Study on mining sector

Study on mining sectorIssues related to financing capital expenditure for Coal mining projects

Tuesday, April 11, 2023 SBI Capital Markets Limited, Hyderabad 2

Introduction

30%

33%

24%

5%6%

2%

Coal Oil

Natural Gas Nuclear Energy

Hydro electric Renewable Source

31%

29%1%

35%

4%

Asia Pacifc

USA

South and Central America

Europe and Eurasia

Africa and Middle East

World Energy Consumption

Coal reserves distribution


Coal There are four stages in coal formation

a) Peat (1000 – 1500 Kcal/Kg),

b) Lignite (1700 – 2600 Kcal/Kg),

c) Bituminous (3500 – 6000 Kcal/Kg) and

d) Anthracite (above 6000 Kcal/Kg).

Commercially Coal is classified into two typesa) Coking Coal – It has a good coking property, low ash and

moisture content, and is used in metallurgy, mainly as a reducing agent.

b) Non Coking Coal - The two key varieties of non-coking coal are steam coal and slack coal. Steam coal is generally used by the railways, textile mills, slack coal and is used largely in power plants, the paper industry, cement plants, brick burning industry, sugar mills


Mining Methods


Indian Scenario

53%

29%

10%

1%

5%

2%

Coal OilNatural GasNuclear EnergyHydro electric Renewable Source

Primary energy consumption in India has grown at CAGR of 8.8 per cent over the last decade, while coal production has grown at CAGR of 6.6 per cent.

The current estimated per capita primary energy consumption in India is about 559.1 million tonnes oil equivalent (mtoe) per year.

Driven by a rising population, expanding economy and a quest for improved quality of life, the energy usage in India is expected to increase from the current level.


Indian Coal reservesTypes of Coal in million

tonnes Proved Indicated Inferred Total

(A) Coking 17,933 13,653 2,102 33,688

-Prime 4,614 699 0 5,313

-Medium 12,837 11,951 1,880 26,668

-Semi 402 1,003 222 1,707

(B) Non Coking 100,211 128,515 31,082 259,808

Total 118,144 142,168 33,184 293,496

There are total 559 coal mines in India, in which 337 are underground mines, 186 are active surface mines, while the remaining 36 are mixed mines.

Other than the reserves in India, Indian companies has coal reserves all over the world, mainly in Australia, Indonesia, USA and New Zealand. The total overseas coal reserve base which belongs to India is 53.549BT.



Coal supply and demandCompany (million tonnes) FY10 FY11 FY12 FY13(E)

CIL 431.40 431.40 435.80 452.20SCCL 50.30 51.30 52.20 53.20Others 50.30 50.30 51.90 52.10

Total Indigenous supply 532.00 533.00 559.00 557.50

Demand 604.00 630.00 670 772.84

Gap to met through imports 72.00 97.00 130.10 192.50

Total Imports 67.74 68.90 98.90 142.93

The overall long-term demand of coal is closely linked to the performance of the Power, Iron & Steel and Cement industry.

Demand from the unorganized small scale sector comprising primarily of the brick and ceramic industry.


Indian Coal Industry StructureGoverning Bodies

Ministry of CoalMinistry of Environment and Forest

Ministry of Mines, Mines Safety

Industry ParticipantsCentral Sector & State Mining

Companies, Private Mine Developers, Coal Traders

End Use SectorsPower, Steel &

Cement


Industry Participants

Sector (million tonnes) 2006-07 2011-12 2016-17

Electricity (A) 341 539 836

Iron and Steel 43 69 104

Cement 25 32 50

Others 51 91 135

Non Electric (B) 119 192 289

Total (A) +(B) 460 731 1125

End use Sectors

1. Central Mining Corporations Coal India Limited

- BCCL, CCL, ECL, WCL, SECL, NCL, MCL. Singareni Collieries Company Limited Neyveli Lignite Corporation

2. State Mining Corporations


Coal Allocation ModalsFUEL SUPPLY AGREEMENT

It is a agreement between the

developer and the coal companies for

long-term supply of coal. The

quantity of coal to be supplied along

with other commercial terms and

conditions are covered in the

FSA itself.

