March 2020 Mining Lease Expiry- Prices May Inch-up

The latest amendment to the Mines & Minerals (Development & Regulation) Act, 1957 comes as a major relief to the steel industry, says India Ratings and Research (Ind-Ra). The amendment allows a deemed transfer of all statutory clearances for iron ore mines to the new lessees for a period of two years post licence expiry on 31 March 2020. Obtaining such mandatory clearances, which includes environmental, wildlife and forest clearances, typically takes 18-24 months post allocation of mines, and hence the two-year extension has been allowed, which would have otherwise postponed the commencement of mining operations by the new lessees, resulting in a short supply domestically. The anticipated supply disruption of iron ore, the primary raw material for the steel sector, post March 2020, shall now be substantially contained as the development ensures a smooth transition from the present leaseholders to the new ones, which may now take one to three months to commence operations. Supply over one to three can be met through the stock available at the mines as on 31 March 2020.

Ind-Ra had highlighted the need for risk mitigation strategies in May 2019 in the report ‘Market Wire: Steel Producers Staring at Production Disruption in 2020’. According to the recent developments, the auction process for over 90% expiring mining leases shall be complete by end-February 2020. The recent extension of statutory clearances for two years post expiry, in line with the mitigants highlighted in the report, shall arrest the potential disruption post auctions. Furthermore, the Central Government continues to back the steel sector by the relief measures detailed below: 

Auto Renewal of Mines held by Public Sector Undertakings (PSUs): The Central Government made the renewal of mining leases held by PSUs mandatory without going through the auction process. The extension will be granted for 20 years. This has paved way for resuming operations at NMDC Ltd.’s (‘IND AAA’/Stable) Donimalai mine, Karnataka (7mt), which was not operational after lease expiry since November 2018, subject to state government’s formal clearance. Further, the move shall aid in auto renewal of licenses for the other mines operated by NMDC (in Chhattisgarh and Karnataka) and MOIL Ltd., due for expiry over the next two years. 

Additional Supply from Captive Mines of CPSU: The Union Mines Ministry has permitted Steel Authority of India Ltd. (SAIL, ‘IND AA-’/Stable) to sell up to 25% of its captive iron ore production in previous year (FY19: 28mt) in the open market for the next two years, post meeting its own requirements. Thus, additional around 7mt iron ore can be made available to partially bridge the gap subject to smooth capacity ramp up at SAIL and extraction viability. The ministry has also allowed SAIL to offload another 70mt low grade iron ore dust and fines stock, accumulated over the years, in the open market.

Storage Licenses for Two Years Post Expiry in Odisha: Odisha accounts for around 92% of the mining output at risk, followed by Karnataka. Accordingly, Odisha’s Steel & Mines Department notified to permit storage license for intermediate stockyards up to 31 March 2022, only to store iron ore by the end-user industries located within the state. The stock shall be captively used by the licensee in its plants located in Odisha and cannot be dispatched for trading purposes or for export outside the state. Scope for additional storage has allowed both, end-user industries and merchant miners, to build up an inventory for the next fiscal during the run-up to expiry in March 2020.

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Moreover, according to the tender documents for mines up for auction in Odisha, a successful bidder shall be bound for the first two years to produce at least 80% of the average volumes actually produced in the preceding two years for the respective mines. 

Consequently, the concerns pertaining to expected stress in the credit profile of new merchant miners and end-user industries, especially the non-integrated steel manufacturers operating without captive mines, have been addressed to a large extent. This is because the minimal lead time post auctions, subject to expected gestation period of one to three months, to commence operations shall contain supply disruptions.

Nevertheless, the steel plants which will meet their iron ore requirements from these newly auctioned iron ore mines may incur higher costs than already captive steel plants or players sourcing iron ore from private merchant miners having valid licences beyond March 2020 or from PSUs such as Odisha Mining Corporation Ltd., NMDC, etc. whose mines will be auto renewed on expiry. The higher cost of iron ore shall be on the back of the auction premium to be paid to acquire the mines. Accordingly, Ind-Ra believes that such captive steel plants or players sourcing through iron ore linkages shall continue to enjoy a cost advantage in the medium term.

Ind-Ra expects aggressive bidding for mines, as five to six companies on an average have participated for each of the iron ore mines to be auctioned. This is despite the latest addition of a clause in the tender document restricting bidders to only one offer per mineral block and no participation from associated entities (subsidiary, parent, or joint venture) for the same mineral block.

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