Tuesday, May 25, 2010 Global mining assets lose sheen for India Inc
Devjyot Ghoshal & Ishita Ayan Dutt / Kolkata May 24, 2010, 0:56 IST
Acquisition of global mining assets, once a must-do on the list of many Indian companies, has suddenly lost sheen. Changes in regulatory frameworks, valuation concerns and inadequate infrastructure have led companies to press the pause button.
Australia is proposing a 40 per cent super-profit tax, Indonesia?s valuations are suspect and Africa?s infrastructural issues have rendered projects unviable.
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CESC Vice-Chairman Sanjiv Goenka said the results of due diligence conducted at mines in Indonesia and other areas have been most disappointing. Actual reserves have turned out to be a fraction of the stated or promised deposits.
That appears a concern for all companies, even for the single largest thermal coal producer in the world, Coal India. Looking to bring coal into the country at a rate lower than the global benchmarks, it says pricing is vital in scrutinising purchase of overseas assets. ?Valuation is our only major area of concern,? director (technical), N C Jha, said.
Consequently, the government-owned undertaking (PSU) is examining prospective asset purchases through technical and financial experts, apart from its internal team, before making a financial decision.
However, it benefits from the fact that it knows the sector, an advantage many firms do not possess while attempting international asset acquisitions. For instance, the coal major has not had problems with ascertaining reserves of assets so far, unlike other less fortunate firms.
Consider that International Coal Ventures Ltd (ICVL), a special purpose vehicle of five PSUs ? Coal India, NTPC, NMDC, SAIL and Rashtriya Ispat Nigam Ltd ? was formed in 2008 to buy coal properties abroad. Two years on, the company is still scouting.
India accounts for 0.5 per cent of world copper reserves, prompting Hindustan Copper to look for assets overseas. But, the search is fraught with risks.
?Chile is rich in copper, but there are issues with regulatory framework, as also sustainability. Moreover, one has to buy water rights in Chile separately, which is time consuming and expensive. In Africa, there are issues with infrastructure, while Australia is now considering a 40 per cent windfall tax,? said Shakeel Ahmed, chairman and managing director of Hindustan Copper.
Recently, the Bolivian government encashed the bank guarantee of Jindal Steel & Power?s El Mutun iron ore project, saying the company had not made the necessary investment within the stipulated time under the contract signed in 2007. Jindal has said the move was against the contract terms.
?Most of the high-grade haematite resources, with more than 60 per cent iron content, are controlled by the big global companies. In low-grade magnetite, the margins are very thin. The average cost of production is Rs 1,200-1,500 (per tonne), while logistics would cost another Rs 500. For our company, which has an Ebitda (earnings before interest, taxes, depreciation and amortisation) margin of 78 per cent, very few assets(acquisition of) make sense,? said Rana Som, chairman and managing director NMDC.
There are exceptions. JSW Steel recently completed the acquisition of nine coking coal mines in West Virginia at a cost of $200-250 million.
Anil Sureka, director-finance, Ispat Industries, says the problems hold for all countries with natural resources. ?There are problems in India as well,? he said.
Domestic companies turned to look at global assets largely due to an inordinate delay in asset allocation in the home country. In the past couple of years, though, many of them have been allocated resources ? coal, iron ore and even copper. Suddenly, India is on the same footing as global peers.
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