E–AUCTION OF COAL

E-auction is of two types - Spot

E-auction and Forward E-auction.

Spot E-auction where a intending

buyer can participate in auction.

Forward E-auction, only end-

users/ actual consumers are

eligible to participate and have

assured supply over a long

period of one year.

Around 10% of estimated annual

production of CIL would be

offered under e-auction.

Coal Supply Levels Penalty

80 – 65% 1.5%

65 - 60% 5.0%

60 – 55% 10%

55 – 50% 20%

Below 50% 40%


BCCL CCL ECL MCL NCL NEC SCCL SECL WCL0

2

4

6

8

10

12

14

16

0%

20%

40%

60%

80%

100%

120%

4.25.7

4.1

14.8

1.60.2

1.8

10.9

5

2.7

4.83.3

12.4

1.60.2

1.7

10.3

4.6

80%

60% 58%

37%

91%

37%

96%

46%56%

Sales volumes of E-auction coal July 2011- July 2012

Total Quantity offered Total quantity soldIncrease over notified price

million

ton

nes


Pricing of CoalColliery Control Order, 2000 - Coal prices are fixed by the

respective coal companies and revised periodically

In February 2011, Coal India Limited (CIL) adopted a differential pricing structure for coal based on end-use sector - Power Utilities (including IPPs), Fertilizers and Defence sector

- Sectors other than Power Utilities (including IPPs), Fertilizers and

Defence sector

Royalty on coal - unit of production basis

- ad valorem basis

- both tonnage basis and ad valorem basis


Legislation, Policy Framework andGuidelines1.Mines and Minerals (Development & Regulation) Act 1957• The Act aims at regulation of mines and development of minerals

under the control of the Central Government. It deals with reconnaissance operations, grant of prospecting licenses and mining lease.

2.Coal Mines (Nationalization) Act 1973• The purpose of the legislation was to acquire the existing mines at the

time and the provisions relate to taking over the management, accounts, and compensating the owners of the mines.

3.Environment related legislation• This area is one where a delicate balance is sought to be maintained

between the often conflicting goals of protecting the environment and that of ensuring energy security in the country.

• ‘Go-No Go’ and CEPI policies adopted by the Ministry of Environment.

• CEPI norms prohibited mining in areas with a high pollution index.


Coal Block Allocation

Coal blocks are allocated to both private and public companies to meet the growing demand by 3 routes

Captive dispensation route through screening committee

– Govt allocates the blocks after considering many factors

Under government company dispensation

- Under this route, only Government companies are allocated coal blocks

Tariff based bidding route

- Coal blocks have been earmarked for the power projects to be set up on the basis of tariff based competitive bidding system

So far 195 coal blocks are allocated with geological

reserves of about 44.23 billion tonne.


Approvals / Clearances Authority / Agency Involved

Mining Lease

Approval or Purchase of

Geological Report

CMPDIL (purchase could also be from SCCL, MECL) Directorate General of Civil Aviation

and Ministry of Defence (for unexplored blocks if aerial reconnaissance is conceived)

Mine Plan CMPDIL Coal Controller

Mine Safety Directorate General of Mine Safety

Mining Technology &

Conservation Measures,

and Coal Categorization

Coal Controller (under the provisions of Colliery Control Rules and the Coal Mines

(Conservation & Development) Act)

Mining Lease State Government (Mining Department), Ministry of Coal (GoI) – Reviewed at various

levels within the Departments at the State & Central Government level

Environment

EIA / EMP Studies

State Pollution Control Board State Environmental Impact Assessment Authority State

Water Resource and Water Supply Department District Administration (for various

aspects of site clearance) Coal Controller Department of Environment (MoEF)

Forest

Forest Clearance &

Valuing Compensatory

Afforestation

Committee to Advise GoI (MoEF) Office of Chief Conservation of Forests, (Regional Office

of MoEF) State Forest Department & District Authority Department of Forest (MoEF)

State Revenue Department Hon’ble Supreme Court

Land Acquisition Ministry of Coal (under provisions of CBA) State Department of Revenue

Infrastructure (Electricity, Water, Railways, Road, etc) Appropriate Departments of the State

