The Bhutanese Leading the way.
The most important paragraph of the 1st June letter from the Prime Minister to the Ministry of Economic Affairs (MoEA) on cancelling the Chunaikhola mine auction was the second last one where the PM said, ‘Given these unavoidable health and economic dynamics (COVID-19), the likelihood of auctioning the mines as a profitable venture to both the private sector and the government appears slim, and this has compelled us to reconsider the timeline.”
Though COVID-19 was the excuse, this paragraph showed a clear new rethink and concern within the government that it would not get the best price or value for what is arguably Bhutan’s biggest and most lucrative mine even with an auction, since the full and proper value of the mine and mineral itself is not well known.
No Nationalization plan
The cancellation of the auction in the meantime has created some speculation that the government is going to nationalize the mine.
The MoEA Minister Lyonpo Loknath Sharma said that no such decision has been taken and he said as far as the position of the ministry is concerned there is no plan to nationalize it as dolomite is not a strategic mineral under the Mining Bill.
Govt to do a reassessment of mine value
However, there are definitely moves within the government to now use this period to try and find out the real value of dolomite and in essence of the mine so that any future auction or move can be done with more information on the real value of the resource at hand.
The MoEA minister while insisting that an auction is the best way to get competitive prices also said that this period can be used by the government to do a commercial study on if the production from the mine can be increased dramatically to meet demand in India and this would mean a better price for the mine.
The minister also said that in handing over the mine for the interim period to the SMCL, which is a government company, it would have no problems in declaring the current and full price of the mineral.
JMCL’s rate
The mine is currently being run by the Jigme Mining Corporation Limited (JMCL) which has been given an extension till the end of the month. Its Joint Managing Director, Ugen Kezang who runs the mine said that they sell Dolomite at Nu 660 to Nu 723 per Metric Ton (MT) and this rate includes the Nu 150 per MT delivery charge 18 km away to Birpara Railway station. This means the value of Dolomite at the JMCL mine is Nu 510 to Nu 573 exclusive of transportation charge.
The JMD said that the dolomite’s main consumers are the Steel Authority of India Limited (SAIL) steel plants and Tata Steel plants in Bokharo and Durgapur apart from Tata Refractory.
He said that JMCL does not sell the dolomite directly to the steel plants but it sells it another two marketing companies in India who are the intermediary. He said that these companies then do the marketing and sell it to the steel companies.
The price at which the mineral is sold is important in calculating the overall revenue and the Corporate Income Tax on it.
The price in India
An SMCL official, on the condition of anonymity, said that based on desk research so far he found that the current value of dolomite in India when bought at the mine itself is up to Nu 1,100 to 1,200 per MT.
The Bhutanese did an online assessment of dolomite prices in India on an online commerce site called indiamart. Here 7 percent of the dolomite was offered at the lowest price of Nu 400 – 500 per MT, 36 percent was offered at Nu 560-Nu 770 per MT, 43 percent at Nu 770- Nu 1,100 and 11 percent at Nu 1,100 to 1,500.
On the same site the paper found Dolomite being sold at Nu 2,000 and even Nu 3,000 per MT.
With a range of prices from the low to the high showing up online, the next important thing is to differentiate on quality.
Quality dolomite and price
The general consensus in India is that the dolomite from Bhutan is of a higher grade than most places in India which is why despite having such large reserves itself, Indian steel companies prefer the low silica content dolomite of Bhutan.
The Indian Minerals Yearbook 2015 on Dolomite published by the Indian Bureau of Mines (under the Ministry of Mines) in January 2017 has comparative information on Dolomite from Bhutan compared to regular Indian dolomite.
It says, ‘The requirement of low silica dolomite is increasing in steel plants at Bhilai, Rourkela, Visakhapatnam and Jamshedpur. However, the supply of such materials from indigenous sources is posing a problem. Therefore, Bokaro, Rourkela, Durgapur and Jamshedpur steel plants are drawing supplies of low silica dolomite from Bhutan for use in tar-bonded refractory bricks required for lining of LD furnaces and also for fluxing purposes.’
