Categories Analysis, Research Summary

Hindustan Copper Limited: Research Report

Indian copper miner Hindustan Copper Ltd. excavates majority of the copper reserves in the country. While, other firms in the Industry focus on the refining segment of the business rather than mining. So, essentially the entire business of copper mining in India falls under Hindustan Copper Ltd.

Few companies in the world find themselves in such an advantageous position. To elaborate further:

  • Increase in Copper Prices: Major nations in the world are taking conscious decisions to keep their carbon emissions in check. This has resulted in a paradigm shift from ‘fossil fuel dependency’ to electrification. Whether we source our energy needs from solar, wind or hydropower, it has to be converted into electricity to be used by the masses. The need for copper will increase when we promote electrification since we need copper to conduct electricity and it is irreplaceable when we consider the economics around it coupled with the laws of chemistry. Although there is an increasing demand for copper, the underinvestment trend in the sector will lead to a supply deficit for the metal, which in turn will result in a hefty increase in copper prices. To learn more about the copper dynamics, we encourage the readers to check out this report.
  • Most profitable Segment: Since, refined copper products are benchmarked to LME Copper Prices. Refining Companies (Buyer) and Mining Companies (Seller) trade at the price point found by  subtracting treatment and refining charge (TcRc) from the LME copper price. Thus, mining is the most profitable segment in the entire value chain and benefits the most from any increase in LME Copper prices.
  • Charge Premium due to Custom Duties: To import Copper Concentrate in India, refining companies would have to pay a custom duty of 2.5%. This allows Hindustan Copper Ltd. to charge a premium on their copper ore over the existing LME Copper Prices.
  • Strong Incentives to Expand: According to a 2014 study, it would need 100 million tonnes of ore to meet the requirement of installed refining/smelting capacity of India. However, Hindustan Copper’s highest production to date has been 4.1 millions tonnes per annum in 2018-19. This provides Hindustan Copper a lot of room to expand its activities while charging a premium for its product domestically.

Though the company has impressive moats and possess strong incentives to capitalise on the opportunity presented to it, the company displays a habitual pattern of not delivering on its commitments. These patterns could very well be signs of incompetence on the company’s part or on the company’s immediate environment.

Postponement & Revision of Plans

In the past 12 years, Hindustan Copper Ltd. has revised and postponed its expansion plan thrice despite the fact the company acknowledges that expansion of mining activities is one of its key strategies.

In the Company’s Draft Red Herring Prospectus released in 2010, the company announced its plans to increase copper ore production. The document stated:

“One of our key strategies is to expand our current production level of approximately 3.21 million tonnes per annum (“MTPA”) to an expected mining capacity of at least 12.41 MTPA by the end of fiscal 2017. In total, we will need ₹ 36,750 million for all of the above projects.”

Along with this figure representing the company’s plans.

In the company’s Annual Report for the Fiscal Year 2017-18, the company announced its revised plans when they failed to meet their previous timelines. The document stated:

“The Company has taken up ambitious mine expansion projects to increase the mining capacity from existing 3.6 mtpa to 20.02 mtpa in next 5-6 years at an estimated investment of ₹5,500 crore.”

In the company’s Annual Report for the Fiscal Year 2019-20, the company again resorted to delaying and postponing their expansion timelines. The document stated:

“In the fiscal year 2019-20, the copper ore production in India was 3.97 million tonnes. The company envisages augmentation of ore production capacity in 1st phase to 12.2 MTPA by 2028-29 in stages. The company will take up enhancement of ore production capacity to 20.2 MTPA in the 2nd phase after successful completion of the 12.2 million tonne per annum capacity plan.”

Reasons that led to delays in every mining projects taken up by the firm

It is vital to understand the specific reasons as to why the company failed to adhere to their original timelines. In order to understand the underlying reasons for the postponement of key expansion plans, we will look into every mine’s progress over the years.

According to the expansion plans, Hindustan Copper Ltd. had chosen 4 existing mines whose operations were to be expanded to produce more ore per annum. Along with that, Hindustan Copper Ltd. had decided to reopen 2 closed mines and to establish 2 new mines. 

Expansion of Existing Mines

Malanjkhand mineConstruction was supposed to commence by July 2011, but didn’t start until April 2015 due to lack of obtaining necessary approvals, especially environmental approval from the Ministry of Environment & Forests (MoEF) and National Board for Wild Life (NBWL). The Capital expenditure in 2010 for Phase 1 to increase production from 2 MTPA to 5 MTPA was thought to be ₹1,418.1 crores but by 2014-15 was revised to ₹1,856.74 crores (Increase of ₹438.64 crores or 30.93%). Due to the late arrival of regulatory approvals, the plan was revised to April 2020. However, the insolvency of the contractual agency in 2019-20 delayed production. The contract ended on 28.12.2021 and in 2021-22 MECON, a CPSE was given a consultancy task to supervise the work. Thus, tenders for the completion of the work are being circulated. In July 2019, SMS Ltd. was given the task of Development, Production Drilling and Ore Production. However, SMS Ltd. could not complete the mobilisation of development and production equipment on time due to various reasons (like readiness of mine to execute the contract) including COVID-19 pandemic etc. So, residual work tenders are still floating or have just been awarded and underground production is yet to begin.