Government & Ministries of Central Government


Global Coal scenario

2009 2010 20110

100,000

200,000

300,000

400,000

500,000

600,000

700,000

3,000,0003,100,0003,200,0003,300,0003,400,0003,500,0003,600,0003,700,0003,800,0003,900,000

6,293.10 5,969.02 6,005.39

Australia Production Indonesia ProductionCanada Production Brazil ProductionIndia Production China Production

Million

sh

ort

ton

s

Million

Sh

ort

ton

s


Coal Production & Consumption

2009 2010 20110

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

3,000,000

3,100,000

3,200,000

3,300,000

3,400,000

3,500,000

3,600,000

3,700,000

3,800,000

3,900,000

6,293.10 5,969.02 6,005.3919,470.57 25,823.16 27,569.97

All values are in Million Short Tons

Australia Production Australia Consumption Indonesia Production

Indonesia Consumption Canada Production Canada Consumption

Brazil Production Brazil Consumption India Production

India Consumption China Production China Consumption


Coal Exports

2009 2010 20110

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

0 0 92.752,901.28 5,029.85

5,036.46

All values are in Million Short Tons

China Exports Australia Exports Indonesia ExportsCanada Exports Brazil Exports India Exports


Coal Imports

2009 2010 20110

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

0.00

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

6.61 15.43 60.63

76.06 60.63 60.63

83,345.77

64,024.45

86,827.96

124,405.80

163,821.10

192,498.80

All values are in Million Short tons

Australia Imports Indonesia Imports Canada ImportsBrazil Imports India Imports China Imports


Risk Structure and AllocationOperating : Technical

Cost

Management

Participant

Completion

Supply

Market

Infrastructure

Environmental

Political

Force Majeure

Foreign Exchange

Engineering

Syndication

Funding/Interest

Legal

Risk can be structured in five ways Controlled or Shared, as in a Contract Switched from one party to another by means of Trigger Financed, such as through standby loans, Deemed reduced, per Study results Avoided altogether


Risk

Supply/Traffic/Reserve

Market

Foreign

Exchange

Operating:

Technical

Operating:

Cost

Operating: Management

Environmental

Infrastructure

Force

Majeure

Completio

n

Engineering

Politica

l

Participan

t

Funding/Interest

Syndicatio

n

Legal

Output Number/Qty � � � � � �

times: Price

� � � �

equals: Revenue

less: Cash Costs

� � � � � � �

Royalties � �

Overheads � � � equals: Net Operating Cashflow

plus: Project Loan

� �

Equity �

equals: Total Sources

less: Capex

� � �

Working Capital � �

Interest (“I”) � � � �

Income Tax � �Principal (“P”) � �

equals: Total Uses


Risk Mitigation

Technical Risk Technology Guarantee, Technology Insurance , Alternative Sourcing.

Cost Risk Sales contract – escalator, Cost Curve, Cost Waivers.

Management Management Agreements , Key-Man Insurance , Labor Contracts , Training Agreements

Participant Risk

Joint Venture Agreement, Cross-collateralization and cross-default

Completion Risk

Turnkey Contract, Equity and Debt Subscription, Delay-In-Startup Insurance , Overrun Undertaking.

Supply Risk Supply Undertaking, Supply Additions , Collateral

Market Risk Off-take contract, Merchant Financing

Infrastructure Risk

F.O.B. Sales Contracts , Pooled Infrastructure Agreements, Government Commitments


Risk Mitigation

Environmental Risk Rehabilitation Guarantee, Environmental Warranty

Political Risk Local National Participation, War and Insurrection Residual, Political Risk Insurance, Co-financing.

Force Majeure Business interruption insurance, Deferral

Foreign Exchange Risk

Hedging, Swaps.

Engineering Risk Independent Certification

Syndication risk


Business Risk


Regulatory Risks1. GUIDELINES Identification of blocks for allocation to private sector by CIL/SCCL. The State Government and its agencies should facilitate infrastructure. The captive block developers should coordinate with other coal block

developers in proximity

2. ALLOCATION OF COAL BLOCK Should give adequate weightage to the technical & financial capability of the

applicants for timely development of the blocks

3. APPROVALS AND CLEARANCES The nodal agency can pre-determine the conditions for each category of

land based on environmental sensitivity and nature of the proposed activity (prospecting, mining etc.)

