Insight - Fresh Prospects in Indian Mining: Mine Development & Operations

Recent changes in the Indian Government’s approach to mining has opened up opportunities for private sector involvement in the industry, including international METS firms.

India’s mining sector is vast. With 1,531 mines in operation, the country produces 95 minerals including 4 that are fuel-related, 10 metallic, 23 non-metallic, 3 atomic and 55 minor minerals[i]. India is the world’s second largest crude steel producer, with an output of 106.5 MT in 2018. India’s steel consumption has grown by 7.5% per year[ii] over the last two years, outpacing the global growth rate of 5%. India is also the second largest producer of coal globally, with a compound annual growth rate (CAGR) of 4.6% from 2014–2019 taking output to 730.35 MT. Coal’s share of India’s primary energy consumption is expected to be 48% by 2040[iii].

Fast-paced growth is triggering change. The Indian mining industry has recently undergone rapid transformation in terms of policy parameters, market participants and the operating profile.

In 2018, the Ministry of Coal revised its policy of ‘captive consumption’ – or production for an entity’s own use – and now allows increased participation by private contract miners. The Ministry has three objectives: enhanced operational efficiency; innovation and productivity improvements; and the labour-cost arbitrage that contract miners can offer.

To date, more than 40 mines with an annual production capacity in excess of 500 million tonnes of coal have been allocated to state and federal government entities via competitive bidding. These entities will be inviting bids for coal mining in the near future. The preferred model for engagement is a Mine Development and Operations (MDO) model.

This model presents major opportunities for local engineering, procurement and construction (EPC) players with a demonstrated and relevant track record. In turn, this offers Australian METS companies the opportunity to supply or partner with Indian EPCs on products, services or technologies.

A new model for mining

The mine development and operations (MDO) model is a variant of the BOT (Build, Operate and Transfer) model. Its purpose is to combine the efficiencies and expertise of private mining contractors with public sector ownership or lessees. Contracts tend to operate such that mining companies supply coal or minerals to the mine owners in return for service fees charged on a per tonne basis. Risks are shared. The attractions of the MDO model are that it provides fresh opportunities for mining companies, while maximising returns on investment for public bodies that own green-field mine sites.

MDO contracts tend to be long term. Successful operations require robust mine-design and engineering capabilities as well as the financial strength to sustain viable operations over the long haul. The upsides are substantial, however. With 15–25 year life-spans, the contracts generate reliable, long-term revenue streams, which strengthen contractors’ order books. They also help EPC companies to diversify.

MDO selection

The selection process of a contract miner or MDO is usually concluded through a competitive bidding process. The scope typically includes environmental permissions, land acquisition, infrastructure financing and mine development. Bidders must describe how they intend to operate the mine to maximise output and ensure high standards.

Bidding is usually a single-step process, although a two-step process is sometimes employed via electronic auctions. The typical bidding parameters include: waste rock, coal/ore, preparation, logistics, transport management, and delivery modes – which are either separate or bundled. These parameters are usually determined by the Tender Conditions used to select an MDO partner as part of an approved Mine Plan. There is usually a window of opportunity for the MDO partner to improvise, albeit with regulatory and commercial risks.

Technology and MDO

The presence of state-of-the-art technology in Indian mining is currently quite low. The MDO model therefore presents significant opportunities. Potential targets for fresh technology include improved excavations and haulage in underground mining, and enhanced beneficiation – especially if it reduces water consumption. Areas where overseas companies could deliver best-practice improvements include:

  • operational planning and resource-management software products
  • more and better sensors for data acquisition
  • analysis of mine-site operations through artificial intelligence
  • robotics, automation and drone surveillance.

MDOs would need to invest significant upfront capital in equipment and infrastructure during the mine development phase. Long-term costs also include recurring replacement capex for machinery during the mine operation phase based on asset condition and usage. Currently, the estimated overall investment outlay is in the range of 8–10% of project revenues over the MDO tenure.

In India, it generally takes two to five years for a new mine to achieve peak production capacity and EBITDA margins of 25%–30%. Critical success factors include: the ability of an MDO to maintain the scheduled production timelines; the ability to maintain or operate below the stipulated strip ratio; and the ability to keep asset utilisation at an optimal level.

Owners with an MDO model

A number of leading asset owners in India are already utilising the MDO model. These include SAIL, NTPC, Coal India & subsidiaries, Singareni Collieries, Tata Steel, Hindustan Copper, Uranium Corporation, Hindustan Zinc, and the State Governments of West Bengal, Odisha, Rajasthan, Telangana, Andhra Pradesh, Madhya Pradesh and Gujarat.