The report giving a future outlook for dolomite says, ‘The importance of high purity dead-burnt dolomite bricks for lining LD furnaces has gained ground due to LD process of steel making…. The resources of the refractory grade dolomite in the country (India) are meagre and this type of material is in short supply but very much required for making tar-bonded dolomite bricks. Therefore, intensive search is needed in non-Himalayan regions for locating deposits of massive non-crystalline dolomite, containing less than 2.5% R2O3 for use in tar-dolomite bricks required for lining of LD steel furnaces.’
From the above it is clear that Bhutanese dolomite is considered high grade and this coupled with a limited domestic supply of such dolomite in India means that Bhutanese dolomite is in demand in India.
The JMD said that the dolomite from JMCL is grade 2 dolomite used in the furnaces of iron and steel industries. He said as per DGM’s average assessment, Bhutan’s dolomite has an average silica content of 1.67 percent.
However, the JMCL website says the dolomite does not have more silica dioxide than 1.5 percent. The JMCL website also shows that its dolomite has very low iron oxide at 0.75 percent which is another indicator of quality dolomite.
Selling to the middlemen
Given that Bhutan’s dolomite is classified as being of high grade by the Indian Bureau of Mines and in short supply in India it is not clear why JMCL is unable to sell the product directly to steel companies in India at a possibly much higher margin than the current price JMCL is getting.
When asked why JMCL does not sell it directly to the steel plants instead of the two intermediary companies the JMD said that the Indian market is tough and it is better to sell it to the intermediary companies who will do the marketing and sell it to the steel plants. The JMD said that their client for them are the intermediary Indian companies.
He said the two main companies who buy from JMCL are Bhiringhee Commercial Pvt Ltd and Subhadra Commercial Pvt Ltd both located in Durgapur in West Bengal.
He said that JMCL sells to the two companies as it was these two companies who got access to all the end user steel and iron companies.
The JMD said that the JMCL has to do the business in large volumes and so it has to keep prices stable and reasonable.
He said the only plant to which they sell directly is Tata Refractrory Limited in Odisha.
This is because it was Tata company which was running the mine with Chhundu Enterprise before JMCL won the auction in 2005.
Since Tata left equipment behind the JMCL adjusted for it by sending them dolomite and it still supplies dolomite to the company even today.
Lucrative revenue
From 2005 to 2018 the JMCL contributed Nu 3.239 bn to the government. This includes Nu 390 mn license fee or auction value, Nu 1.576 bn in CIT, Nu 79.11 mn in Environment Restoration Bond and Nu 1.193 bn in Royalty, mineral rent and land lease rent.
It is interesting to note that though JMCL said it still sells the dolomite at Nu 510 – Nu 573 (exclusive of transportation charge) and pays tax accordingly, in 2016 the former government while revising the Royalty and mineral rent charges decided to charge Royalty at 6.5 percent of a minimum floor price of Nu 1,055 per MT. So at least on the Royalty front there was recognition from 2016 itself that the dolomite price could be higher.
In 2019 JMCL extracted 2.859 mn MT with a sales turnover of Nu 1.623 bn and profit after tax of Nu 509.189 mn.
So even with JMCL selling the dolomite at Nu 510-Nu 573 per MT its profit after tax for one year in 2019 is much higher than the Nu 390 mn license fee of 2005 showing the highly lucrative nature of the mine.
The DGM estimates that the mine has around 592 mn MT which at the current rate of extraction would last 197 years.
The DGM, however, while preparing for the auction did not have an estimate price of the dolomite in India except for the Nu 1,055 per MT Royalty rate set in 2016 which does not apply in CIT taxes where the JMCL’s actual declared rate of sale is used.
Current situation
Given the COVID situation the mine is operating at only 45 to 50 percent capacity and is able to export only around 10 percent of its production. From 30th May around 30 trucks per day of the mineral is being allowed for export to India.
The JMD said the main market for the mine is India where more than 95 percent of what is produced goes and the remaining either goes to a local powdering plant or a Bangladesh.