Khetri mine – Khetri Mine’s expansion plan was supposed to increase production from 0.49 MTPA to 1 MTPA by the year of 2017. Work was supposed to start by December 2010 but the EPC agency for executing the project was appointed on 15.07.2011 and the work at site started from 16.9.2011. HCL revealed in 2016-17 that a bad ground / fault plane encountered at (-) 120 mRL near the production shaft which could not be solved by the EPC agency. Studies have been conducted to modify the plan but new tender contracts have not been awarded to any agency as of yet.

Kolihan mine – Kolihan Mine’s expansion plan was to expand its production from 0.42 MTPA to 1.2 MTPA which was later revised to 1.5 MTPA. Construction was said to be commissioned by December 2010 but environmental clearance was obtained on 2/2/2015. Tender for the work was discharged for technical reasons and the work was then awarded in the year 2016-17. The work was exploratory in nature and as of 2021-22 establishing the ore body at depth is in progress and further work will be taken up post that.

Surda mine – Surda Mine’s expansion plan sought to increase production from 0.39 MTPA to 0.9 MTPA by the end of 2016, when the work was expected to be commissioned by 2012. EPC contract was issued on 18/11/2011. However, the mine ran into several problems regarding its Environmental Clearance with MoEF and problems regarding its mining lease with the Government of Jharkhand. Surface Exploratory drilling has begun in 2019-20 and the Mine has cleared up its problems regarding its lease and Environmental Clearance in the year 2022.

Reopening of Closed Mines

Rakha mine – Rakha Mine’s reopening plans were meant to produce 1.5 MTPA of copper ore by 2017 and work was supposed to be commissioned by 2012. The contract for reopening and expansion for 5 years was awarded on 02/07/2013. Environment Clearance was obtained in 2014 and Forest Clearance was obtained in 2016. Due to the high price quoted by bidders, the MDO (Mine Developer cum Operator) has been planned. The Tender and Agreement are being created as of now. Also, the Rakha Mining Lease has expired in 2021 and the matter is in progress.

Kendadih mine – The Kendadih Mine’s plan expected production capacity to reach 0.21 MTPA by 2016 while expecting the work to be commissioned by 2012. EPC contract for reopening and mine development was awarded in 2012. Environmental Clearance was obtained in 2015 and Forest Clearance was awarded in 2016. Work commenced in 2017 and in 2021 production contract was awarded to JMS Mining Pvt. Ltd. Ore production and development activities have started.

Establishment of New Mines

Banwas mine – Banwas Mine’s creation plan expects to produce 0.6 MTPA of copper ore by the end of 2015. Construction of the mine project began in 2010. Construction plan was revised and delayed thrice and was finally completed in 2017. SMS Nagpur was given the contract to handle the long term operations of the mine in 2017-18. As of 2021-22, the Mine produced 0.3 MTPA copper ore and the company expects that the targeted production of 0.6 MTPA by 2023-24.

Chapri-Siddeshwar mine – Chapri-Siddeshwar mine’s plan is expected to produce 1.5 MTPA of copper ore by the end of 2017 which was later revised to 3 MTPA in 2020-21. Work was supposed to begin in 2011-12 after power facility and environmental clearances were completed. All environmental and forest clearances were obtained in 2016-17. By the time clearances were obtained the company decided to try the mine-developer-and operator (MDO) route and the company is still exploring their options through a transaction advisor. Exploration reports have been finalised but the Rekha Mining Lease has expired on 28/8/2021 and the matter of renewal is still pending with the Government of Jharkhand.

The company has run into several complications in every step of the way, as is evident from the aforementioned information. To run into few unanticipated complications in one or few cases might be a matter of luck but to face hindrance in every single one of its projects might make one wonder whether something is deeply flawed in the company’s method of functioning.

Repeated Impediments to Copper Production

Over the years, Hindustan Copper Ltd. has faced various obstacles that have hampered their ore or cathode production. However, few of these impediments have been repeatedly occurring over the years. To elaborate further:

  • Lower Grade of Ore at Malanjkhand Copper Complex: The transition of the Malanjkhand Mines from Open Pit to Underground Mining has been persistently delayed. The delay in the Underground Project has resulted in widening of the open pit mines to sustain production. However, the widened open pit mines did not possess high grade ore. This problem has repeatedly surfaced as an impediment to the company’s physical production.
  • Water Shortage at Khetri Copper Complex: The Khetri Copper Complex is situated in Rajasthan. The Complex has repeatedly suffered by the absence of meeting its water requirements to sustain production. The acute water shortage at KCC has proved itself to be an impediment to the company’s physical production time and time again.
  • Repeated Breakdown of the Hoisting System at Khetri Copper Complex: The repeated breakdown of the hoisting system at Khetri Copper Complex has consistently resulted in marginally less ore production. This problem has been reported as a reason for lessened ore production in fiscal years 2012-13, 2013-14 and 2019-20.
  • Repeated Breakdown of the Smelter Furnace at Indian Copper Complex: The repeated breakdown of the smelter furnace at the Indian Copper Complex in Ghatsila has proved itself to be an impediment to the company’s cathode production for two consecutive years before the company decide to carry out a major overhauling for the smelter plan.

By all counts, and with supporting evidence, it is no wonder that Hindustan Copper Ltd. displays a habitual pattern of not delivering on its commitments.

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