Background
In 2014, the Supreme Court ruled all existing mineral leases had expired in 2007, and ordered the state government to issue fresh leases. After a variety of shenanighans, in December 2022, the state government has finally auctioned off four mineral lease blocks representing 10 Portuguese area mineral concessions partly amalgamated. The results were stunning.
| Leases auctioned | 4 |
| Corresponding to Portuguese-era concessions | 10 |
| Reserves (million tons) | 138 |
| Value of Estimated Resources (VER) (Rs. Crore) | 43,188 |
| Bid Documents sold | 51 |
| Initial Price Offers received | 27 |
| Average winning bid (% of IBM Average Sale Price) | 75.96% |
| Estimated Auction Premia (Rs. Crore) | 32,804 |
The Zero Loss goal
India’s National Mineral Policy 2019 declares that “natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance. State Governments will endeavour to ensure that the full value of the extracted minerals is received by the State.”
Put simply, minerals are inherited wealth; in effect, it comprises our collective ‘family gold’. Mining converts mineral wealth into income earning forms of wealth. Royalties, auction premia and contributions to the Goa Iron Ore Permanent Fund (GIOPF) together make up the mineral sale consideration, received in exchange for the minerals extracted. Therefore, if we extract and sell our mineral wealth, we must achieve zero loss in value; the state as trustee must capture the full in-situ value (mineral sale price minus cost of extraction including a reasonable profit for the extractor).
It is estimated from the annual reports of Vedanta that over the eight years 2004-2012, the state of Goa lost more than 95% of the in-situ value of its minerals, receiving less than 5% of its value by way of royalty. Rs. 100 of our family gold was sold off to the miners for less than Rs. 5. If we examine the recent auctions of four mineral blocks, we find that the Goa government has likely ensured that the full in-situ value of the extracted minerals is contractually due to the state.
The mineral blocks
The first four mineral blocks represent 10 Portuguese-era mineral concessions, some of which have been amalgamated. Interestingly, the first three mineral blocks auctioned are also contiguous, yet were not combined for the auction process. It is worth pointing out that while the original mineral concessions were granted between 1941 and 1952 (over 70 years ago), there are still 138 million tons of reserves, which amounts to approximately 7 years of extraction at the interim cap of 20 million tons per annum imposed by the Supreme Court in 2014. The estimated value of these reserves is Rs. 43,188 crore. By comparison, the Goa government debt as on 31-Mar-2023 as per the recent budget is Rs. 21,940 crore.
| Mineral Block | Old TC | Old leaseholder | Area in Ha | Reserves (Million Tons) | Value of Estimated Resources (VER) |
| 1 – Bicholim | 08/AMLG: 11-15/41 | Sesa Mining Corp | 478.52 | 84.92 | 27,167 |
| 2 – Sirigao-Mayem | 07/AMLG: 5/49 & 13/49 | Chowgule & Co | 171.25 | 23.58 | 7,544 |
| 3 – Monte De Sirigao | 4/49 | Rajaram Bandekar | 95.67 | 9.15 | 2,928 |
| 4 – Kalay | 02/AMLG: 40/51 & 12/52 | N.S. Narvekar | 179.18 | 20.66 | 5,549 |
| Total | 17 | 1,401.22 | 138.32 | 43,188 |
The auction process
Under the MMDR Act, the Mineral (Auction) Rules 2015 apply. In brief, interested parties need to purchase the tender document, which is priced at Rs. 5 lakhs each. The tender document specifies the details of the mineral block including the reserves as well as the Value of Estimated Resources (VER). Under the Mineral (Auction) Rules, the VER is calculated based on the resources on the lease and the average IBM Average Sale Price (ASP) for that type/grade of ore over the preceding 12 months.
Technically, the IBM ASP is an average of the average sale prices reported by extractors to the IBM on a monthly basis in Form F-1. The price reported is at the mine head – the exit gate from the mine. The extractor gains ownership over the ore from the state when they have (a) “won the ore” and (b) have paid the sale consideration for the minerals extracted (royalty+GIOPF+auction premia), provided of course there is a valid lease. If minerals exit the mine without the sale consideration having been paid, it is illegal mining, in effect theft of public wealth.
The IBM ASP is the basis on which leaseholders calculate and pay the mineral sale consideration. In Goa, leaseholders are required to pay 15% towards royalty and 10% towards GIOPF, adding up to 25% of the IBM ASP. The auction premia is also payable as a % of the IBM ASP.
A reserve price is set for each mineral block.
Bidders submit an initial price offer (IPO) as % of IBM ASP, and the top 5 qualified bidders participate in the e-auction. The highest bidder wins the auction, and becomes the ‘Preferred Bidder’.
The Preferred Bidder is required to make an Upfront Payment of 0.50% of VER, payable in three installments of 20%, 20% and 60% based on milestones. Upon payment of the 1st instalment, the Preferred Bidder would receive a Letter of Intent. They are then required to complete the Mining Plan, provide performance security (0.50% of VER) as well as pay the 2nd installment of the Upfront Payment, at which point they become ‘Successful Bidders’. Finally, after all consents and permissions are received, the Successful Bidder signs the Mine Development and Production Agreement and is required to pay the 3rd installment of the Upfront Payment. The Upfront Payment is fully adjusted against the Auction Premia payable upon mining.