The nodal agency may complete the requirements of identification of land for compensatory afforestation, enumeration of trees, cost benefit analysis, etc. before inviting application for mining lease.


MoEF should segregate coal bearing areas into ‘Go‘ and ‘No-Go‘ areas for each type of lease (Reconnaissance, Prospecting, and Mining) on the basis of the forest cover and environmental & ecological sensitivity

State Government should adopt procedures to issue the prospecting license within a minimum time.

4. LAND ACQUISITIONThe procedure for land acquisition needs to be made less time consuming

5. REHABILITATION OF PROJECT AFFECTED PEOPLE (PAP) It is recommended that the Ministry of Coal coordinate with the State

Governments to align the State R&R Policies with the National R&R Policy.Area Development Fund by applying a levy on each tonne of coal

produced. This fund could be utilized for social welfare of PAP including their health & education, improvement of infrastructure, roads, water supply etc.


6. GEOLOGICAL INVESTIGATIONS & MINING PLAN New agencies with the competence to perform geological

investigations need to be set up and accredited by the Government of India. These agencies or an independent expert group should also be empowered to review and approve the mining plan, which would be an input to Ministry of Coal.

7. JOINT ALLOTMENT OF COAL BLOCKS In case of joint allotment of coal blocks - the companies that do not

furnish the Bank Guarantee, should be replaced with other companies from among the applicants whose applications are pending with the Ministry.

8. INFRASTRUCTURE STATUS FOR COAL INDUSTRYCoal industry needs to be given infrastructure status so as to attract

more players into this industry and to incentivize domestic production of mining equipment.


S.No EVENT TIME LIMIT in months from '0' date

1 Allocation 0

2 Purchase of GR 1.5

3 Bank Guarantee 3

4 Mining Lease Application 3

5 Mining Plan submission 6

6 Mining Plan approval 8

7 Previous approval application 11

8 Previous approval 11

9 Forest Clearance application 12

10 Forest Clearance 18

11 Environment Clearance Application 12

12 Environment Clearance 18

13 Mining Lease grant 24

14 Land acquisition begin 9,19

15 Land Acquisition 30,36

16 Opening permission application 34, 40 for OC

17 Opening permission grant 35,41 for OC

18 Production36, 42 for OC

48, 54 for UG


Capital Raising options

Economic uncertainty created volatility and risk aversion among investors. The fall in overall capital raised in 2012, to $249b from $340b in 2011, reflects changing investment appetite. A volatility-led structural shift in investor preferences from equity to fixed income instruments



2007 2008 2009 2010 2011 2012 (April - May)

6.62

444.26

34.16

174.4

79.51 98.28

FDI inflow in Indian Mining Industry

US

D m

illion

Mining and metals companies raised bond proceeds of $113b in 2012, using bond markets to diversify away from their past reliance on bank debt.

Low benchmark rates encouraging demand from investors for yield, which in turn is reducing borrowing costs for investment grade issuers. Mining and exploration of metal and non-metal but excluding titanium - MMDR

Coal & lignite mining and its processing – Coal mines (Nationalization) Act


Innovative optionsFlow Through Shares (FTS)A flow through share (FTS) is a share, or the right to buy a share, of

the stock of a mineral resource company where tax deductions, “flow through” from the company to the investor.

The individual agrees to pay for the shares, and the corporation agrees to transfer certain mining expenditures to the individual

Eligible exploration expenditure has been 100% deductible from income from any source for more than two decades

Canadian mining firms have raised $2.5-billion over the past five years using flow-through shares

Mineral BondsMineral bonds can be used to attract more investments in mineral

exploration and mining fields like infrastructure bonds.


SME Exchange


Mining/Mineral development fundThis fund needs to have three crucial components.

a) Provision of low interest loans to local mining venturesb) Financing geological exploration and mappingc) Contribution towards developing to enhance the national

capacity in this field

Sourcing funds from professional lending institutions The private sector body is encouraged to form a joint

venture company along with the participating public sector agency with the later holding only minority shares in a PPP arrangement.

