New hunt for the yellow metal

N. N. Sachitanand, Bangalore, The Hindu, 15 December 2003 :

THERE’S GOLD in them thar hills! was the rallying cry of the great California Gold Rush of the 19th Century. Some such spirit seems to be motivating the promoters of the Perth-based Australia India Resources (AIR), which has embarked on its own hunt for the yellow metal in India. According to AIR, Peninsular India and Western Australia are geologically similar, having been contiguous when they were a part of the super-continent, Gondwanaland, some 200 million years ago. But, while exploration using modern techniques led to the discovery of major gold deposits in Western Australia, which are now being mined, Indian deposits have remained under-explored and largely untapped.

While Australia produces 280 tonnes of gold annually, India’s yearly output is a measly two tonnes. Ironically, India is the world’s largest gold consumer, absorbing about 700 tonnes a year, which involves an import bill of around $7 billion at current prices. The World Gold Council estimates more than 20 million tonnes of proven, probable and possible gold ore reserves in India. Most of this has remained unexploited, despite the 8000 years of gold mining history in the country.

Those who think that gold price is ruling very high now above $400 an ounce should reflect on the fact that it had touched $850 an ounce back in 1980. If adjusted for inflation, that would translate to a few thousand dollars per ounce today. In fact, gold market analysts strongly feel that metal prices should be touching $1,000 an ounce in the next two to three years.

John Embrey, a partner of Toronto-based Sprott Asset Management and portfolio manager of the Sprott Gold and Precious Metals Fund, outlines several reasons for being bullish on gold prices. Some of these are:

Huge gap between mine supply of around 2,500 tonnes a year and demand of 4,000 tonnes a year. The central banks, which were bridging this gap through a leasing mechanism, are nearing an inflection point beyond which they will be reluctant to provide more gold to the market. Anywhere between 10,000 and 16,000 tonnes of central bank gold is in the market.

Alarming increase in the U.S. budget deficit, a weak U.S. dollar and negative real interest rates in the reserve currency (U.S. dollar). The global currency debasement will see tangibles, particularly gold, rise in prices. The low interest rates discourage hedging and producers are removing gold from the market.

China has recently relaxed control over gold, established a National Gold Exchange and will, in the next few years, rival India as a big buyer with purchases nearing 500 tonnes a year.

AIR was set up back in 1993 with a capital of Australian $40 million, soon after India opened up the mining sector for foreign private investment.

However, because of fuzziness in the policies, especially with regard to demarcation of controls between the Centre and the States, it took another seven years for the company to obtain exploration licences. AIR is now conducting gold and base metal exploration in India through two wholly owned Indian subsidiaries, Geomysore Services (India) Pvt. Ltd. (GMS) and Indophil Exploration Resources (IER). A total of 26 reconnaissance permits (RPs) covering about 50,000 sq. km. in Central and Southern India have been granted to the two companies.

To actually exploit the mineral reserves, AIR has taken the Mauritius route by forming Rama Mines (Mauritius) Ltd. and then using this entity to acquire more than 80 per cent equity in a BSE listed Kanoria Group company called Wimper Trading Ltd. (WTL), which was in a dormant state, through the “open offer” route. The acquisition was completed in January 2003 and the name of WTL changed to Deccan Gold Mines Ltd. (DGML). This company has a subscribed share capital of Rs. 24.50 lakhs, comprising 2.45 lakh equity shares of face value Rs. 10 each.

DGML has recently announced a rights issue, which has now secured SEBI approval.

It plans to split each Rs. 10 share into 10 shares of Rs. 1 and issue 490 lakh equity shares of Rs. 1 each for cash at par on a renounceable rights basis to the existing shareholders of DGML in the ratio of 20 equity shares for every share held. Post rights, the issued and subscribed capital would expand to Rs. 5.14 crores.

According to Sandeep Lakhwara , CEO of DGML, the first area where mining operations may start, within the next two years, is in the Dharwar/Shimoga prospect in Karnataka, which covers an area of 5,660 sq. km. Exploration work undertaken so far has identified 15 independent gold bearing prospects in banded iron formation with a cumulative length of 5.3 km and gold values in the range of 2 grams to 29 grams per tonne. These prospects have the potential to become independent, open pit gold mines at depths of up to 30 metres.

The second priority area for DGML is Hutti in Raichur district of Karnataka. DGML has prospecting licences here over an area of 800 sq. km. to the north and south of the existing mining leases of Hutti Gold Mines. Preliminary exploration has yielded promising deposits with gold values ranging from 5 grams to 33 grams per tonne.

The potential gold recovery from all these areas far exceeds the 2 tonnes per year output from Hutti Gold Mines.

Yet another metal that AIR intends to focus on in the coming years is nickel. It is a strategically important metal that goes into such materials as stainless steel, heat resistant alloys, rocket casings and armour plate. India imports all its nickel requirements.

“We have identified 74 prospects for nickel ore in India,” says Lakhwara, “of which five are of Grade 1, in Central India. A separate group company of AIR, called Indian Nickel Mines Company, will be handling this project.”

Overall, AIR intends to invest around Rs. 30 to 50 crores in the next two to three years in mining operations in India. Besides gold and nickel, the other minerals on its radar horizon are zinc ore and diamonds.