Mining auction winners need to complete projects on time or face penalties

Delays would result in deduction of a part of performance security that will be paid by successful bidders to state governments. (Photo: Mint)
Delays would result in deduction of a part of performance security that will be paid by successful bidders to state governments. (Photo: Mint)

Summary

  • The policy is being formulated for both mining as well as composite licences (includes prospecting plus mining)

NEW DELHI : The government is finalizing a carrot-and-stick approach to ensure that mining companies move swiftly towards production at mineral blocks awarded to them at auctions, and to make delays unpalatable.

The stick first: delays in work at every milestone within an overall timeline will attract penalties. And the carrot: if delays in meeting milestones are overcome in the full course of the project development, the penalties paid will be adjusted, two people aware of the development said.

Delays would result in deduction of a part of performance security that will be paid by successful bidders to state governments. Performance security is calculated as a percentage of the value of estimated resources (VER) of a mineral block.

According to the people cited above, the government is holding consultations with industry on the draft recommendations of a committee that was constituted last year to explore intermediary milestones for activities to be completed from after a letter of intent (Lol) is issued till the execution of a mining lease.

The discussions with industry are expected to be completed by this month. Timelines and milestones for various stages of mining would be notified in March, following which they would form part of the rules of mineral block auctions, including for critical and heavy earth minerals such as lithium.

Such resources are being put up for auction for the first time after amendments to Mines and Minerals (Development and Regulation) Act, 1957, one of the two people said.

The policy is being formulated for both mining as well as composite licences (includes prospecting plus mining). But the timelines will differ for the two. For mining licences, the overall timeline will be of 33 months from LoI to execution of lease. And for composite licences, the duration of the timeline will be 81 months, the people cited above said.

Queries sent to the ministry of mines remained unanswered till press time.

While pointing out that the approach is not new per se, Rakesh Surana, Partner, Deloitte India, said that the government’s renewed focus, including penalty clauses and the possibility of reclaiming and re-auctioning resources, is still a welcome step. “The industry will benefit from increased self-reliance in terms of raw material security. Therefore, we look forward to a focused implementation of this initiative," said Surana.

As per the draft recommendations of the committee, winners of mining leases will get four months from the LoI issue date to submit their mining plan and get approval. Any delay over this up to six months from LoI date would attract forfeiture of 5% of performance security deposited by mining companies. If the delay is more than six months, 2% of performance security would be deducted for delay of each month or a part of the month. This would be treated as Milestone 1 in the entire chain of mining activities.

Further delay of more than 18 months from the completion of Milestone 1 for securing environmental clearance of the project, would attract 5% deduction of performance security, which would be scaled up to additional 2% penalty for delay of each month after completion of 22 months. This would be Milestone 2.

From Milestone 2, delay of 11 months but less than 14 months would again attract deduction of 5% performance security, and 2% for each month of delay beyond 14 months. This would be Milestone 3, which would require miners to complete land acquisition and get permission to draw water and power.

Milestone 4 will have to be reached in a month after completing Milestone 3. This will involve intimation to authorities for opening of the mine. So, in all, the regulations will give 33 months’ time for a mining operation to go onstream from the time of a mineral block getting awarded under the auction route.

Similarly, timelines have also been provided for awardees of composite licence that is being issued for the first time in the country and will involve both prospecting of resource and mining thereafter under a seamless process. The proposed regulations have divided the timeline for composite licence into six milestones spreading over 81 months (six years and nine months).

Every time a part of performance security is deducted for a delay, the successful bidder will need to top up the penalty amount within two months.

However, the government will reward miners who despite delays in initial milestones, are able to bring a mineral block to production within the overall timelines finalized (33 months for mining lease and 81 months for composite licence). In these cases, the amount of performance security appropriated for delay in completion of any intermediate milestone (if any) would be adjusted against auction premium payable by the successful bidder.

Currently, the performance security and upfront amount in mine auctions is a percentage of the value of estimated resources (VER). This is also being altered as the Centre now wants to cap the performance security and upfront amount for mining lease at 500 crore each for a mining lease. A cap of 250 crore is being considered for performance security under a composite licence.

Under the Mineral (Auction) Rules 2015, performance security and upfront payment for a mining lease is 0.5% of the VER, which shall be adjusted every five years so that it continues to correspond to the resource value. For a composite lease, the performance security is 0.25% of the VER, but it is revised upwards when the mining licence is issued for the same block.

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