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Introduction
2Sunday, July 14, 2013
30%
33%
24%
5%
6%
2%
Coal Oil
Natural Gas Nuclear Energy
Hydro electric Renewable Sour...
Coal
 There are four stages in coal formation
a) Peat (1000 – 1500 Kcal/Kg),
b) Lignite (1700 – 2600 Kcal/Kg),
c) Bitumin...
Mining Methods
Sunday, July 14, 2013 4SBI Capital Markets Limited, Hyderabad
Indian Scenario
Sunday, July 14, 2013 5
53%
29%
10%
1%
5%
2%
Coal Oil
Natural Gas Nuclear Energy
Hydro electric Renewable ...
Indian Coal reserves
Types of Coal in million tonnes Proved Indicated Inferred Total
(A) Coking 17,933 13,653 2,102 33,688...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 7
Coal supplyand demand
Company (million tonnes) FY10 FY11 FY12 FY13(E)
CIL 431.40 431.40 435.80 452.20
SCCL 50.30 51.30 52....
Indian Coal Industry Structure
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 9
Governing Bodies
Ministry of...
IndustryParticipants
Sector (million tonnes) 2006-07 2011-12 2016-17
Electricity (A) 341 539 836
Iron and Steel 43 69 104
...
Coal Allocation Modals
FUEL SUPPLY
AGREEMENT
It is a agreement between the developer
and the coal companies for long-term
...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 12
4.2
5.7
4.1
14.8
1.6
0.2
1.8
10.9
5
2.7
4.8
3.3
12.4
1.6
0...
Pricing of Coal
Colliery Control Order, 2000 - Coal prices are fixed by the respective
coal companies and revised periodi...
Legislation, Policy Frameworkand
Guidelines
1. Mines and Minerals (Development & Regulation) Act 1957
• The Act aims at re...
Coal Block Allocation
Coal blocks are allocated to both private and public
companies to meet the growing demand by 3 route...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 16
Approvals / Clearances Authority / Agency Involved
Mining ...
Global Coal scenario
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 17
6.29 5.97 6.01
3,000
3,100
3,200
3,30...
Coal Production & Consumption
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 18
6.29 5.97 6.01
19.47 25.82 2...
Coal Exports
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 19
0 0 0.092752.90 5.03
5.04
0
50
100
150
200
25...
Coal Imports
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 20
0.00661 0.01543 0.06063
0.07606 0.06063 0.060...
Risk Structureand Allocation
Operating : Technical
Cost
Management
Participant
Completion
Supply
Market
Infrastructure
Env...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 22
Risk
Supply/Traffic/Reserve
Market
ForeignExchange
Operati...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 23
Risk Mitigation
Technical Risk
Technology Guarantee, Techn...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 24
Risk Mitigation
Environmental
Risk
Rehabilitation Guarante...
Business Risk
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 25
Regulatory Risks
1. GUIDELINES
 Identification of blocks for allocation to private sector by CIL/SCCL.
 The State Govern...
 MoEF should segregate coal bearing areas into „Go„ and „No-Go„ areas for
each type of lease (Reconnaissance, Prospecting...
6. GEOLOGICAL INVESTIGATIONS & MINING PLAN
 New agencies with the competence to perform geological investigations need
to...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 29
S.No EVENT TIME LIMIT in months from '0' date
1 Allocation...
Capital Raising options
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 30
Economic uncertainty created
volat...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 31
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 32
6.62
444.26
34.16
174.4
79.51 98.28
2007 2008 2009 2010 20...
Innovativeoptions
Flow Through Shares (FTS)
 A flow through share (FTS) is a share, or the right to buy a share, of the s...
SME Exchange
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 34
Mining/Mineral development fund
This fund needs to have three crucial components.
a) Provision of low interest loans to lo...
Risk, Value and Sourceof Finance
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 36
Equity
ProjectDebt
drawdo...
Appropriate Funding Sources
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 37
License Acquisition &
Grassroo...
Business models
Engineering, Procurement and Construction (EPC) Model
 In this model, the owner goes in for separate EPC ...
Joint Venture Model
 Under this type of business model the mining company owns the authority over the
coal block. The joi...
RelationshipContracting – by MCA and ACA
Core Values Guiding Principles
Commitment
Total commitment to achievement of the ...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 41
Project Circumstances Weight Low 1 2 3 4 5 6 7 8 9 10 High...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 42
Relationship Contracting
Decreasing use Increasing use
1 2...