Coal India Ltd (CIL) and IL&FS Infrastructure Development Corporation Ltd (IL&FS IDC) have signed a memorandum of agreement (MoA) to float a 50-50 joint venture, to undertake project development for mine, power and other coal-based projects.


Risk, Value and Source of Finance

Equity Pro

ject

Deb

t d

raw

dow

n Project Debt repayment

Returns to Equity


Appropriate Funding SourcesLicense Acquisition &

Grassroots Exploration

Advanced Exploration &Delineation

Feasibility Studies

Construction & Commissioning

Production & BrownfieldExpansion

Private Equity & Pre-IPO Finance

IPO & Public Equity

IPO, Public Equity & Quasi-equity

Debt (Full or Limited Recourse), Equity & Other

Refinancing, Senior Debt & Equity


Business modelsEngineering, Procurement and Construction (EPC) Model

In this model, the owner goes in for separate EPC contracts (mine construction), coal & OB removal & haulage contracts. These are short duration contracts and adopted in operational mines.

Since multiple contractors work on the site management becomes a complex task. The owner takes all the responsibility and obligations in terms of planning and construction. Subsidiary obligations of mine management also remain with the owner.

Mine Developer cum Operator (MDO) Model

Under the MDO model, the mine owner outsources all the tasks and obligations of developing the mine. The contractor furnishes the entire requisite capital for the progression of the coal mine. The mine owner gives a fixed fee generally fixed on per tonne of coal produced, to the MDO.


Joint Venture Model

Under this type of business model the mining company owns the authority over the coal block. The joint venture partner is chosen via bidding process.

Mine owner bears the responsibility of ensuring that all clearances, permits, leases, along with the liability towards mining license, land acquisition and also solely takes accountability for coal evacuation.

Mine contractor takes on the activities of production planning, construction & mine operations like drilling, blasting, excavation and hauling. Apart from this to maintain the safety standards is also the responsibility of mine contractor.

Alliance Model

The ownership of the project is limited to the mine owner only and the alliance formed only focuses on developing the mine in a timely manner. However the cost of development is borne by the mine owner.

Every profit and loss, would be divided between the mine owner and mining partner

The primary advantage is that the board of the alliance entails the emissaries of both the parties.


Relationship Contracting – by MCA and ACACore

Values Guiding Principles

Commitme

nt

Total commitment to achievement of the project goals – actively promoted by the Chief Executives of all parties

Trust To work together in a spirit of good faith, openness, cooperation and no blame

Respect The interests of the project take priority over the interests of any of the parties

Innovation To couple breakthrough thinking with intelligent risk taking to achieve exceptionally good project outcomes

Fairness To ensure that neither party is being unfairly disadvantaged

Enthusias

m

To engender enthusiasm for professional duties and the project’s social activities


Project Circumstances

Weight Low 1 2 3 4 5 6 7 8 9 10 High

1 Is project completion critical?

10%Doesn’t matter ● Critical

2 Is early completion valuable?

10% Little value ● High value

3 Brownfield or greenfield work?

15%Mature

environment ● Unworked

4 Geological environment

15% Well known ● Not well known

5 Geotechnical environment

15% Defined ● Undefined

6 Quality parameters

5% Well known ● Not well known

7 IR Environment 10% Low risk ● High risk

8 Owners capacity to be part of project

5%Little

experience ● Very experienced

9 Owners Risk Culture

10% Risk adverse ● Sophisticated

view

10 Availability of Contractors

5% Few ● Many

100% Totals - - 0.3 - 0.5 0.3 1.4 2.4 0.9 1.5 Net total 7.3

<3 3 - 7 >7

Use hard StrategyRequires closer

examinationCo-operative risk

embrace


Relationship Contracting

Decreasing use Increasing use

1 2 3 4 5 6 7 8 9 10

<3 3 - 7 >7

Lump Sum

Schedule of Rates

Cost reimbursable

Cost plus incentive

Alliancing

Partnering

The benefits offered by Relationship Contracting

Time

Cost

Risk

Relationship

Flexibility

Technology and innovation

Optimum Standards

Clearly defined project goals and scope

Gain share/pain share

Integrated project team


Fortescue Project – Case Study Constructing and Operating iron ore mines (Cloud Break and

Christmas Creek) in western Australia to produce an initial targeted amount of 45 million tons per annum (―mtpa) through Chichester Hub.

