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The World Has Never Seen A Mining Exploration Scheme Like This

As I’ve been discussing the last several months, reforms in India’s mining and exploration sector have been coming quickly of late.

And this week things appear to have reached a climax. With the government saying it will offer a historic licensing round for exploration tenements — under one of the most unusual sets of conditions ever seen in the global minerals business.

Local press reported Wednesday that the government has identified 100 land packages with potential for various minerals — which are now to be offered to the private sector under a “reverse auction” process. Related: Oil Companies Market Caps Crushed By Oil Crash

The details around this unique licensing regime are somewhat vague. But here’s what initial reports suggest we can expect as part of the this bid round.

Companies interested in bidding for exploration blocks will have to make a proposal for the amount of royalties from the property they will share with the government. For example, if the overall royalty on a property is 5%, the company could propose to take 2.5% and give the government an equal 2.5%.

The firm will then conduct the exploration work. If they discover a deposit, they do not own it — rather, the government will then put the deposit out for another round of bidding from companies that wish to carry out the mine development and operation. Related: Japan And Iran Could Keep a Lid On Oil Price Rally

The exploration firm thus ends up with only a royalty on the project. Which makes this sound like an unattractive proposition — except for one additional feature of these contracts.

That’s a compensation mechanism — which pays exploration firms back their expenses in the event they don’t make a discovery on their bid blocks. With these expenses reportedly to be paid from a government fund that will be set up to support exploration.

With this clause in play, it’s possible that explorers here could get a risk-free shot at making a discovery — and generating a valuable royalty in the process. A proposition that could be attractive for the right players, given India’s high-potential geology and vastly under-explored nature. Related: Fundamentals For Oil Still Bearish, But Sentiment Is Shifting

Watch to see if this auction goes ahead as early reports are suggesting. And to see who makes offers for the 100 blocks reportedly coming available.

Here’s to trying it a different way,

By Dave Forest

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