Fortescue Project – Case Study
 Constructing and Operating iron ore mines (Cloud Break and
Christmas Creek) in western Au...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 44
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 45
Leucadia National
Corporation
Fortescue Metals Group Ltd
F...
Project Financing Plan
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 46
Source of Funds US $
(millions) App...
Risk
POLITICAL RISK
 The Mining State Agreement has not yet been ratified by the Upper
House of the Western Australia Par...
MANAGEMENT RISK
 The project group does not have an operating history and is still in
the early stages of development.
FO...
THE RISKS ELIMINATED BYTHE PROJECT GROUP
MARKET RISK
 The Fortescue and the Project Group have negotiated and
executed co...
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 50
Risk
Supply/Traffic/Reserve
Market
ForeignExchange
Operati...
Thank You
Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 51
Study on mining sector
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  1. 1. Introduction 2Sunday, July 14, 2013 30% 33% 24% 5% 6% 2% Coal Oil Natural Gas Nuclear Energy Hydro electric Renewable Source 31% 29% 1% 35% 4% Asia Pacifc USA South and Central America Europe and Eurasia Africa and Middle East World Energy Consumption Coal reserves distribution SBI Capital Markets Limited, Hyderabad
  2. 2. Coal  There are four stages in coal formation a) Peat (1000 – 1500 Kcal/Kg), b) Lignite (1700 – 2600 Kcal/Kg), c) Bituminous (3500 – 6000 Kcal/Kg) and d) Anthracite (above 6000 Kcal/Kg).  Commercially Coal is classified into two types a) Coking Coal – It has a good coking property, low ash and moisture content, and is used in metallurgy, mainly as a reducing agent. b) Non Coking Coal - The two key varieties of non-coking coal are steam coal and slack coal. Steam coal is generally used by the railways, textile mills, slack coal and is used largely in power plants, the paper industry, cement plants, brick burning industry, sugar mills Sunday, July 14, 2013 3SBI Capital Markets Limited, Hyderabad
  3. 3. Mining Methods Sunday, July 14, 2013 4SBI Capital Markets Limited, Hyderabad
  4. 4. Indian Scenario Sunday, July 14, 2013 5 53% 29% 10% 1% 5% 2% Coal Oil Natural Gas Nuclear Energy Hydro electric Renewable Source  Primary energy consumption in India has grown at CAGR of 8.8 per cent over the last decade, while coal production has grown at CAGR of 6.6 per cent.  The current estimated per capita primary energy consumption in India is about 559.1 million tonnes oil equivalent (mtoe) per year.  Driven by a rising population, expanding economy and a quest for improved quality of life, the energy usage in India is expected to increase from the current level. SBI Capital Markets Limited, Hyderabad
  5. 5. Indian Coal reserves Types of Coal in million tonnes Proved Indicated Inferred Total (A) Coking 17,933 13,653 2,102 33,688 -Prime 4,614 699 0 5,313 -Medium 12,837 11,951 1,880 26,668 -Semi 402 1,003 222 1,707 (B) Non Coking 100,211 128,515 31,082 259,808 Total 118,144 142,168 33,184 293,496 Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 6  There are total 559 coal mines in India, in which 337 are underground mines, 186 are active surface mines, while the remaining 36 are mixed mines.  Other than the reserves in India, Indian companies has coal reserves all over the world, mainly in Australia, Indonesia, USA and New Zealand. The total overseas coal reserve base which belongs to India is 53.549BT.
  6. 6. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 7
  7. 7. Coal supplyand demand Company (million tonnes) FY10 FY11 FY12 FY13(E) CIL 431.40 431.40 435.80 452.20 SCCL 50.30 51.30 52.20 53.20 Others 50.30 50.30 51.90 52.10 Total Indigenous supply 532.00 533.00 559.00 557.50 Demand 604.00 630.00 670 772.84 Gap to met through imports 72.00 97.00 130.10 192.50 Total Imports 67.74 68.90 98.90 142.93 Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 8  The overall long-term demand of coal is closely linked to the performance of the Power, Iron & Steel and Cement industry.  Demand from the unorganized small scale sector comprising primarily of the brick and ceramic industry.
