By Aniek Paul, Mint, New Delhi
Feb23, 2011
Diversified conglomerate Emami Ltd is close to taking control of an unexploited iron ore mine in Orissa for '400-500 crore in staggered cash payments.
A memorandum of understanding has been signed between Emami and the company that owns the lease right to the mine and the deal could be concluded within two weeks, according to people familiar with the deal.
Emami's co-chairman R.S. Goenka said the company was scouting for iron ore reserves in Orissa and collieries in Indonesia. Emami may consider diversifying into steel if it could secure iron ore mines. It has already decided to launch a power plant, for which it is looking to buy collieries producing energy coal in Indonesia, he added.
Emami is following other private miners in "securing iron ore reserves" in states such as Orissa, Jharkhand and Chhattisgarh through "intriguing deals structured to comply" with the restrictions on transfer of mining leases under Indian laws, said a person who has acted as an intermediary in several similar deals in the past couple of years. He did not wish to be identified.
Starting in the 1970s, several people, mostly from the "local landed gentry", were given mining leases in the iron ore-rich states--Orissa, Jharkhand and Chhattisgarh. The assets were leased out to them initially for 20 years, but at the end of the first term, the lease was renewable "automatically" for 20 more years even if the developer hadn't made any effort to extract minerals.
But on completion of 40 years, the state governments are to auction these assets, according to the person cited above. "For those owning the mining leases, the only way to retain them is to develop the mines much before the end of the lease term," he said. "Only if a mine is in operation, the company owning the lease right could request the state government to renew the lease again."
But most of these people do not have the cash to develop the mines on their own, so they approach large companies such as Emami to "capitalize" them, he said. Under Indian laws, companies owning mining leases cannot sell shares or receive funding from others to develop the mines, he said.
Notwithstanding the restrictions aimed at making sure that mining leases couldn't be transferred or mortgaged, lawyers have devised a way to "bring in new beneficiaries without breaking the laws", according to him.
One of the key determinants of valuation is the "number of years left in the (40-year) lease term". Those attracting the best valuations are the ones that have at least 15-20 more years left, he added. "But at least one mine with less than three years left in the lease term is known to have found an investor recently." This is significant because, at times, it takes years to obtain clearance from the ministry of environment and forests to start mining.
Companies such as Emami enter as "long-term buyers" of iron ore, paying an "advance to secure the right" to buy the future production of the mine. In some cases, the company owning the mining lease even stages a contest to determine the highest bidder. On conclusion of the deal, however, the "long-term buyer" effectively gets control of the mine.
Though a substantial amount is normally paid at the time of signing the deal, the payment of the best part of the consideration is "linked to milestones". "This is because, even though the long-term buyer would operate the mine going forward, it is entirely dependent on the company owning the mining lease for securing clearances," he said.
It isn't immediately known--and it may not have been firmed up either--how much Emami is to pay upfront for the mine that it is eyeing. "Talks are at final stages; the details are being discussed now," said another person familiar with Emami's deal, who also did not wish to be named.
There's a considerable amount of risk involved in these deals, said a lawyer familiar with them, speaking on condition of anonymity. "Considering the strict environment laws these days, there's no guarantee that all clearances could be obtained," he said. "All deals need not lead to commercial exploitation of reserves--if the investor has such doubts, it would pay a small amount, say '5 crore, at the time of signing the deal."
Another problem is that of "squatters", he added. During legal due diligence, it's often discovered that the firm owning the mining rights signed a similar agreement with another investor years ago, but has been unable to exploit the mine. "In some cases, the right of that person has to be bought out. But at times, the squatters are so demanding that the deal cannot be closed."
(sourced:livemint)
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