Constructing and Operating rail and Port Infrastructure through TPI (The Pilbara Infrastructure Pty Ltd) to transport and load the iron ore for shipment to customers in Asia.

Start up scheduled at 2008 Ore Type

Marra Mamba High Grade lump – 61.1%Fe Fines Grade – 60.2% Fe and 58.7% Fe

Lead Arranger / Debt Underwriter – CitibankCo-Lead Manager – Jeffries & Co



Leucadia National Corporation

Fortescue Metals Group Ltd

FMG Pilbara Pty Ltd

International Bulk Ports Pty

Ltd

Pilbara Mining Alliance Pty Ltd

(“PMA”)

The Pilbara Infrastructure Pty Ltd (“TPI”)

FMG Chichester Pty Ltd

FMG Finance Pty Ltd (SPV)

Equipment Leasing

Senior Secured Notes

US $300 million Leucadia Placements

US $ 100 million Leucadia Sub -ordinated Notes

US $

115

M

US $2

,051

M

28 Sales Contracts

Project Group

WorleyParsons

Team 45

Roche Mining Pty Ltd

Alliance Contract for mining construction and operations

Connell Wagner Pty Ltd

Independent Engineer

EPC Contract


Project Financing PlanSource of Funds US $

(millions) Application of Funds US $ (millions)

Debt

Senior Secured Notes

Operating Leasing

2,051

115

Project Capital

Feasibility capital expenditure

Repayment of Bridge Loan

Infrastructure

Mining

Working Capital

136

150

1,130

408

139Equity and Subordinated Debt

Sponsor Equity

Leucadia Placements

Leucadia Subordinated Notes

136

300

100

Contingencies

Cost overrun Reserve Account

Back – Up Reserve Account

Risk provision contingency

223

100

147

Other Sources

Interest on proceeds on deposits

Initial production

142

81

Financing Related Costs

Debt Service Reserve

Account

Fees

419

73

2,925 2,925


Risk

POLITICAL RISK The Mining State Agreement has not yet been ratified by the

Upper House of the Western Australia Parliament until August

22, 2006

FORIGN EXCHANGE RISK The assets, earnings and cash flow of the project group are

influenced by movements in exchange rates of the U.S dollar

against the Australian dollar

TECHNICAL RISK

The Project Group‘s projections for mining iron ore include

a new application of Strip mining methodology, which has

not yet been applied in other iron ore mining settings


MANAGEMENT RISK The project group does not have an operating history and is

still in the early stages of development.

FORCE MAJEURE RISK The Pilbara Region is exposed to adverse weather events,

including cyclones

COMPLETION RISK Construction costs for the development of the project may be

higher than anticipated and the project may be subject to

delays.

PARTICIPANT RISKProject group has to bear all the risks, if the individual

contractors who are engaged but fail to perform as there is no

single overarching contractor that would bear these risks


THE RISKS ELIMINATED BY THE PROJECT GROUP

MARKET RISKThe Fortescue and the Project Group have negotiated and

executed contracts for 39.5 mtpa under 28 contracts

SUPPLY RISKCurrent reserve estimates provide for a minimum project

mine life of approximately 20 years at an ongoing

production rate of 45mtpa

INFRASTRUCTURE RISK260 Kilometers railroad with loading and unloading

facilities and a new port facility at Port Hedland with all

facilities required for export from the port


Risk

Supply/Traffic/Reserve

Market

Foreign

Exchange

Operating:

Technical

Operating:

Cost

Operating: Management

Environmental

Infrastructure

Force

Majeure

Completio

n

Engineering

Politica

l

Participan

t

Funding/Interest

Syndicatio

n

Legal

Output Number/Qty � �

times: Price

� �

equals: Revenue

less: Cash Costs

� � � � �

Royalties �

Overheads � �

equals: Net Operating Cashflow

plus: Project Loan

�

Equity �

equals: Total Sources

less: Capex

� � �

Working Capital �

Interest (“I”) � � �

Income Tax �

Principal (“P”) � �

equals: Total Uses


Thank You

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Study on mining sector

Economy & Finance