The hidden agenda behind issuance of mining licences

There are two serious problems with Section 13 (1) of the Mining Act. The first says that the state government will issue a notification inviting applications for prospecting licences (PLs). This leaves discretion in the hands of the state government with regard to timing of the concession. The Meta Data, or summary of preliminary exploration carried out by GSI, is there in the public domain. The prospector’s decision to invest will depend largely on his analysis of this data.

Obviously, he cannot purchase the entire report which can cost crores of rupees until he actually gets the PL. He will have to apply on the basis of the Meta Data information available to all. When the basic data is already available in the public domain at all times where is the need to issue a notification inviting applications? The first-in-time is the only logical exercise and it is an international best practice. A prospector in Australia or Canada, who has risk funds available for investing, will not wait for our notification even if he is willing to invest on the basis of our Meta Data. In 2003, Ivanhoe, the well known Canadian Junior, was invited by the Mongolian Government to look for gold in the Gobi desert. Within three years they found a huge gold vein half a mile underground at Oyu Tolgoi. The resulting mine is now the main stay of that country’s economy and is described by Grainger David in an article in the Fortune as its “economic silver bullet”. Robert Friedland, chairman of Ivanhoe, also known as “Toxic Bob”, brought to Oyu Tolgoi the new UDR 5000, the biggest mining drill in the world, flown by the biggest plane in the world, a Russian Antonov, (which) reached nearly two miles into the earth’s crust where it pulled up core samples of 0.73% copper and 0.17 grams per tonne of gold”.

Compare this with the fact that we do not have the technology to pull up and refine anything less than 5 grams per tonne from our deepest 3000 feet mine in Kolar, and so we have promptly closed the whole mine as defunct.

Canadian and Australian Juniors converted China from a zero producer and second largest importer of gold (like India) to the largest gold producing country in the world within five years. Neither China nor Mongolia asked the Juniors to wait for the notification. So to expect Juniors to hold their breath waiting for the state government to come out with a notification is not a realistic expectation.

The obvious purpose of the notification appears to be the expectation that this will make it possible to strike a bargain with the “bidder” in advance. However, the expectation is bound to be belied because the response to the notification asking people to pay for prospecting is a non-starter. This can happen only if a deal is already struck and a notification is then issued to play out the drama of transparency.

The second proviso under Section 13 (1) (b) exempts bulks from the scheme of competitive bidding for prospecting licences. This is a mysterious proviso. Why exempt only bulks?  If there is any case at all for competitive bidding for prospecting in the MMDR minerals it is for the bulks. The bulks comprise iron ore, bauxite, limestone and dimension stone and their associates like manganese and chrome. These are close to the surface and the mining is open cast and not underground. The prospecting is relatively simple and the dividing line between preliminary and detailed exploration is thin.

The preliminary exploration data is usually enough to determine the characteristics of the ore body and detailed exploration is mainly for ore body delineation, so the investment is neither risky nor substantial. The technological requirements are also not very great. This is the reason why exploration in India by Geological Survey of India (GSI) and Mineral Exploration Corporation Limited (MECL), the only two exploration agencies in India, is primarily of bulks and so is the mining. India’s mining is restricted to iron ore, bauxite and lime stone and their associates. There is only one copper mine, one zinc mine and one SME gold mine.

That is the sum total of non-bulk mining in India. What this means is that in the normal circumstances prospecting licences in bulks are unnecessary and mining leases on competitive offer basis can be opted for straight away. On the other hand, even in bulks there are many greenfield areas — for example for magnetite, and also for brownfield areas abandoned by GSI as unworthy of pursuit in hematite, bauxite and limestone, where reconnaissance permits and large area prospecting licences are needed. So the distinction between bulks and non-bulks for prospecting licences in the context of competitive offers is infructuous. It can only be explained by the need to retain discretionary allotments currently enjoyed by the government. In effect, it becomes a backdoor arrangement for iron ore miners to escape the auction route for mining leases under Section 13(4) by allowing them PLs through the first-in-time route and then accessing mining leases through the seamless facility. Of course, it is a different matter that Section 13(4), the so-called auction, itself appears an exercise of pulling the wool over the eyes of the lawmakers. It pretends to follow the Hoda report but in fact turns it on its head.