  8. 8. Indian Coal Industry Structure Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 9 Governing Bodies Ministry of Coal Ministry of Environment and Forest Ministry of Mines, Mines Safety Industry Participants Central Sector & State Mining Companies, Private Mine Developers, Coal Traders End Use Sectors Power, Steel & Cement
  9. 9. IndustryParticipants Sector (million tonnes) 2006-07 2011-12 2016-17 Electricity (A) 341 539 836 Iron and Steel 43 69 104 Cement 25 32 50 Others 51 91 135 Non Electric (B) 119 192 289 Total (A) +(B) 460 731 1125 Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 10 End use Sectors 1. CentralMiningCorporations  CoalIndiaLimited -BCCL,CCL, ECL,WCL,SECL,NCL,MCL.  SingareniCollieriesCompanyLimited  NeyveliLigniteCorporation 2. StateMiningCorporations
  10. 10. Coal Allocation Modals FUEL SUPPLY AGREEMENT It is a agreement between the developer and the coal companies for long-term supply of coal. The quantity of coal to be supplied along with other commercial terms and conditions are covered in the FSA itself. E–AUCTION OF COAL E-auction is of two types - Spot E- auction and Forward E-auction. Spot E-auction where a intending buyer can participate in auction. Forward E-auction, only end- users/ actual consumers are eligible to participate and have assured supply over a long period of one year. Around 10% of estimated annual production of CIL would be offered under e-auction. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 11 Coal Supply Levels Penalty 80 – 65% 1.5% 65 - 60% 5.0% 60 – 55% 10% 55 – 50% 20% Below 50% 40%
  11. 11. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 12 4.2 5.7 4.1 14.8 1.6 0.2 1.8 10.9 5 2.7 4.8 3.3 12.4 1.6 0.2 1.7 10.3 4.6 80% 60% 58% 37% 91% 37% 96% 46% 56% 0% 20% 40% 60% 80% 100% 120% 0 2 4 6 8 10 12 14 16 BCCL CCL ECL MCL NCL NEC SCCL SECL WCL milliontonnes Sales volumes of E-auction coal July 2011- July 2012 Total Quantity offered Total quantity sold Increase over notified price
  12. 12. Pricing of Coal Colliery Control Order, 2000 - Coal prices are fixed by the respective coal companies and revised periodically In February 2011, Coal India Limited (CIL) adopted a differential pricing structure for coal based on end-use sector  - Power Utilities (including IPPs), Fertilizers and Defence sector  - Sectors other than Power Utilities (including IPPs), Fertilizers and Defence sector Royalty on coal  - unit of production basis  - ad valorem basis  - both tonnage basis and ad valorem basis Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 13
  13. 13. Legislation, Policy Frameworkand Guidelines 1. Mines and Minerals (Development & Regulation) Act 1957 • The Act aims at regulation of mines and development of minerals under the control of the Central Government. It deals with reconnaissance operations, grant of prospecting licenses and mining lease. 2. Coal Mines (Nationalization) Act 1973 • The purpose of the legislation was to acquire the existing mines at the time and the provisions relate to taking over the management, accounts, and compensating the owners of the mines. 3. Environment related legislation • This area is one where a delicate balance is sought to be maintained between the often conflicting goals of protecting the environment and that of ensuring energy security in the country. • „Go-No Go‟ and CEPI policies adopted by the Ministry of Environment. • CEPI norms prohibited mining in areas with a high pollution index. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 14
  14. 14. Coal Block Allocation Coal blocks are allocated to both private and public companies to meet the growing demand by 3 routes Captive dispensation route through screening committee – Govt allocates the blocks after considering many factors Under government company dispensation - Under this route, only Government companies are allocated coal blocks Tariff based bidding route - Coal blocks have been earmarked for the power projects to be set up on the basis of tariff based competitive bidding system So far 195 coal blocks are allocated with geological reserves of about 44.23 billion tonne. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 15
  15. 15. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 16 Approvals / Clearances Authority / Agency Involved Mining Lease Approval or Purchase of Geological Report CMPDIL (purchase could also be from SCCL, MECL) Directorate General of Civil Aviation and Ministry of Defence (for unexplored blocks if aerial reconnaissance is conceived) Mine Plan CMPDIL Coal Controller Mine Safety Directorate General of Mine Safety Mining Technology & Conservation Measures, and Coal Categorization Coal Controller (under the provisions of Colliery Control Rules and the Coal Mines (Conservation & Development) Act) Mining Lease State Government (Mining Department), Ministry of Coal (GoI) – Reviewed at various levels within the Departments at the State & Central