Page 16 - The Mineral Development and Regulation Framework in India (English Version)
P. 16
Discussion Paper
downstream industrial activities that will bring In passing, it may be stated that valuing a mine
jobs, revenues, and economic growth to the through bidding or other processes is, strictly
State; and speaking, different in concept from royalty. The
royalty is payable to the owner of the mineral. The
Mineral resources occur in areas occupied by bid for the mine or the prospect is payable to the
local communities who have a legitimate claim owner of the mineral concession, and is similar to the
to ownership of the resource in some form, and concept of payment for transfer of a mine or a mineral
so mining for private profit must ensure that the concession between any two parties. It is perhaps
local communities are not adversely affected and akin to payment for a right of access, factoring in
in fact benefit from the opportunity. the legal and technical and intellectual property
considerations and the sector-costs of exploration. It
The MMDR Act 1957 was conceived at a time when may be counterproductive in the long run to attempt
the Public Sector was at the commanding heights to include elements of royalty into such a process as it
of the economy. Minerals were required mainly for would create a non-level playing field between mines
production of metals by the public sector giants like based on bidding and those which came in through a
SAIL and NALCO (TATA Steel was an exception), non-bidding route.
and captive mining was the only kind of mining. After
liberalization in 1991, the MMDR Act was amended There is one more aspect, which goes to the heart
to provide for private companies and non-captive of the mining concession system. Any sensible system
mining (also called merchant mining) commenced, must reward extraction efficiency. If a mine is able to
to an extent that today the areas under private mines recover low grades or minor metals, based on R&D
exceeds that with the public sector. Most of the PLs at the risk and cost of the entrepreneur, it should be
applied for were based on geoscientific surveys of the a “win-win” situation for the lessor and lessee. There
GSI or State agencies, and most of the direct lease is a real danger that bidding systems, since they are
applications were either based on visual indications not compatible with risk-reward paradigms, may not
(in the case of small deposits), or work of public be able to adequately incentivize R&D for resource
agencies. Royalty was seen as the consideration extraction efficiency beyond that already specified in
(value) that the State legitimately received for the the bidding document and resource estimations.
minerals extracted by the mining companies, and in
most cases the royalty was computed as specific or The ruling constraint today is that in most cases, the
unit-based royalty on the basis of weight or volume, exploration for prospects to be given out as concessions
without regard to current value. However, with the does not conform to a “fully prospected ore body”
entry of private mining enterprises, mining royalties under UNFC, much less as a “pre-development” stage
were seen as important sources of revenue, and a under JORC. As such, for the purposes of realizing
system of ad-valorem royalty [as a percentage of the better value for the minerals extracted, particularly
pit mouth value of the mineral or a standard value where it is felt that the current royalty system does not
for the metal, such as the London Metal Exchange fully capture resource rents, instead of putting in place
(LME) price] was introduced. complex systems prone to errors and uncertainties,
and perhaps in the process creating a non-level playing
The Hoda Committee recommended that the field with negative consequences for the sector, it may
royalty system move strongly in favour of the ad- in fact be preferable, for the medium term at least, to
valorem system from the earlier unit-based (or specific) generally move further along the path of ad-valorem
system and royalty rates were notified accordingly in royalty, to a “sliding scale” ad-valorem royalty which
2009 and again recently in 2014. At the same time, the factors in the volume of production, and thus captures
Committee also recommended that fully prospected the economies of scale. Theoretically, it is possible to
ore bodies should be put to bid, in order to capture move to an income or profit-based system which also
some residual value.
16 JANUARY 2015
downstream industrial activities that will bring In passing, it may be stated that valuing a mine
jobs, revenues, and economic growth to the through bidding or other processes is, strictly
State; and speaking, different in concept from royalty. The
royalty is payable to the owner of the mineral. The
Mineral resources occur in areas occupied by bid for the mine or the prospect is payable to the
local communities who have a legitimate claim owner of the mineral concession, and is similar to the
to ownership of the resource in some form, and concept of payment for transfer of a mine or a mineral
so mining for private profit must ensure that the concession between any two parties. It is perhaps
local communities are not adversely affected and akin to payment for a right of access, factoring in
in fact benefit from the opportunity. the legal and technical and intellectual property
considerations and the sector-costs of exploration. It
The MMDR Act 1957 was conceived at a time when may be counterproductive in the long run to attempt
the Public Sector was at the commanding heights to include elements of royalty into such a process as it
of the economy. Minerals were required mainly for would create a non-level playing field between mines
production of metals by the public sector giants like based on bidding and those which came in through a
SAIL and NALCO (TATA Steel was an exception), non-bidding route.
and captive mining was the only kind of mining. After
liberalization in 1991, the MMDR Act was amended There is one more aspect, which goes to the heart
to provide for private companies and non-captive of the mining concession system. Any sensible system
mining (also called merchant mining) commenced, must reward extraction efficiency. If a mine is able to
to an extent that today the areas under private mines recover low grades or minor metals, based on R&D
exceeds that with the public sector. Most of the PLs at the risk and cost of the entrepreneur, it should be
applied for were based on geoscientific surveys of the a “win-win” situation for the lessor and lessee. There
GSI or State agencies, and most of the direct lease is a real danger that bidding systems, since they are
applications were either based on visual indications not compatible with risk-reward paradigms, may not
(in the case of small deposits), or work of public be able to adequately incentivize R&D for resource
agencies. Royalty was seen as the consideration extraction efficiency beyond that already specified in
(value) that the State legitimately received for the the bidding document and resource estimations.
minerals extracted by the mining companies, and in
most cases the royalty was computed as specific or The ruling constraint today is that in most cases, the
unit-based royalty on the basis of weight or volume, exploration for prospects to be given out as concessions
without regard to current value. However, with the does not conform to a “fully prospected ore body”
entry of private mining enterprises, mining royalties under UNFC, much less as a “pre-development” stage
were seen as important sources of revenue, and a under JORC. As such, for the purposes of realizing
system of ad-valorem royalty [as a percentage of the better value for the minerals extracted, particularly
pit mouth value of the mineral or a standard value where it is felt that the current royalty system does not
for the metal, such as the London Metal Exchange fully capture resource rents, instead of putting in place
(LME) price] was introduced. complex systems prone to errors and uncertainties,
and perhaps in the process creating a non-level playing
The Hoda Committee recommended that the field with negative consequences for the sector, it may
royalty system move strongly in favour of the ad- in fact be preferable, for the medium term at least, to
valorem system from the earlier unit-based (or specific) generally move further along the path of ad-valorem
system and royalty rates were notified accordingly in royalty, to a “sliding scale” ad-valorem royalty which
2009 and again recently in 2014. At the same time, the factors in the volume of production, and thus captures
Committee also recommended that fully prospected the economies of scale. Theoretically, it is possible to
ore bodies should be put to bid, in order to capture move to an income or profit-based system which also
some residual value.
16 JANUARY 2015