The reasons for introducing the new instrument of large area prospecting licence (LAPL) are dealt with extensively in paras 1.41, 1.42 and 1.43 of the Hoda report. One of the main reasons is to enable prospecting work to be done over a larger area on an exclusive basis by those who are willing to take higher risks, spend more money and bring in the more invasive technology. This is relevant in the case of underground minerals but not so in the case of bulks or surface minerals which are easy to find. Hence, LAPLs have to be encouraged in the case of non-bulks and can be easily ignored or even discouraged in the case of bulks. Section 13 (1) does the exact opposite. The non-bulk explorers are to await notification and then pay up for the licence to prospect by competing in an auction whereas the bulk explorers can apply for and get PLs without any charge at the pleasure of the state government. The hidden agenda is clear.

The major minerals are to be sacrificed at the altar of the current money spinner, hematite iron ore. The reconnaissance work in the case of hematite iron ore has been almost completed by GSI and the data generated is enough to enable a mining decision. Permitting Pls licences in the case of hematite ore amounts to permitting PL holders to hang on to large areas for long periods thus pre-empting competition and in the bargain obtaining mining leases at zero or minimal cost. Besides, since captive miners have already been prioritised elsewhere in the Bill, the old practice of enabling them to hang on to their leases in perpetuity and without cost continues through the “new” PL. Yet the new Bill while introducing a counter productive auction for PLs of the major minerals keeps iron ore safely outside the bidding process.

Section 13 (4)
After taking care of the iron ore miners at the prospecting stage the draft Bill then carries this “special” dispensation for iron ore further to the mining stage. The grant of mining leases is dealt with in Section 13(4) of the draft Bill. The Hoda report had concluded, in paras 1.32 and 1.46, that in areas where detailed prospecting work has been completed by an agency other than an applicant for the lease, the lease should be granted on the basis of competitive offers from among those who satisfy a list of severe eligibility conditions. The main advantage is that since the bidding miners would be operating in a free market they would throw up a bid based on the economic value of the mineral extracted as a commercial operation. Thus, an auction would enable the government to garner that part of the value of the mineral as reflected in the market price which is over and above the miner’s legitimate profit due to the demand-driven nature of the market price. Let us see what this does to hematite iron ore vis-a-vis other minerals. In the case of other minerals the margin between extraction cost and market prices being considerable the auction would enable the government to get the true price of its minerals after accounting for the cost of extraction and what the miner considers to be his legitimate profit.

On the other hand, in the case of iron ore, the margin between extraction cost and market price being mind boggling the auction would mop up for the government the hitherto huge rentier incomes earned by the lessees, both standalone and captive. A number of advantages would follow, not least among them being the end of illegal mining and the need to tax windfall profits or impose export duties.

Since the Hoda report has been accepted by government it was expected that the draft Bill would reflect this thinking. In fact, Section 13 (4) introduces a peculiar twist to the auction which does away with the concept of mopping up rentier or surplus incomes for the government. It turns out that the auction is to be not an auction of extraction leases for the delineated ore body but an auction for the data which the prospector of the ore body (mostly GSI itself or MECL) has archived with the government in the National Repository. The Explanation (i) below 13 (4) states that the purpose of the auction is to recover the cost of the exploration report, which basically means that the cost of a successful prospector’s report archived by GSI or MECL.

The author is a retired IAS officer. He was secretary, Ministry of Mines, Government of India, from 2005 to 2007. He can be reached at akdjadjav@yahoo.com

Now, in the current dispensation the miner is supposed to purchase the report from GSI or MECL at a cost. There is a detailed procedure for working out the cost which can often go into crores of rupees depending on the amount of work done and the mineral concerned. An exploration exercise of GSI or MECL is akin to an expedition and is carried out over a number of years deep in the hinterland in severe conditions and the report produced has much value. It is the prospector’s data which the world over is the marketable product of the prospector from where the prospector recovers not only the expenses incurred by him in that particular operation but also on other operations which did not result in recoverable finds. Thus restricting auctions to auctions of exploration data rather than the ore body, the new dispensation now makes mining leases cheaper than in the earlier dispensation when the miner at least paid for the data at a cost. The auction becomes a travesty.