Government level Environment EIA / EMP Studies State Pollution Control Board State Environmental Impact Assessment Authority State Water Resource and Water Supply Department District Administration (for various aspects of site clearance) Coal Controller Department of Environment (MoEF) Forest Forest Clearance & Valuing Compensatory Afforestation Committee to Advise GoI (MoEF) Office of Chief Conservation of Forests, (Regional Office of MoEF) State Forest Department & District Authority Department of Forest (MoEF) State Revenue Department Hon‟ble Supreme Court Land Acquisition Ministry of Coal (under provisions of CBA) State Department of Revenue Infrastructure (Electricity, Water, Railways, Road, etc) Appropriate Departments of the State Government &
  16. 16. Global Coal scenario Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 17 6.29 5.97 6.01 3,000 3,100 3,200 3,300 3,400 3,500 3,600 3,700 3,800 3,900 0 100 200 300 400 500 600 700 2009 2010 2011 MillionShorttons Millionshorttons Australia Production Indonesia Production Canada Production Brazil Production India Production China Production
  17. 17. Coal Production & Consumption Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 18 6.29 5.97 6.01 19.47 25.82 27.57 3,000 3,100 3,200 3,300 3,400 3,500 3,600 3,700 3,800 3,900 0 100 200 300 400 500 600 700 800 2009 2010 2011 All values are in Million Short Tons Australia Production Australia Consumption Indonesia Production Indonesia Consumption Canada Production Canada Consumption Brazil Production Brazil Consumption India Production India Consumption China Production China Consumption
  18. 18. Coal Exports Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 19 0 0 0.092752.90 5.03 5.04 0 50 100 150 200 250 300 350 400 2009 2010 2011 All values are in Million Short Tons China Exports Australia Exports Indonesia Exports Canada Exports Brazil Exports India Exports
  19. 19. Coal Imports Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 20 0.00661 0.01543 0.06063 0.07606 0.06063 0.06063 83.35 64.02 86.83 124.41 163.82 192.50 0.00 50.00 100.00 150.00 200.00 250.00 0 10 20 30 40 50 60 70 80 90 100 2009 2010 2011 All values are in Million Short tons Australia Imports Indonesia Imports Canada Imports Brazil Imports India Imports China Imports
  20. 20. Risk Structureand Allocation Operating : Technical Cost Management Participant Completion Supply Market Infrastructure Environmental Political Force Majeure Foreign Exchange Engineering Syndication Funding/Interest Legal Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 21 Risk can be structured in five ways  Controlled or Shared, as in a Contract  Switched from one party to another by means of Trigger  Financed, such as through standby loans,  Deemed reduced, per Study results  Avoided altogether
  21. 21. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 22 Risk Supply/Traffic/Reserve Market ForeignExchange Operating:Technical Operating:Cost Operating:Management Environmental Infrastructure ForceMajeure Completion Engineering Political Participant Funding/Interest Syndication Legal Output Number/Qty       times: Price     equals: Revenue less: Cash Costs        Royalties   Overheads    equals: Net Operating Cashflow plus: Project Loan   Equity  equals: Total Sources less: Capex    Working Capital   Interest (“I”)     Income Tax   Principal (“P”)   equals: Total Uses
  22. 22. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 23 Risk Mitigation Technical Risk Technology Guarantee, Technology Insurance , Alternative Sourcing. Cost Risk Sales contract – escalator, Cost Curve, Cost Waivers. Management Management Agreements , Key-Man Insurance , Labor Contracts , Training Agreements Participant Risk Joint Venture Agreement, Cross-collateralization and cross-default Completion Risk Turnkey Contract, Equity and Debt Subscription, Delay-In- Startup Insurance , Overrun Undertaking. Supply Risk Supply Undertaking, Supply Additions , Collateral Market Risk Off-take contract, Merchant Financing Infrastructure Risk F.O.B. Sales Contracts , Pooled Infrastructure Agreements, Government Commitments
  23. 23. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 24 Risk Mitigation Environmental Risk Rehabilitation Guarantee, Environmental Warranty Political Risk Local National Participation, War and Insurrection Residual, Political Risk Insurance, Co-financing. Force Majeure Business interruption insurance, Deferral Foreign Exchange Risk Hedging, Swaps. Engineering Risk Independent Certification Syndication risk
  24. 24. Business Risk Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 25