When mining commences, the leaseholder is required to pay mineral sale proceeds towards royalty, auction premia and GIOPF. In addition, there are payments to the District Mineral Foundation (DMF, 10% of royalty or 1.5% of IBM ASP) and to the National Mineral Exploration Trust (NMET, 2% of royalty or 0.3% of IBM ASP).
Auction results
The results are stunning. Perhaps incredible. Certainly far in excess of expectations. Twenty separate entities purchased bid documents and ten submitted Initial Price Offers. The winners have bid much in excess of the reserve price. This is partly due to strong competition – in the 2nd and 4th block, the winning bid was considerably higher than the highest IPO. And only in the 4th block did the highest bidder at the IPO stage win the auction.
| Mineral Block Auction Results | ||||||
| % of IBM ASP | ||||||
| Mineral Block | Winner | Reserve Price | Initial Price Offers | IPO Range | Winning bid | Mineral sale proceeds |
| 1 – Bicholim | Vedanta Ltd | 25% | 5 | 28.95 -63.00% | 63.55% | 88.55% |
| 2 – Sirigao-Mayem | Salgaocar Shipping | 25% | 7 | 27.15 -86.05% | 99.25% | 124.25% |
| 3 – Monte De Sirigao | Rajaram Bandekar | 25% | 9 | 25.20 -88.88% | 111.28% | 136.28% |
| 4 – Kalay | Sociedade de Fomento | 15% | 6 | 28.00 -86.05% | 86.40% | 111.40% |
| Weighted Average | 75.96% | 100.96% | ||||
Based on the auction results and the VER, we can estimate that over the life of these leases, the state will receive mineral sale proceeds of Rs. 43,602 crore. Of this, Rs. 4,319 crore would be saved in the GIOPF while Rs. 39,283 crore would flow to the state consolidated fund as “revenue”, comprising Rs. 6,478 crore of royalty (inclusive of dead rent), and Rs. 32,805 crore of auction premia (inclusive of the Upfront Payment). If more minerals are subsequently discovered on these leases, these amounts will go up further.
| Mineral Sale Proceeds | ||||||
| (Rs. Crore) | ||||||
| Mineral Block | Winner | Value of Estimated Resources | Estimated Mineral Sale Proceeds | |||
| Auction Premia | Royalty | GIOPF | Total | |||
| 1 – Bicholim | Vedanta Ltd | 27,167 | 17,265 | 4,075 | 2,717 | 24,056 |
| 2 – Sirigao-Mayem | Salgaocar Shipping | 7,544 | 7,488 | 1,132 | 754 | 9,374 |
| 3 – Monte De Sirigao | Rajaram Bandekar | 2,928 | 3,258 | 439 | 293 | 3,990 |
| 4 – Kalay | Sociedade de Fomento | 5,549 | 4,794 | 832 | 555 | 6,182 |
| Total | 43,188 | 32,805 | 6,478 | 4,319 | 43,602 | |
Instant cash!
As there were 55 purchasers of the tender documents @ Rs. 5 lakhs each, the state earned Rs. 2.55 crore on this account. Further, the winning bidder must make an Upfront Payment of 0.50% of the Value of Estimated Resources (VER) in three instalments. It is worth pointing out that the entire Upfront Payment will be adjusted against the Auction Premia, making it in effect a component of the mineral sale proceeds. The first instalment is 20% of the Upfront Payment, or 0.10% of the VER, or Rs. 43.19 crore. Consequently, from these 4 auctions, the state has received Rs. 45.74 crore. This is a significant amount for a state whose revenue deficit for 2022-23 is estimated at Rs. 545.29 crore.
Winner’s Curse
Overall, the winning bidders have agreed to pay 101% of the IBM ASP. In addition, they have to pay 1.8% towards DMF & NMET. And they have to pay their employees, suppliers and financiers as well. And make a profit after all that.
It is not entirely surprising that former leaseholders have won their leases back in auction. After all, they know the lease intimately and the surface rights holders as well, giving a distinct advantage. But perhaps the auctions may have been a little too successful. Three of the bidders have agreed to pay more than the IBM average sale price for iron ore from Goa. What is the IBM average sale price? The IBM average sale price is the average of the mineral sale price reported by the top 10 miners for different grades of minerals over a calendar month and for each state separately. So the IBM average sale price for Goan iron ore would be based on the actual sale prices reported by Goan iron ore miners. Since almost all Goan iron ore is exported to China, the sale prices reported by different miners should be very similar to each other, as would their average.
On the face of it, the economic viability for most of these winning bids is questionable. We have the ‘Winner’s Curse’. It would appear that the only way this can be economically viable for the winners in aggregate is if there is under-reporting of quantity extracted, grade of ore or its mine-head price. In the case of Odisha, where similar auctions have taken place and mining has commenced, violations have already been observed. Perhaps the Winner’s Curse will morph into the Resource Curse, which includes an association between mineral wealth extraction on the one hand and corrupted governance on the other hand. The persistent lack of effort by the Goa government to stop illegal sand mining in Goa at the current time doesn’t bode well in this regard.
Conclusion
On the face of it, the results of the first four mineral block auctions in Goa have been a stunning success. Zero Loss has been achieved IN THEORY. Significant inflows to a cash strapped government have taken place. The estimated mineral sale proceeds flowing to the budget (Rs. 39,284 crore) are substantial – greater than the current state debt (Rs. 21,940 crore). However, can Zero Loss be achieved IN PRACTICE in Goa? What can we do to control mining related corruption so that we achieve Zero Loss in practice as well?