KOLKATA (miningweekly.com) - India’s largest mining companies would suffer a sharp erosion of their current aggregate $14.12-billion free cash reserves once the Indian government goes ahead with its plans to reduce fiscal deficit through a buy-back of shares in these government majority-owned companies.
However, several of the mining and integrated metal companies have expressed reservations over government draw-down from their cash reserves, fearing deleveraging in their negotiations in acquiring overseas assets and domestic expansion investments.
In the 2011/12 Budget, the Indian government had targeted raising $7.65-billion through public sale of shares in government-controlled companies but has to date been able to mobilise a mere $219-million.
To maintain its fiscal deficit within the targeted 4.6% of gross domestic product, the government has circulated a note proposing to raise funds by selling part of its equity holdings back to companies controlled by it.
The fiscal deficit was forecast to rise beyond 6% on the back of increasing social sector spend and with barely three-and-a-half months before the end of the current fiscal year, share buy-back by government companies was perceived as the fastest route to bridge the deficit.
The government has proposed that only those companies that have high cash balances would come under the fundraising scheme. Accordingly, in cases where the cash balance of a company was more than its annual turnover, the buy-back of shares would be up to 10%, while in cases where the cash balance was at least half of turnover the buy-back would be up to 5% of the shares currently held by the government.
Under this criteria, 15 government companies would be eligible for the share buy-back scheme of which seven operate in the mining and metal sector.
Indian mining and metal companies, which were among the cash-richest among government controlled entities, figured high on a list of proposed share buy-backs.
These include the country’s largest iron-ore miner, Coal India Limited (CIL), with a cash reserve of $8.77-billion, NMDC Limited with $3.29-billion, Neyveli Lignite Corporation (NLC) with $846-million, National Aluminium Company Limited with $725-million, MOIL Limited (formerly Manganese Ore India Limited) with $359-million and Orissa Minerals with $134-million.
“We have received a Cabinet note on the share buy-back of CIL and we have to give a reaction,” Coal Secretary Alok Perti said.
“But before that we have to seek the view of the CIL management on the issue,” he added.
However, several Ministries have opposed the share buy-back scheme in the case of the companies under their administrative charge. “Most government companies have their own expansion investments within the country and need to keep enough cash on their balance sheet,” a Coal Ministry official said.
“Moreover, reduction in free cash reserves was not prudent given that raising fresh funds in the current environment would be difficult, particularly for capital intensive mining companies where projects have long gestation and payback times,” the official said.
For example, CIL has investment riding on operating two coal blocks in Tete, in Mozambique, within the next twelve months, including building infrastructure like rail linkages to port. The company was also currently negotiating to acquire two coal blocks in central and south Kalimantan province in Indonesia.
NMDC, in turn, was negotiating to acquire a stake in three mineral assets overseas by March 2012, taking its aggregate foreign investment to about $500-million. The targeted acquisitions were the Wonarah phosphate deposits owned by ASX-listed Minemakers, iron-ore deposits owned by Greystone Mineracao do Brasil, in Brazil and the Vincy coal project, in Russia. The company recently completed the purchase of 50% of the shares of Legacy Iron Ore by investing some A$18.9-million.
The company has tied up with Severstal, Russia to construct a five-million-ton-a-year steel mill in the southern Indian province of Karnataka entailing an investment of $5-billion which includes a plan to swap coal and iron-ore assets between the two companies.
NLC was negotiating to acquire coal assets in Indonesia and South Africa through joint ventures with local companies for supply of thermal grade coal for its domestic power projects.