India looking to lure foreign contract miners

By: Ajoy K Das
3rd July 2012
KOLKATA (miningweekly.com) - The Indian government has proposed fleshing out a model framework for a mine development and operation (MDO) agreement in a bid to lure foreign investments into contract mining.

“In the last few months, few contract mining projects have taken off. But for it to gain momentum, policy thrust was required,” said a senior official in the Mines Ministry.

“A model MDO agreement for all large government-owned mining companies would offer clarity and transparency to foreign investors keen on contract mining mineral reserves in India,” he added.

The haste to kick-start contract mining was prompted by a directive from the Prime Minister ManmohanSingh’s office to the Coal Ministry last week, to fast track development of coal blocks by implementing MDOs at the earliest opportunity.

In response, Coal India Limited (CIL) initiated the process of implementing MDOs for three coal blocks - Brahmini, Chichro Patsimal and Kalyaneswari - originally allocated to various user companies but de-allocated and awarded to CIL for development.

Last month, government owned Hindustan Steel Construction Limited marked its foray into contract mining, bagging contracts for coal extraction from two CIL mines, one captive iron coal asset of Steel Authority of India Limited and one iron-ore asset of Orissa Mineral Development Corporation.

“Contract mining was the fastest route for development of virgin mineral reserves. But it involves many legal hurdles like land acquisition, rehabilitation, pricing and issues of ownership of the asset. These issues could be paved through a model MDO agreement and enable foreign investors to get into mining development activities avoiding several procedural delays,” the official said.

“There was a lot of Australian interest in the Indian mining sector. But at the moment the policy barriers were too high to see a lot of Australian presence on the ground here,” the Australian High Commissioner to India, Peter Verghese said recently.

However, Australian mining and contract mining services company, Thiess has bagged a $5-billion contract over 20 years for development of a coal blocks in Jharkhand province on behalf of thermal power producer, NTPC Limited.

Earlier, the Mines Ministry proposed creating special purpose vehicles (SPV) for each mineral reserve to be responsible for securing all mandatory clearances necessary for development of the mine. The SPV would subsequently be transferred to a contract miner, chosen through competitive bidding for development and operation, thereby eliminating any risk of delays for the contractor.

But the SPV proposal was subsequently rejected by the Law Ministry on the ground that it would entangle the issue of right of ownership of the mineral asset.

However, Mines Ministry officials said that while evolving a framework MDO agreement, several challenges would have to be addressed since contract mining was a new concept in the Indian industry and risk sharing between parties was not well defined.

A fine balance would have to be struck between interest of the asset owner and the contractor since mine owners tend to load risk on the contractor and insist on lowest cost of mining while the mine developer-operator inflate capital costs on assumptions of geological data, the official said.

Edited by: Esmarie Swanepoel