  25. 25. Regulatory Risks 1. GUIDELINES  Identification of blocks for allocation to private sector by CIL/SCCL.  The State Government and its agencies should facilitate infrastructure.  The captive block developers should coordinate with other coal block developers in proximity 2. ALLOCATION OF COAL BLOCK  Should give adequate weightage to the technical & financial capability of the applicants for timely development of the blocks 3. APPROVALS AND CLEARANCES  The nodal agency can pre-determine the conditions for each category of land based on environmental sensitivity and nature of the proposed activity (prospecting, mining etc.)  The nodal agency may complete the requirements of identification of land for compensatory afforestation, enumeration of trees, cost benefit analysis, etc. before inviting application for mining lease. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 26
  26. 26.  MoEF should segregate coal bearing areas into „Go„ and „No-Go„ areas for each type of lease (Reconnaissance, Prospecting, and Mining) on the basis of the forest cover and environmental & ecological sensitivity  State Government should adopt procedures to issue the prospecting license within a minimum time. 4. LAND ACQUISITION  The procedure for land acquisition needs to be made less time consuming 5. REHABILITATION OF PROJECT AFFECTED PEOPLE (PAP)  It is recommended that the Ministry of Coal coordinate with the State Governments to align the State R&R Policies with the National R&R Policy.  Area Development Fund by applying a levy on each tonne of coal produced. This fund could be utilized for social welfare of PAP including their health & education, improvement of infrastructure, roads, water supply etc. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 27
  27. 27. 6. GEOLOGICAL INVESTIGATIONS & MINING PLAN  New agencies with the competence to perform geological investigations need to be set up and accredited by the Government of India. These agencies or an independent expert group should also be empowered to review and approve the mining plan, which would be an input to Ministry of Coal. 7. JOINT ALLOTMENT OF COAL BLOCKS  In case of joint allotment of coal blocks - the companies that do not furnish the Bank Guarantee, should be replaced with other companies from among the applicants whose applications are pending with the Ministry. 8. INFRASTRUCTURE STATUS FOR COAL INDUSTRY  Coal industry needs to be given infrastructure status so as to attract more players into this industry and to incentivize domestic production of mining equipment. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 28
  28. 28. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 29 S.No EVENT TIME LIMIT in months from '0' date 1 Allocation 0 2 Purchase of GR 1.5 3 Bank Guarantee 3 4 Mining Lease Application 3 5 Mining Plan submission 6 6 Mining Plan approval 8 7 Previous approval application 11 8 Previous approval 11 9 Forest Clearance application 12 10 Forest Clearance 18 11 Environment Clearance Application 12 12 Environment Clearance 18 13 Mining Lease grant 24 14 Land acquisition begin 9,19 15 Land Acquisition 30,36 16 Opening permission application 34, 40 for OC 17 Opening permission grant 35,41 for OC 18 Production 36, 42 for OC 48, 54 for UG
  29. 29. Capital Raising options Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 30 Economic uncertainty created volatility and risk aversion among investors. The fall in overall capital raised in 2012, to $249b from $340b in 2011, reflects changing investment appetite. A volatility-led structural shift in investor preferences from equity to fixed income instruments
  30. 30. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 31
  31. 31. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 32 6.62 444.26 34.16 174.4 79.51 98.28 2007 2008 2009 2010 2011 2012 (April - May) USDmillion FDI inflow in Indian Mining Industry  Mining and metals companies raised bond proceeds of $113b in 2012, using bond markets to diversify away from their past reliance on bank debt.  Low benchmark rates encouraging demand from investors for yield, which in turn is reducing borrowing costs for investment grade issuers.  Mining and exploration of metal and non-metal but excluding titanium - MMDR  Coal & lignite mining and its processing – Coal mines (Nationalization) Act
  32. 32. Innovativeoptions Flow Through Shares (FTS)  A flow through share (FTS) is a share, or the right to buy a share, of the stock of a mineral resource company where tax deductions, “flow through” from the company to the investor.  The individual agrees to pay for the shares, and the corporation agrees to transfer certain mining expenditures to the individual  Eligible exploration expenditure has been 100% deductible from income from any source for more than two decades  Canadian mining firms have raised $2.5-billion over the past five years using flow-through shares Mineral Bonds  Mineral bonds can be used to attract more investments in mineral exploration and mining fields like infrastructure bonds. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 33
  33. 33. SME Exchange Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 34
