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Digging Up A New Opportunity

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It was Malcolm Forbes who said that diamonds are nothing but chunks of coal that stuck to their jobs. Indian mine owners and global contractors seem to have finally paid heed to him. In December 2010, Thiess and state-owned energy giant NTPC entered a win-win deal. The Australian mining major bagged an Australian $5.5-billion deal from NTPC for a 20-year mining lease for the Pakri Barwadih coal block in Jharkhand. The power major has since put Chatti Bariatu in the state into play, and also plans to throw open Kerandari. NTPC's act was copied by state-owned steel major SAIL - the 4-million tonne open-cast Tasra, and the underground Sitalana owned by it will be soon handed over to contractors.

Coal-mine owners seem to have taken a shovelful from Hindustan Copper. Three years ago, it inked an agreement for its Surda mine with the Australian firm, India Resources (IRL). The once idle mine now produces a record 300 tonnes of copper-in-concentrate a month. IRL recently joined hands with Polish mining construction and engineering company Kopex to bid for future projects.

Click here to view enlarged imageIRL has now moved into coal. Bankura DRI Mining Manufacturers Company - a consortium of six sponge iron makers - has entrusted the development of its allotted coal at Biharinath, West Bengal, to the company. Bankura's promoters will spend Australian $500 million on the project.

A New Market
Thiess and IRL may have cracked market open for other reputed mining firms to follow. India has the fourth-largest reserves of coal in the world; it is the third-largest producer of the mineral. There is enough to attract hordes of multinationals who have been waiting to hit pay-coal. The Theiss-NTPC deal shows you can skirt around the issue if you become a contractor or a sub-contractor. There is opportunity to be tapped. Theiss, owned by Leighton Holdings, will partner with Sedgman to process coal in India.

In the mining industry, several captive leases have been lying dormant in the hands of a host of end-users. This has only pushed up demand for coal, overwhelming the national coal miner. Enter contract miners, and there is going to be an overhaul on how the business of mining has been undertaken so far.

It is an outsourcing model that cuts down on hassles. Explains Tuhin Mukherjee, managing director of Essel Mining and Industries: "If you consider the government as the promoter of a group of companies, it should expect each vertical, whether it's steel or mining, to do what they do in the most efficient and sustainable manner and be the best in their core competencies."

Ideally, it is the headache of contractors - or mining developers and operators - to take care of issues with regard to land, exploration, mine plans, transportation of ore or putting up fixed infrastructure such as shafts, conveyers and storehouses. For the NTPC project, Thiess will lay conveyer belts from the mouth of the coal mine right up to loading points. It will bring in all the technological paraphernalia, from GPRS-enabled shovels and buckets to 400-tonne trucks; and put up a coal-handling plant capable of storing 400,000 tonnes of crushed coal.

India has nationalised every mineral for a state monolith. It is iron ore for NMDC, zinc for Hindustan Zinc, copper for Hindustan Copper, lignite for Neyveli Lignite Corporation or coal for Coal India. Captive coal blocks have also been hawked to steel, cement and power firms in just about every state. It has offered them assured supplies of coal, but has also forced them to shift away from their core-competencies.

And, in a seemingly even-handed attempt, blocks have been given to state-level entities such as the Kerala State Electricity Board and  Pondicherry Industrial Promotion Development and Investment Corporation. To a consortium, in other cases. For instance, the Rampia and Dip Side of Rampia blocks in Orissa are shared by Arcelor Mittal, Sterlite Energy, Essar's Navabharat Power, GMR Energy, Lanco Group and Reliance Energy.

Such policies have affected large-scale mining. "The preference for captive use of mineral resources is justified by saying it encourages value enhancement. A uniquely Indian argument," says Mukherjee. Neither mineral-rich Australia nor the US pursue such an approach. Mukherjee says coal assets should never have been opened in the scattered manner as they have. "Our coal mining plan has left smallpox scars across the face of the countryside." His prescription is to focus on increasing production with fewer operations. "With larger projects, you can not only invest more in infrastructure, but in the sustainability and CSR efforts that are more important today. There is reason why the mineral industry's share of the GDP has slipped to 2.4 per cent from 3 per cent."

It is no wonder that the Ministry of Coal has lost patience with lease owners. It suspects they have been squatting on precious raw material. It is also no coincidence that the Centre, irked by delays in developing the mines, had sent out notices threatening to de-allocate some blocks that have been contracted out.

Spade Or Shovel
It is clear that contract mining is the way forward. And there are ways to get ahead. The country's second-largest coal producer, Singareni Collieries Company, plans to form joint ventures. It will develop mines, and hand them over to private miners. It has six mines - Javaharkhani and Koyagudem in Khammam, Kakatiyakhani in Warangal and Chennur (I and II) and Ramakrishnapur in Adilabad districts - to offer under this model. SAIL intends to have the entire project - including a pithead coal benefication plant (washery) and more importantly the rehabilitation and resettlement (R&R) - taken off its hands. It is a costly proposition. The steelmaker has twice cancelled its tender for the Tasra coal mine.
According to K.S. Solanki, promoter of Sainik Mining, the rehabilitation headaches that the firm is trying to escape turn out to be a contractor's impasse. Local landowners want a job at the state-run firm; and not left at the mercy of potential fly-by-night contractors.

DIGGING IT OUT: Once idle, Surda mines now produces a record 300 tonne copper-in-concentrate every month

Explains Solanki: "They would like to be re-compensated with all the benefits they did by missing out on as a non-state run unit's employee." It is an expensive proposition. And SAIL may also opt for a joint-venture where risks can be shared and the cost of outsourcing R&R lowered. R&R is also the kind of job that requires the blessings of "local muscle power". Not surprisingly, Thiess - bound by its rules of conduct - takes on projects only after the land has been acquired. "There is no dearth of people who offer to do it all. But if the land is in the name of the owner, it's in the owner's interest to acquire it on its own," says a candid Raman Srikanth, managing director of Thiess India.

 Then you have Adani. Of its four mining contracts, two are joint ventures. In Parsa Kente Collieries, it holds a 74 per cent equity interest under a 30-year agreement with Rajasthan Rajya Vidyut Utpadan Nigam. And it is doing just about everything from obtaining approvals, acquiring land, setting up a washery and constructing a railway siding at the mine.
Adani has a 49-51 per cent joint venture with the Chhattisgarh State Power Generation Company. It will develop coal from the Parsa block. Adani will also develop and operate the Machhakata block in Orissa for Maharashtra Power Generation Company and Gujarat State Electricity Corporation. Likewise for the 1.6 billion-tonne Chendipada coal block in Talcher, with a production capacity of 40 million tonne per year, for the consortium - Uttar Pradesh Rajya Vidyut Utpadan Nigam, Chhattisgarh Mineral Development Corporation and Maharashtra State Power Generation Company.

According to Mukherjee, there are two basic challenges. The first is to understand the management of all regulatory frameworks. The second is to provide logistical support that will ensure the evacuation of the mined resource in the most efficient and least polluting manner. In more developed mining environment, such as that in Australia or South Africa, minerals are taken from the pit mouth straight to the loading depot often through private railways. Emerging markets in the African continent are also planning similar infrastructure support.

In India, Adani hopes to bring its shipping assets to the table. According to its spokesperson, it is cheaper to transport coal from Australia to India than move it from the east coast to the west coast of the country via road and rail. With ports planned in Orissa, Adani can ship coal to its clients in Gujarat and Maharashtra more economically. With more entrants, it's a matter of time before contract mining digs itself out of the pits.