MDO operators in India include Thriveni Group, Adani, Sainik, Essel Mining, Sical, Ambey Mining, BGR Group, Dilip Buildcon, VPR Mining, AMR Group, NCC Ltd., Monte Carlo, Mahalaxmi, Maheshwari, Rawmin, JMS, and Barminco.

Key considerations for an MDO

A number of factors are important considerations for entities that are considering using an MDO model. These include:

  • Land acquisition
  • Reclamation and rehabilitation (R&R)
  • Mine planning through to development
  • Operation of mine (25+ years)
  • Coal extraction
  • Coal transportation up to the owner’s loading silo on behalf of the mine owner who holds the mining lease.

MDO in coal: a rare opening

In the near term, about 121 coal blocks will be available for allocation or auction. This opens new opportunities for METS, in particular in planning, consulting and mining IT, as well as operations, equipment supply and beneficiation.

Since 2018, 83 coal blocks have been allotted to – or auctioned off to – government and private companies. Of the 52 coal blocks allotted to government companies and public sector undertakings (PSUs), private mining companies have been selected as MDO partners in 19 blocks. The selection process for MDO partners for the remaining blocks is underway.

The potential scale of this activity is significant. Over the next 25 years, these 19 mines will produce approximately 160 million tons each year. Coal blocks have also been allocated to State Mineral Development Corporations (SMDCs) and PSUs for commercial mining. These entities are likely to adopt the MDO model for the development of the coal blocks allocated to them.

The challenges of MDO

The MDO model is used by owners and lessees who are highly value-conscious. Projects are won at aggressive prices, and successful bids often include risk-sharing partnerships and performance-linked payments. There is a strong focus on co-operation with stakeholders such as mine owners, OEMs, financial institutions, and others to ensure smooth and efficient operations. There is also a short-term focus on generating returns on METS investment.

Successful MDOs will need to focus on the overall quality of human resources, processes, energy efficiency and productivity. Environmental and sustainability issues are taken very seriously. Mine owners are keen to collaborate with foreign METS companies in the areas of strategic and operational mine planning, resource optimization services, energy efficiency and project management. Mine owners are also open to innovation in training and development, including the use of augmented and virtual reality simulations. Proposed technologies will need to help deliver higher production capacities and lower costs, and to manage lower grades and remote operations.

The opportunities for overseas METS companies are significant. In some cases – particularly in underground mining – Indian MDOs may not satisfy the qualification criteria. Bidders may feel compelled to find a foreign contract mining partner to mount a bid.

Entering the Indian mining sector

The MDO model is likely to dominate the Indian coal sector once all the mines allocated become operational in 5–6 years. MDO contracts attract stringent penalties for any delay in the development of a coal block, or a shortfall in quantity, or a deviation in quality. Therefore, METS that can be deployed to enhance efficiencies and reduce risks will find favour. A top priority for bidders will be any innovation that helps save additional dollars per tonne of mineral produced.

Contract miners have started to develop risk-sharing models with METS partners, in preference to fixed payments. This form of partnership requires a local presence for the foreign METS providers. For those able to establish a local presence, it may be beneficial to consider joint ventures, alliances and other types of close collaboration. Forging alliances together with well-known Indian businesses may deliver a faster route to market – and a surer foothold. Local partnerships may also provide scale that new entrants find difficult to achieve in a complex and unfamiliar market.

Even with a partnership strategy, the market in India requires perseverance. Negotiations can become drawn out.
The principal advantage of a local partnership strategy is that foreign METS companies may not have to deal with the labyrinthine procurement processes of government corporations. Private counterparts tend to smooth forward paths.  

For Australian METS companies, the long-term and strategic business potential is significant – and many of these opportunities are analysed in greater detail in An India Economic Strategy to 2035. India has a large, growing and aspirational young population. Investment in infrastructure is triggering great demand for minerals and this underpins growth in the mining industry.

The costs of doing business in India may appear high and efforts may take longer to yield financial returns. However, these challenges have to be weighed against high volumes and huge market potential. With a fast-growing, liberalising economy, India offers top-grade prospects to METS companies with international ambition.

How can Austrade assist?

Austrade has a presence in six significant locations in India. Austrade employees work closely with mining contractors (EPC companies), engineering companies and consultants in the Indian mining industry and can introduce you to  decision-makers and influencers so that you could access the commercial opportunities in MDO projects. For assistance or queries, contact Ramakrishna Dastrala from Austrade’s Hyderabad office.

Impact of COVID-19

As of May 2020, the proposed timelines for bids and tenders have been put on hold due to COVID-19. There will be short-term impacts on how the mining sector operates during the current lockdown. The insights in this report are based on operations in a normal year.

[i]  India Brand Equity Foundation

[ii]  The Economic Times

[iii]  The Economic Times