India to offer free pricing, revenue sharing model to open up commercial coal mining

KOLKATA (miningweekly.com) – Returning to commercial coal mining for the first time since 1973, India will offer free pricing and revenue sharing contracts to investors securing coal blocks through the reverse auction route.

In a working paper outlining the plans for the launch of commercial mining, the Coal Ministry proposed commercial mining be kickstarted by putting aggregate reserves of 30-million tonnes on offer to miners through the reverse auction route.

The working paper was being circulated among various stakeholders for comment, based on which the final rules for opening up coal mining to private investors would be framed, a Ministry official said.

The government proposed that private miners be allowed full freedom on the pricing of their production, a key concern when opening up of the sector was first announced last month.

The miners would have to sign up for a revenue sharing contract after a successful reverse auction. The contract for revenue sharing proposes that the government’s share of revenue be calculated on the basis of actual revenue or actual production multiplied by 1.2 times Coal India Limited’s run-of-mine price for the average grade of coal, whichever is higher.

A Coal Ministry official pointed out that the revenue sharing model was premised on factoring in any "windfall gain" that private miners might get, and the calculation would ensure that the government got its share of such windfall gains too.

However, some private miners have expressed reservations about the revenue sharing formula.

According to one private mine developer, who spoke on condition of anonymity as his company proposed to participate in the auction, several mining companies were expected to submit their concerns over revenue sharing to the government.

It was to be pointed out to government that adhering to a revenue sharing formula based on a fixed formula would be impractical, as the geological parameters of the coal blocks were unknown and margins from merchant sale of coal would differ from block to block, as cost of production varied, depending on the difficulty of mining in the respective blocks, the private miner said.

Laying out the eligibility parameters of prospective bidders, the working paper said each bidder should have a minimum net worth of $230-million and the experience to excavate at least 25-million cubic metres a year.

Simultaneously, the government proposed that private miners have the freedom to optimise production up to the maximum laid out in the sanctioned mining plan. But, in the case of adverse economic conditions, the miner would not be able to reduce production from the mine to less than half of the maximum sanctioned in the mining plan.

Successful bidders would be required to make an upfront payment of 10% of the yearly turnover value of the coal in three instalments, 50% on the execution of the mining plan, 25% on the execution of a mining licence and the balance on the grant of permission to open a mine by government.