Nov 062013
 
A critical analysis of equity investments in foreign coal mining companies by GOSL
Two recent  articles in a weekly newspaper  reported that the government of Sri Lanka  has been advised  equity participation in coal mining companies after the Board of Investment (BOI) had contacted  20 potential coal producing companies in Indonesia , China  and particularly in Australia and include three companies Orpheus Energy Ltd. Australia, Shanxi Coking Coal Group China and Yancoal Australia all of whom have  agreed to supply coal on a long-term basis, and trial shipments of 20, 000 to 80 ,000 tons are available at current prices. It is not clear whether this is a commitment prior signing long-term contracts and from which company /ies trial purchases will be made.

Before I deal with the three companies above, I shall review the demand of coal. The use of coal continues to grow rapidly and will continue together with other fuels, to support world economic and social development particularly in rapidly developing world economies such as China and India.

The consumption of coal in China increased from 1.5 billion tons in 2000 to 3.8 billion tons by 2011,  almost a threefold increase and the electricity production from coal in 2009 was 79 percent.

India consumed 122.9 million tons in 1980 and 721.4 million tons in 2011 a six fold increase and electricity production from coal was 66 per cent with an additional 3 per cent from lignite in 2009.

At present China consumes nearly as much coal as the rest of the world combined and the growth of world consumption increased from 3billion tons in 1970 to 6.9 billion tons in 2011.

However the IEA’s Energy Technology Perspectives 2010 target reduction in non renewable energy related (coal, oil and gas, shale gas) CO2   emissions by 50 per cent and such emissions from power generation are projected to be reduced by 76 per cent. Renewable energy (wind, solar and hydro) will account for 48 per cent of power generation and nuclear 24 percent.

It must be stressed that expansion of electricity generation by commissioning coal power plants will increase   emissions of CO2 resulting in global warming and eventually climate change. The construction of coal power plants from 2010 to 2035 should aim at a path to achieve near –zero emissions by retrofitting the coal plants with Carbon Capture Storage (CCS)   in 2015 and   commercial Integrated   Gasification Combined Cycle (IGCC) by 2020 and finally Retrofit Pulverized Coal Plants with CCS by 2035.Accordingly the cost of construction of coal power plants will increase dramatically if we are to reduce CO2 emissions.

According to International Energy Agency (IEA) the deployment of some technologies to use renewable energy such as   wind, solar, wave etc for generation of electricity will increase  carbon price   to US$ 175 /ton of CO2.

 Since substantial natural and financial resources are needed to   develop alternative sources of electricity at a scale to replace coal, it is stressed the importance of CCS in mitigating CO2 reductions and thus global warming.

Sri Lanka’s projected electricity generation mainly from thermal and hydro   was 960 GWh  in the year 2000 and was 96 percent and 4 percent respectively.  In 2011 it was  4968  GWh  where thermal contributed to 86 per cent , hydro 12 percent and others (solar, wind ) 2 per cent .The installed capacity of power generation mix was 186 MW at  94 percent thermal and 6 percent hydro  in 2000 which increased to 1081 GWh in 2011 (an increase of nearly 6 times within 10 years) with a mix of 78 percent thermal, 18 percent hydro and 4 percent others. It is also reported that the private sector contributed to 43 percent of the power demand at the end of 2011. (Source RAM Ratings (Lanka) Ltd.-Sri Lanka’s Power Sector –Firing the Rain August 2012).


Reduction on thermal energy reliance
The latest report published by the ADB indicated that Sri Lanka needs to reduce its reliance on thermal energy. “It may not be wise to rely on thermal energy due to environmental concerns and status of future world markets”. Energy outlook for Asia and the Pacific notes that Sri Lanka’s   electricity   demand is projected to grow by 3.6 per cent a year. The ADB recommends that “Sri Lanka must utilize hydro energy for power generation while increasing the role of renewable energy in the country’s power generation mix.”

BOI Report on Three Coal Mining Companies for Equity Investment
In the backdrop of the above analyses, my comments on the above are as follows:

Orpheus Energy Ltd. (OEG ASX) is a junior coal producer engaged in acquiring exploring and developing projects in Indonesia and Australia. In March 2012 the company secured 50 per cent interest in the JV partner PT Mega Colt’s ADK operating coal mine located in South Kalimantan, Indonesia. The revenue was 4.32 M AUS$ and with a net income of   – 4.12 M Aus $ incorporated in 2006 with 394 employees. This revenue could be compared to Tiaro Coal of 189 M AUS$ and market capitalization of Orpheus is only 9 million AUS $ as compared to other coal mining companies going up to AUS $ 1,662 million. (Financial Times as of 2013)

  •  Shanxi Coking Coal Group

Shanxi is the largest coking coal producer  in China with  a wide variety of products   and  28 mines and 18 coal –washing plants and a production capacity of 65.8 million tons . The company   trades with  South  Korea, India and Taiwan in  coal  and  sells large excavation equipment to Romania, the Philippines, Russian Federation , Nigeria , Pakistan, Malaysia and Thailand.
Yancoal was incorporated in Australia in November 2004 as a wholly owned subsidiary of Yanzhou Coal Mining Company Ltd(Yanzhou) in China and is publicly listed in Shanghai, Hong Kong and New York stock exchanges. Yancoal was formed with the intention of   acquiring and further developing Australian coal assets and to introduce underground mining technology Long Top Coal Caving (LTCC) .

