Lagging Far Behind: Exploration works still require a push to take off

Exploration works still require a push to take off

Mineral exploration in India is yet to make a mark. The country is far behind its global counterparts with respect to exploration activities. While countries such as Canada and Australia account for a share of 14 per cent and 12 per cent, respectively, in the global exploration budget, India’s share is negligible. Further, the country’s exploration expenditure is estimated at around $17 per square km, in sharp contrast with its BRIC counterparts such as China and Brazil that have exploration expenditures to the tune of $56 per square km and $35 per square km respectively.

One of the key reasons behind the low levels of exploration in India is the restriction on depth. Currently, exploration is mostly restricted to a depth of 50-100 metres in contrast to about 300 metres in countries such as Australia. India thus has to make significant efforts to realise its immense mining potential. The role of the private sector in exploration activities needs to be enhanced as well.

Current exploration spending

Since 2014-15, the Geological Survey of India (GSI) has invested over Rs 700 million towards mineral exploration activities. In 2016-17, a significant portion was in the eastern and northeastern regions, aligned with the government’s vision of stepping up exploration efforts in these areas. Further, since 2013-14, Mineral Exploration Corporation Limited (MECL) has incurred over Rs 390 million in carrying out exploration activities across the country.

NMEP, 2016

On the policy front, a major push for exploration activity has been the introduction of the National Mineral Exploration Policy [NMEP], 2016. The policy framework outlines the government’s action plan and spells out the strategy to ensure comprehensive exploration of the country’s mineral resources (non-fuel and non-coal). One of the most significant changes brought in by the NMEP is assurance to the explorer. The policy seeks cost compensation in the wake of an unsuccessful exploration effort, so as to encourage private players to take part in exploration activity. Another key highlight of the policy with regard to exploration is the prioritisation of minerals in accordance with their criticality for industrial and economic growth/security. These priorities will be subject to periodic review. The Indian Bureau of Mines will develop a mechanism for fixing national priorities based on mineral intelligence information.

Current drilling levels

Exploration work in the country is carried out primarily by the GSI and MECL. Exploration is carried out each year under field season programmes for which annual targets are set. In the case of coal, the Central Mine Planning and Design Institute (under the Ministry of Coal) carries out drilling/exploration works for Coal India Limited (CIL) and in non-CIL areas. As compared to other countries, annual exploration drilling in India is only about 0.5 million metres (government estimates), while Australia drills between 10 million-12 million metres annually, similar to that in Canada.

Investment needs and requirements for exploration

After the notification of the NMEP, the GSI identified 100 potential mineral blocks for regional exploration. Of these, 30 blocks each have been allotted to the GSI and MECL, 19 blocks to central and state public sector undertakings and the remaining 21 blocks have been earmarked for exploration by private entities, to be engaged under a contractual framework. Currently, these projects for the discovery of mineral blocks are at various stages of progress.

The investment requirement over the next five years for the implementation of the NMEP has been pegged at Rs 21.16 billion. This figure is over and above the annual budget of the GSI under the Ministry of Mines.

Under Union Budget 2019-20, the Ministry of Mines received an allocation of Rs 14.98 billion (budget estimates). The allocation is lower than the budget estimate of Rs 16.7 billion and higher than the revised estimate of Rs 13.5 billion for 2018-19. Of the total allocation in 2019-20, Rs 5.67 billion was allocated to the GSI and Rs 1.5 billion was transferred to MECL under the National Mineral Exploration Fund.

Options for funding future plans

Funding options for mining companies depend on the reserve confidence level (how well established or proven the reserve levels are) and the stage of the project life cycle. Sources can be tapped according to project risks and expected cash flows, depending on the status of project execution. The financing options that can be tapped by mining companies include:

  • Flow through shares (FTSs): Large-scale exploration expenses that are incurred before revenue generation lead to significant losses for mining companies. FTSs allow these losses to flow through to the investors holding shares in these companies, which they can deduct from their taxable incomes. These instruments have performed well in the Canadian markets.
  • Dedicated stock exchanges: A dedicated platform for mining companies to raise equity funding may be another viable solution. These can be a one-stop solution for companies looking for funds, especially in the initial phases of project development.
  • Offtake agreements: Offtake agreements involve takeout of the initial funding through determined volume or share of production over a future life cycle. Thus, these agreements offer a guaranteed source of demand for the mining company, which helps it in securing finance from other sources.
  • Stream financing: This involves a long-term purchase and sale agreement between the financier and the mining company. The financier provides the mining company with payment (either up front or stage-wise), in exchange for the right to purchase the future stream of output at a fixed price. Once production starts, the financier also makes ongoing payments at a fixed price (which is typically less than the market price).

Key challenges

Exploration, by its very nature, has a high degree of unforeseen challenges. While the reserves may be established, the economic feasibility of mining can vary significantly. This, in turn, makes the outlook for a given mining project uncertain. Besides, lack of coordination among various government entities is another challenge impeding growth of the sector.

At present, financing exploration activity is also a big issue. Tapping the equity route, for instance, has its own set of challenges – stock exchange transactions are subject to significant reporting standards and regulatory procedures and costs. Further, investor appetite as well as valuations for risk are highly dependent on the prevailing macroeconomic scenario. Addressing these challenges will be critical to future exploration activities.

The mining sector faces huge gaps with regard to skilled manpower and technology deployment, and this affects exploration works. Besides, local communities often protest against exploration activities due to fear of loss of livelihood. The absence of community involvement and poorly executed rehabilitation and resettlement plans are a key reason for this.

In sum

The GSI has already initiated a National Aerogeophysical Mapping Programme over the geological potential areas, covering an area of about 0.8 million square km, for acquiring the baseline magnetic and spectrometric data. The programme will help identify concealed and deep-seated mineral deposits and will help improve the effectiveness of exploration activities. The Rs 3.52 billion project will be funded through the National Mineral Exploration Trust.

Going forward, concerted efforts are expected to be made towards driving mineral exploration in the country. Ideally, India needs to invest at least Rs 60 billion per annum for carrying out exploration works, besides undertaking about a million metres of drilling per annum, in order to achieve higher self-sufficiency in key minerals.