JMCL has around 246 staff and once SMCL takes over the staff and the machinery is expected to also be transferred.
JMCL will be kept alive as a company with reduced manpower as it is one of the eight eligible bidders. 16 auction documents were sold of which only 10 applied for an eligibility certificate of which two were disqualified by DGM.
SMCL to takeover
The MoEA Minister said that the auction timeline is not know for now because since it was a cancellation and not deferment, the government does not have to give a date.
The minister said that what is different this time is that as per the Mining Bill 49 percent of the shares of the company was supposed to be floated to the public.
The SMCL on 11th June said that apart from media reports it has not got any written and official order to take over the Chunaikhola Dolomite mine and also the conditions of operating it.
It has been learnt that ever since the cancellation of the auction of the mine and the government’s decision to give it to the SMCL to run for the interim period the SMCL has already been contacted by people who want to buy the Bhutanese dolomite.
A SMCL official said that one of the first things it will have to do is look at the price of the mineral and the markets. In the backdrop of COVID-19 SMCL will have to not only take over the mine but overnight figure out how to run it efficiently and export it.
The official said that SMCL will not be in a rush to sell right away but it will do its due diligence first.
2014 RAA Report
In 2014 the Royal Audit Authority (RAA) came out with an audit report on Bhutan’s mining sector from 2008-2012. It looked at an array of mines including dolomite.
The RAA on review of the of the system of transportation of minerals from the mine sites to stockyards pertaining to dolomite, gypsum and coal found lack of appropriate monitoring controls by the DGM.
The common problem noted in all mines was that mine inspectors from DGM were not fielded at the mine sites. There was no weigh bridge installed at the mine site and there was no reconciliation of quantities of materials extracted at the mine site and quantities received at the stockyard. The practice of issuing Transport Permits for transportation of minerals was a mere formality and there was no authenticity of information in it. RAA noted that pre-signed TPs were directly issued to company officials at the site.
The RAA noted that based on the above there was hardly any control mechanism to keep track of information on actual extraction at the mine site and also created potential for deflection to places other than stockyards and hence result in loss of royalty and revenue to the government.
Some major mining companies, as a requirement under law floated 30 percent of their shares to the general public. However, RAA found that except for some disclosure there was no adequate legislative protection for such shareholders and so some companies like the JMCL, Druk Satair (Gypsum) and SD Eastern (Coal) entered into transactions that prime-facie was not in the interest of minority shareholders.
In case of dolomite mining JMCL a public company was formed with 70% holding by promoters and 30% by the public.
Later JIPL was formed as a private company by JMCL for crushing and screening of dolomite for export and supply to domestic markets. JMCL as a company held 51% shares and the promoters held 49% of the shares. The proportion of shareholding of minority shareholders in JIPL had decreased to 15% and the promoter’s share increased to 85%.
JMCL at the time responded to RAA saying that neither the auction terms nor the Companies Act 2000 prohibited JMCL from forming a subsidiary company and all decisions were made by the JMCL Board within the legal framework of the country. It also said that all companies were legal business units disclosed in the annual audited statements.
RAA pointed out the high salary of the CEOs of JMCL and SD Eastern which is much higher than salaries of CEOs of State Owned Enterprises and senior civil servants. It also said that from 2010 to 2013 Nu 60 mn was paid as commission to Directors of JMCL while another Nu 30 mn was paid to Directors of JIPL. Another donation of Nu 4.9 mn was made by JMCL to directors and other individuals from 2009-2012.
Both JMCL and SD Eastern at the time pointed out that all salaries and benefits were paid after approval from their boards based on the nature of their responsibilities and moreover the Companies Act did not have limitations on pay and perks. JMCL also said that it was international practice to pay a part of the profit to the Directors as commissions and it was a legitimate expenditure not prohibited by the Companies Act.
The RAA report also pointed out issues in the then Companies Act which did not cover some of these issues and the MoEA at the time put them up in the new Companies Act passed by Parliament.
