Mining Policy: A Few Burning Questions

- Concerned Citizen

Consider the questions listed below concerning some of the key aspects of mining policy, and reflect on the possible answers from among the options suggested:

1.       Who has the right over the mineral wealth of the nations?

a.  Local people of the region
b.  State Government
c.  Central Government
d.  Industrialists and politicians

2.       The market price of the extracted mineral is Rs. 3500/- per mt, mining cost is around Rs. 300/- per mt. The net value creation is Rs. 3200/- (3500-300). Of this value of Rs. 3300/- per mt, what value according to current practice remains with the government as royalty? Please guess.

a.    More than Rs. 3000/-per mt
b.    Between Rs. 2000 to 3000 per mt
c.    Between Rs. 1000 to 2000 per mt
d.    Between Rs. 100 to 1000 per mt
e.    Between Rs. 20 to 100 per mt
f.     Less than Rs. 20/- per mt

3.       After liberalization, Metal Companies are allowed to sell their finished product at the market determined price. On what basis should these companies be given minerals as their raw material?

a.      Market price
b.      Miniscule royalty, which is less than 1% of the market value of the mineral
c.      Highest bid in an auction

4.      On what basis is royalty for minerals fixed?

a.    Royalty is a factor of (Market price-raising cost)
b.    Royalty is to recover administrative costs of the mining industry and related departments

I do not know what your answers would be to the above questions, but my answers for all the above are as follows:

1.       a. Local people of the region
2.       f. Less than 20/- pmt
3.       c. Highest bid in an auction
4.       God only can answer this question!

While post-liberalisation, metal companies sell their product based on international market price, they continue to get access to minerals at royalty fixed historically at an abysmally low rate in comparison to the market price of the minerals. The best example in this regard is iron ore. The royalty that is recovered for it is less than 1% of its market price. The basis on which such a low rate of royalty is fixed is beyond the understanding of any sensible person.

Last year (2006) around 16.5 crore ton of iron ore was extracted in India (4.5 crore ton by the Steel industry having captive mines like Tata Steel, SAIL, Jindal etc. and 12 crore ton by miners who simply mine and sell iron ore to the Steel industry). The market value of the above iron ore is around Rs.50, 000 crore (@Rs.3000/- pmt), for which the government might have recovered maximum royalty of Rs.300 crore (royalty on iron ore is Rs. 16-19, depending on quality of the ore). Of the remaining value of Rs.49700 crore, the industry might have spent a maximum of Rs.5000 crore as extraction cost (@Rs. 300 pmt). The remaining Rs. 44,700 crore went into the pockets of industrialists who have mining rights.

The Government has to address this abnormality and our friends in the industry who advocate for the market to determine price should also respond to the issue of getting iron ore not at market price but virtually free of cost. This is an example drawn only from the case of one mineral: iron ore. I am sure the scene for other minerals like coal, bauxite, copper, zinc etc. must be quite similar.

Some facts to wonder:

One company, Sesa Goa Limited, simply extracts and sells the iron ore. Its profit last year was about 910 crore. Its book value is Rs. 275 crore. However, its valuation is Rs. 8000 crore (29 times its assets base). This high valuation is directly linked with the mining right of iron ore that it has. Anil Agrawal (Sterlite Group) has recently acquired 51% stake in this company @Rs. 4041 crore.

Tata Steel which was making a profit (PAT) in the range of Rs. 200-500 crore until the year 2001 now makes an annual profit of over Rs. 4000 crore. The reason behind this is that while the price of its finished goods has increased significantly in the last 5 years, it continues to get iron ore at the same price: royalty of maximum Rs. 19 pmt + extraction cost of Rs. 300 pmt.

Sterlite Industries which acquired Hindustan Zinc for around Rs. 1000 crore five-six years back now makes a quarterly profit alone of around 1000 crore. It is only because of the fact these industries continue to get minerals at historically low prices while they sell their product at market-driven prices.

All the recent MOUs for the steel industry by Mittals, POSCO, Tatas in Orissa, Jharkhand and Chhattisgarh have one important condition, that the investor must get the mining right for access to iron ore at virtually no cost. The moment you ask them to buy iron ore at market price, all the MOUs would turn into waste paper. Currently, getting mining rights is a big deal, like winning a jackpot of a goose that lays golden eggs every day. We do not know the exact amount of subsidy that the government is granting to our poor billionaires. But by a rough estimate, it should not be less than Rs. 100,000 on an annual basis – and this amount will go up as mining activity increases. It is urgent that this huge and unjustifiable subsidy be checked by linking the royalty for all the minerals with the market price, and making public the process of awarding and renewal of mining rights.