  34. 34. Mining/Mineral development fund This fund needs to have three crucial components. a) Provision of low interest loans to local mining ventures b) Financing geological exploration and mapping c) Contribution towards developing to enhance the national capacity in this field Sourcing funds from professional lending institutions  The private sector body is encouraged to form a joint venture company along with the participating public sector agency with the later holding only minority shares in a PPP arrangement.  Coal India Ltd (CIL) and IL&FS Infrastructure Development Corporation Ltd (IL&FS IDC) have signed a memorandum of agreement (MoA) to float a 50-50 joint venture, to undertake project development for mine, power and other coal-based projects. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 35
  35. 35. Risk, Value and Sourceof Finance Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 36 Equity ProjectDebt drawdown Project Debt repayment Returns to Equity
  36. 36. Appropriate Funding Sources Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 37 License Acquisition & Grassroots Exploration Advanced Exploration & Delineation Feasibility Studies Construction & Commissioning Production & Brownfield Expansion Private Equity & Pre-IPO Finance IPO & Public Equity IPO, Public Equity & Quasi- equity Debt (Full or Limited Recourse), Equity & Other Refinancing, Senior Debt & Equity
  37. 37. Business models Engineering, Procurement and Construction (EPC) Model  In this model, the owner goes in for separate EPC contracts (mine construction), coal & OB removal & haulage contracts. These are short duration contracts and adopted in operational mines.  Since multiple contractors work on the site management becomes a complex task. The owner takes all the responsibility and obligations in terms of planning and construction. Subsidiary obligations of mine management also remain with the owner. Mine Developer cum Operator (MDO) Model  Under the MDO model, the mine owner outsources all the tasks and obligations of developing the mine. The contractor furnishes the entire requisite capital for the progression of the coal mine. The mine owner gives a fixed fee generally fixed on per tonne of coal produced, to the MDO. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 38
  38. 38. Joint Venture Model  Under this type of business model the mining company owns the authority over the coal block. The joint venture partner is chosen via bidding process.  Mine owner bears the responsibility of ensuring that all clearances, permits, leases, along with the liability towards mining license, land acquisition and also solely takes accountability for coal evacuation.  Mine contractor takes on the activities of production planning, construction & mine operations like drilling, blasting, excavation and hauling. Apart from this to maintain the safety standards is also the responsibility of mine contractor. Alliance Model  The ownership of the project is limited to the mine owner only and the alliance formed only focuses on developing the mine in a timely manner. However the cost of development is borne by the mine owner.  Every profit and loss, would be divided between the mine owner and mining partner  The primary advantage is that the board of the alliance entails the emissaries of both the parties. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 39
  39. 39. RelationshipContracting – by MCA and ACA Core Values Guiding Principles Commitment Total commitment to achievement of the project goals – actively promoted by the Chief Executives of all parties Trust To work together in a spirit of good faith, openness, cooperation and no blame Respect The interests of the project take priority over the interests of any of the parties Innovation To couple breakthrough thinking with intelligent risk taking to achieve exceptionally good project outcomes Fairness To ensure that neither party is being unfairly disadvantaged Enthusiasm To engender enthusiasm for professional duties and the project‟s social activities Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 40
  40. 40. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 41 Project Circumstances Weight Low 1 2 3 4 5 6 7 8 9 10 High 1 Is project completion critical? 10% Doesn‟t matter ● Critical 2 Is early completion valuable? 10% Little value ● High value 3 Brownfield or greenfield work? 15% Mature environment ● Unworked 4 Geological environment 15% Well known ● Not well known 5 Geotechnical environment 15% Defined ● Undefined 6 Quality parameters 5% Well known ● Not well known 7 IR Environment 10% Low risk ● High risk 8 Owners capacity to be part of project 5% Little experience ● Very experienced 9 Owners Risk Culture 10% Risk adverse ● Sophisticated view 10 Availability of Contractors 5% Few ● Many 100% Totals - - 0.3 - 0.5 0.3 1.4 2.4 0.9 1.5 Net total 7.3 <3 3 - 7 >7 Use hard Strategy Requires closer examination Co-operative risk embrace
