, vital regulatory and bureaucratic obstacles in India will continue to prevent mining companies from achieving their full production capacity. In the past, mining permits/licences are issued contingent on success in the reconnaissance phase. This practice exposes firms to high levels of risk. However, the MMDR bill would allow for the granting of non-exclusive reconnaissance licences and high-tech reconnaissance/exploration licences based on ability and intention to develop an area. In addition, mining companies would be required to submit and display all data pertaining to the granting, extension, termination and planning of operations in the public domain.

The bill also calls for a system for bidding licences; this would create a market for these licences, increasing transparency. The current system of first-come, first-served in distributing natural resources for development is fraught with potential conflicts of interest and can be easily abused by officials. As of April 2012, the Indian government decided to still distribute natural resource assets through this manner, despite a Supreme Court ruling stating that all national resources must be distributed only through auction.

Indias mining sector is highly stratified. There are a number of giant, mostly state-owned mines that have an outsized impact on total output, in addition to the existence of a large number of small and inefficient mines operating illegally. According to Austrade, 5% of operating mines in India produce about 50% of the countrys mineral output. Given the sectors strategic and economic importance, there is significant government involvement, with the sector dominated by state-owned companies or public sector undertakings (PSUs) such as National Aluminium Corp (NALCO), Steel Authority of India Limited (SAIL), National Mineral Development Corp (NMDC) and Coal India. These four account for around 85% of Indias total value of mineral production and are the main producers of key commodities such as coal, iron ore, aluminium, copper and gold.

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