The Future We Need

Background

After a successful first tranche of auctions of mineral blocks in December 2022, the state government has completed a second tranche of auctions. The results are as follows:

The mineral blocks

While the first tranche of four mineral blocks represent 10 Portuguese-era mineral concessions due to amalgamations, the second tranche of five blocks represent 7 concessions. Just as the first three mineral blocks auctioned are contiguous, so too are blocks 5 & 8 in Advalpal. While the first tranche auctioned off 138 million tons of reserves, a further 95 million tons were auctioned in the second tranche, adding up to 233 million tons, or around approximately 12 years of extraction at the interim cap of 20 million tons per annum. Goa’s Natural Resource Accounts 2020-21 estimates iron ore reserves of 264 million tons, which would indicate only 31 million tons remain for auction. The estimated value of the reserves in the second tranche is only Rs.12,089 crore, as against Rs. 43,188 crore in the first tranche, adding up to Rs. 55,277 crore. A key reason is the grade of ore is generally lower, and the largest reserve in 9-Surla-Sonshi is only 46% Fe.

The auction process

We had explained the auction process in our post on the first tranche of auctions. This process was also followed for the second tranche. 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).

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. 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.

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 second tranche of auctions seem less successful compared to the first. Only fifteen separate entities purchased bid documents, compared with twenty for the first tranche. However, twelve separate entities submitted IPOs compared with ten earlier, although the average IPOs per block is much lower (4.8 vs 6.75). The winning bids remain much in excess of the reserve price and arguably are even higher than the first tranche.

Unlike the first tranche, none of the former leaseholders won their leases back in auction. In fact, Jindal South West (JSW) and KAI International make their debut into Goa. JSW has a large integrated steel plant on the coast at Dolvi near Mumbai, and imports coal through Mormugao Port Trust (MPT) for its steel plant at Torangallu, Hospet, Karnataka. Will we finally witness significant domestic use of Goan iron ore?

Based on the auction results and the VER, we can estimate that over the life of the second tranche leases, the state will receive mineral sale proceeds of Rs.15,015 crore. Of this, Rs.1,209 crore would be saved in the GIOPF while Rs.13,806 crore would flow to the state consolidated fund as “revenue”, comprising Rs.1,813 crore of royalty (inclusive of dead rent), and Rs.11,993 crore of auction premia (inclusive of the Upfront Payment).

In aggregate across both tranches of auctions, the estimated mineral sale process is Rs.58,617 crore, of which Rs.5,528 crore would go toward the GIOPF, Rs.8,291 crore by way of royalty and Rs.44,797 crore of auction premia. Of course, if more minerals are subsequently discovered on these leases, these amounts will go up further.

Instant cash!

As there were 31 purchasers of the tender documents @ Rs. 5 lakhs each, the state earned Rs.1.55 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. The first instalment is 20% of the Upfront Payment, or 0.10% of the VER, or Rs.12.09 crore. 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. (Dead rent is also adjusted against royalty and forms part of the mineral sale proceeds.)

Winner’s Curse

Overall, in this tranche, the winning bidders have agreed to pay 124% of the IBM ASP towards mineral sale proceeds. 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. This is obviously uneconomic, but surprisingly has gone unremarked.

So far, in seven of the nine auctioned mineral blocks, the bidders have agreed to pay more than the IBM average sale price for iron ore from Goa. It would appear that the only way this can be economically viable for the leaseholders in aggregate is if there is under-reporting of (a) quantity extracted, (b) grade of ore or (c) its mine-head price. In the case of Odisha, where similar auctions have taken place and mining has commenced, violations have already been observed (grade of ore, price of ore.) The recent Mineral Resource Accounts for Goa 2020-21 shows that there is no scrutiny of either the quantity of ore dispatched, or its grade. This does not bode well for the future.

Time for a pause?

On the face of it, the results of the first nine mineral block auctions in Goa have been a stunning success. It is already clear that the Directorate of Mines and Geology is potentially the single most important part of the state government considering the enormous mineral wealth it manages. Zero Loss has been achieved IN THEORY. 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?

Further, we have already auctioned off enough reserves to ensure mining for the next 12 years. There is a need to deal with the many dumps lying all across Goa. The government needs to develop a mineral lease grant policy. The corruption in the DMG was noted by ex-CM, Manohar Parrikar. The results were described in horrific detail by the Shah Commission and the CEC. After all these years, things have not changed. Surely now is a good time to take a pause and take stock of where we are, and the way forward. Don’t hold your breath.

Top