Yancoal manages on behalf of Yangtze applying   LTCC and Ultra Clean Coal (UCC) technologies and other exploration assets and operates seven mines located in New South Wales and Queensland.

Conclusions
According  to media reports,  the BOI has indicated that the total annual coal  demand mainly for generating electricity  in Sri Lanka is 3.75 million metric  tons by 2017  and  the Norochcholaii Plant  presently consume about 600,000 -700,000 metric  tons and the proposed  Trincomalee   Sampur  Plant  projected to 1.5 million metric  tons  per year.

With the uncertainty of the projected  utilization of coal for electricity generation  in the short , medium and long-term  as analyzed above and the profiles of the three identified  foreign  companies involved in a diversified  mix of mining , exploration and due diligence review of projects  and  suppliers  of machinery,  it would not be advisable for the GOSL  to take equity  in these  companies  for long term supply of coal. Further with the market   showing downward trends it is possible that long term contracts negotiated at present prices, GOSL will be at grave risk as international trading practice is to enter into “take or pay “contracts. Moreover if 15 per cent equity  envisaged by GOSL as recommended by BOI, it will be a disaster as mining costs and other technologies will lead to additional capital costs, overheads and  production costs..

It must be stressed that investments in coal mining in Australia are mainly by Chinese companies with a majority shareholding and sometimes wholly owned by China and   Yancoal a Chinese company is an example.. Also the off shore companies’ especially in Indonesia will not guarantee security on investment by third parties.
Further most of the coal output will be channeled to China to meet its insatiable demand  and countries like Sri Lanka will be   given the second choice.
My contention is that the GOSL should call for worldwide tenders annually   for our projected  coal  requirements   from 2015 on a CIF basis. If the proposal of the BOI is accepted it will be another disaster like the hedging deal of the Ceylon Petroleum Corporation, a few years back.

Finally, dependence on coal should be minimized by a more acceptable energy mix as recommended by ADB for electricity generation.

(The writer is a retired Economic Affairs Officer United Nations ESCAP and a senior mineral economist and can be reached through fasttrack@eol.lk )

Oct 232013
 
Graphite and mineral sands exploration by foreign companies– Legal implications
Two recent news items in the local print and electronic media on exploration activities by foreign companies prompted me to write this article to highlight the legal implications involved under the Mines and Minerals Act No 33 of 1992 (MM Act), Mines and Minerals (Amendment) Act No.66 of 2009 and Regulations made by the then Minister of Industries, Science and Technology under Section 64 to read with Section 34 of the Mines and Minerals Act No.33 of 1992.

I also refer to my article published in the Daily Mirror Business Features of 25 September 2013 under the Title “Revival of Graphite Mining in Sri Lanka –A Critical Review “where I brought to the attention of the relevant entities on the legal  aspects  related to foreign mining  or exploration companies  where a Mineral Investment Agreement (MIA) has to be negotiated with the Secretary of the Ministry charged with administering the GSMB( Ministry of Environment and Natural Resources).
This is a legal requirement for exploration, mining and further development of mineral based industries with foreign and  local private  equity participation. A case in point was the Eppawela Phosphate Project which was negotiated by a foreign company with the Secretary of the Ministry of Industries (under which the GSMB functioned at that time) which was then further negotiated with a Cabinet appointed Negotiating Committee chaired by the Secretary to the Cabinet .As a member of this Committee appointed by the Cabinet, I am aware that exploration was an integral part of the MIA.

The GOSL did not approve this project as the foreign company insisted on government guarantees on the foreign loan component. This project was revived as a BOI Project in the mid 1990’s and negotiations were conducted with the BOI and the ministry of industrial Development  by a consortium of a US and a Japanese company on an equity basis with 10 per cent equity to the GOSL as free equity with carried interest. It is well known that this project was shelved after an injunction issued by the Supreme Court in 1 December 2000. The judgment was delivered by the Late Justice Amerasinghe.

In the above case the Respondents were (1) Secretary to Ministry of Industrial Development (2)  BOI  (3) GSMB (4) Central Environmental Authority (5) Project company Sarabhoomi (Pvt)  representing  the foreign consortium (6) Lanka Phosphate Ltd  (7) another Sri Lankan company whose exploration and mining licenses were to be transferred to the Project company and (7) the Attorney General.