  41. 41. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 42 Relationship Contracting Decreasing use Increasing use 1 2 3 4 5 6 7 8 9 10 <3 3 - 7 >7  Lump Sum  Schedule of Rates  Cost reimbursable  Cost plus incentive  Alliancing  Partnering The benefits offered by Relationship Contracting  Time  Cost  Risk  Relationship  Flexibility  Technology and innovation  Optimum Standards  Clearly defined project goals and scope  Gain share/pain share  Integrated project team
  42. 42. Fortescue Project – Case Study  Constructing and Operating iron ore mines (Cloud Break and Christmas Creek) in western Australia to produce an initial targeted amount of 45 million tons per annum (―mtpa) through Chichester Hub.  Constructing and Operating rail and Port Infrastructure through TPI (The Pilbara Infrastructure Pty Ltd) to transport and load the iron ore for shipment to customers in Asia.  Start up scheduled at 2008  Ore Type  Marra Mamba  High Grade lump – 61.1%Fe  Fines Grade – 60.2% Fe and 58.7% Fe Lead Arranger / Debt Underwriter – Citibank Co-Lead Manager – Jeffries & Co Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 43
  43. 43. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 44
  44. 44. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 45 Leucadia National Corporation Fortescue Metals Group Ltd FMG Pilbara Pty Ltd International Bulk Ports Pty Ltd Pilbara Mining Alliance Pty Ltd (“PMA”) The Pilbara Infrastructure Pty Ltd (“TPI”) FMG Chichester Pty Ltd FMG Finance Pty Ltd (SPV) Equipment Leasing Senior Secured Notes US $300 million Leucadia Placements US $ 100 million Leucadia Sub - ordinated Notes 28 Sales Contracts Project Group WorleyParsons Team 45 Roche Mining Pty Ltd Alliance Contract for mining construction and operations Connell Wagner Pty Ltd Independent Engineer EPC Contract
  45. 45. Project Financing Plan Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 46 Source of Funds US $ (millions) Application of Funds US $ (millions) Debt Senior Secured Notes Operating Leasing 2,051 115 Project Capital Feasibility capital expenditure Repayment of Bridge Loan Infrastructure Mining Working Capital 136 150 1,130 408 139 Equity and Subordinated Debt Sponsor Equity Leucadia Placements Leucadia Subordinated Notes 136 300 100 Contingencies Cost overrun Reserve Account Back – Up Reserve Account Risk provision contingency 223 100 147 Other Sources Interest on proceeds on deposits Initial production 142 81 Financing Related Costs Debt Service Reserve Account Fees 419 73 2,925 2,925
  46. 46. Risk POLITICAL RISK  The Mining State Agreement has not yet been ratified by the Upper House of the Western Australia Parliament until August 22, 2006 FORIGN EXCHANGE RISK  The assets, earnings and cash flow of the project group are influenced by movements in exchange rates of the U.S dollar against the Australian dollar TECHNICAL RISK  The Project Group„s projections for mining iron ore include a new application of Strip mining methodology, which has not yet been applied in other iron ore mining settings Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 47
  47. 47. MANAGEMENT RISK  The project group does not have an operating history and is still in the early stages of development. FORCE MAJEURE RISK  The Pilbara Region is exposed to adverse weather events, including cyclones COMPLETION RISK  Construction costs for the development of the project may be higher than anticipated and the project may be subject to delays. PARTICIPANT RISK Project group has to bear all the risks, if the individual contractors who are engaged but fail to perform as there is no single overarching contractor that would bear these risks Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 48
  48. 48. THE RISKS ELIMINATED BYTHE PROJECT GROUP MARKET RISK  The Fortescue and the Project Group have negotiated and executed contracts for 39.5 mtpa under 28 contracts SUPPLY RISK  Current reserve estimates provide for a minimum project mine life of approximately 20 years at an ongoing production rate of 45mtpa INFRASTRUCTURE RISK  260 Kilometers railroad with loading and unloading facilities and a new port facility at Port Hedland with all facilities required for export from the port Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 49
  49. 49. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 50 Risk Supply/Traffic/Reserve Market ForeignExchange Operating:Technical Operating:Cost Operating:Management Environmental Infrastructure ForceMajeure Completion Engineering Political Participant Funding/Interest Syndication Legal Output Number/Qty   times: Price   equals: Revenue less: Cash Costs      Royalties  Overheads   equals: Net Operating Cashflow plus: Project Loan  Equity  equals: Total Sources less: Capex    Working Capital  Interest (“I”)    Income Tax  Principal (“P”)   equals: Total Uses
  50. 50. Thank You Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 51
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