In the light of the above judgment I shall analyze now the legality of foreign companies undertaking exploration for graphite and mineral sands without negotiating a MIA.

Present exploration activities by foreign firms
The Daily FT of 11 October 2013 under the heading “Canadian firm signs deal for 113 Sri Lankan lump mining claims” that “Torch River Resources Ltd (Torch) has entered into an arms length non binding purchase and transfer agreement with Han Tal Graphite Ltd (Han) a Sri Lankan based holding company to acquire 113 mining grids with 36 historical mines and exclusive exploration licenses to explore and develop its wholly owned 113 sq kms  mining claims in south west Sri Lanka “
A news item in the media on 18 October 2013 reported that a   helicopter was seen flying over the north west of the Island and the Director General GSMB confirmed that it was an air borne  electromagnetic survey undertaken by a foreign company .The report further stated that the exploration is done by a Chinese company and the results will be processed in Canada. With my experience as an exploration geologist for over 45 years, this survey will not pick up the thin  lump graphite veins that are highly erratic and show a pinch and swell nature. It will indicate a regional anomaly and there was no need for such a survey as the area is known to contain graphite veins mined at shallow depths during the two world wars.

Legality to explore graphite by Torch and Han
It is interesting to examine in the first instance the legal status of Han, a Sri Lankan-based holding company which is presumed to have “exclusive exploration licenses for 113 grids”

Part 11 of the MM Act No.33 of 1992  Para 35 (1) and (2) related to issue of licenses state that “Subject to other provisions of this Act , every license issued under this section  shall  (a) be in such form and be subject to such terms and conditions set out in Sub section (4)  (b) specify the limits of the area in respect of the licensee  is authorized to explore for or mine transport , process trade in or export  minerals (c) specify the minerals of the area in  respect in which  exploration , mining transportation ,processing , trading in or exporting is authorized (d) not be transferable or given as security  (e) specify the duration of such license.

The GSMB should under the Act disclose the name of the original exploration license holder and the duration of the licenses issued   and whether Han the Sri Lankan holding company has been issued exploration and mining licenses covering the 113 grids. Further there is no provision under the MM Act or the Regulations for a license holder to sell or trade an exploration or a mining license and if the GSMB has recognized such sale or transfer it has committed an illegal act and the license holder should also be punished under the Act.

Further under Para 41 (3) of the MM Act it is stated that “where the holder of the license being a partnership is dissolved the license shall be deemed to be terminated with effect from the date of dissolution of the partnership “

I am not aware what the status of the Sri Lankan based holding company is whether it was a partnership or not but in any case Torch is not legally entitled to carry out any exploration on a license issued to Han.

I would also like to draw the attention of the GOSL to Para 48 (1) of the MM Act which states that “No license to explore for minerals shall be issued in respect of any area exceeding 100 square kilometers”.

 Further according the news report referred to above 113 sq kms has been given by GSMB to Torch to carry out an Air Bourne electromagnetic survey.

Exploration for mineral sands by Australia’s Iluka Resources
A news item in the local media on October 8, 2013 under the title “Australia’s Iluka Resources to mine Sri Lanka‘s mineral sands in northwest”  stated that “”Iluka  Resources Ltd an Australian company has bought a Sri Lankan company that is in business of sand mining.”

This purchase under the MM Act is illegal as such a purchase has to be approved by the GSMB and the Ministry of Environment. Further as elaborated above and   related to graphite, Iluka Resources should negotiate a Mineral Investment Agreement (MIA) with the Secretary of the Ministry of Environment and any transfer of exploration or a mining license by PKD Resources (Pvt) Ltd is illegal. It must again be queried as to who held the original exploration license for PKD   Resources Pvt Ltd and who were the directors of this company. It is known that Iluka Resources had blocked out large areas for exploration from early 2000 and the GSMB should report whether the exploration licenses were renewed after assessing the work carried out earlier every six months.

Conclusions
I also would draw the attention of the GOSL  to the  MM Amendment Act No. 66 of 2009 Para 6 (2) which repealed Para (e) of that section in the  original MM Act to “advise the Minister on measures to be adopted for promotion, extraction, value addition through development of mineral based products on a commercial basis” Accordingly  recognition of exploration by foreign companies for extraction of graphite and mineral sands without any plans for value addition is again contravening the MM Act as well as its amendments.

It is my contention that the GSMB as well as the BOI should request for a legal opinion from the Attorney Generals Department whether the involvement of foreign exploration and mining companies in exploring for graphite and mineral sands  contravenes the MM Act, Amendments and Regulations without entering into a Mineral  Investment Agreement  with the GOSL and all exploration activities by foreign companies for graphite and mineral sands be suspended until  this issue is resolved.

(The writer is a retired Economic Affairs Officer United Nations ESCAP and can be contacted at fasttrack@eol.lk )

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