SANDEEP Lakhwara , Executive Director , DGML – India Info Online

India Info Online, 5 April 2004 :

Deccan Gold Mines Ltd (DGML) is a publicly listed company on the Mumbai Stock Exchange. The majority shares in DGML are owned by the shareholders of Australian Indian Resources (AIR). AIR was constituted in 1993 in Perth, Australia, with the sole purpose of undertaking gold and base metal exploration activities in some of the highly prospective areas in India for gold and base metals.

However, the public listing in Mumbai has enabled the Indian public to also own shares in the company. GeoMysore Services (GMS) and Indophil Exploration Resources (IER) are the Indian arm of the AIR group of companies. These companies hold Reconnaissance Permits (RPs) throughout India for gold and base metal exploration and have been completed funded by AIR. A total of 26 RPs have been granted to these and other AIR Indian subsidiaries. Sandeep Lakhwara, Executive Director, Deccan Gold Mines, is a founding director of an accountancy practice based in Perth, specializing in business development, taxation, financial planning and corporate regulatory compliance. He has extensive experience in international trade and banking. Mr. Lakhwara is a Certified Practising Accountant, who has headed various organizations in the past. He has been actively involved in the public company arena both as an investor and managing director and has made several presentations on capital raisings, corporate regulatory requirements and international taxation.

Mr. Lakhwara is managing director of Perth-based Australian Indian Resources Pty Limited (AIR). (Deccan Gold Mines Ltd. is an AIR-related company) Anil Mascarenhas of India Infoline speaks with Mr. Lakhwara about the prospects of gold mining in India and some of the pitfalls plaguing the industry. Give us a brief overview on gold as an industry? What is your outlook for the metal and mining activities? How big is the potential for gold mining in India? The only gold producer currently in existence in India is The State of Karnataka owned Hutti Gold Mines Ltd. Hutti produces around 90,000 ounces (3 tons) of gold a year and an additional 1,80,000 ounces (6 tons) is produced by Hindalco as a by product of copper mining. India’s consumption is around 21,000,000 ounces (700 tons) of gold per year. There is therefore a tremendous shortfall in production versus consumption. The shortfall is catered through imports. The World Gold Council and a lot of other authorities have done their homework in terms of prospects of gold in India.

The geological terrain in India and Australia is almost identical. Australia has made some very large gold discoveries and is now producing about 8,400,000 ounces mainly due to intensive exploration activities carried out in the country. This potential has not been realised in India because of lack of adequate exploration. Whilst the Geological Survey of India has done a commendable job, most large discoveries worldwide have been made by the private sector exploration companies listed on the respective stock exchanges. Companies like us were not in existence until around 8-9 years ago. In my opinion, the opportunity for development of gold mining in India is very substantial. Through progressive and detailed exploration and efficient investment of capital, we are trying to unearth the gold reserves that we believe are beneath the surface. Indians are emotionally attached to gold. Births, marriages, and religious occasions are all celebrated with the giving of gold. The rural sector prefers gold as a currency to cash. The farmer’s wife can go to the goldsmith and convert gold to cash as required. She may not know how to operate a bank account. I have a strong view on gold prices. The largest driver is the weakening US dollar. As the dollar sheds weight, the price of gold moves upwards. The economists believe the dollar could see some more weakness going ahead. Of course, there are going to be dips but in my opinion the price is generally heading northwards.

Geo-political tensions worldwide is another contributor to this northward movement. There are a lot of countries, which are looking to add some gold into their system and thereby gain substance within their currencies. The Malaysian government is looking to introduce a currency made of gold – the gold dinar. The new President of Argentina has proposed a gold-backed peso. Moreover, on our web site we have mentioned about prices of gold being subdued on account of some acts by bullion bankers. “According to GATA (Gold Anti Trust Action Committee), about 15,000 tons of gold has been loaned by the Central banks to the Bullion banks for which they paid about 1% per annum. The Bullion banks then sold the “loaned” gold on the open market and invested the proceeds at 6-7% per annum. When gold prices started heating up, the bullion banks (that are in debt to the Central banks ) have to buy it back to repay the gold borrowed from the banks. Each time gold rallies, the Central banks reportedly are selling more government gold to cap its price. A landmark legal case is before a US federal judge alleging a variety of collusive, manipulative activities in the gold global markets.

There is also a demand- supply deficiency internationally, according to World Gold Council. Demand is running at about 120 million ounces (4000 tons) whilst the supply is around 67.5 million ounces (2250 tons). How long can the shortfall be met from existing reserves held by the banks? What would happen to the price, if the shortfall continues when the existing reserves are depleted? Do factors like commodity trading bring in more interest in the yellow metal? I think they will create a greater understanding and awareness of gold as a tradable commodity. It is a very positive development for companies like ours. Tell us about your rights issue. What is the money being utilized for? We successfully raised Rs 5 crore. Deccan Gold will be utilising the proceeds of the rights issue for more detailed exploration to adequately define the gold mineralization in the prospects being transferred to Deccan Gold. Our subsidiary companies have done a lot of exploration work on these prospects.

We believe in the potential of these prospects to deliver gold mines. Give us some details about your latest find in Dharwar-Shimoga block? Have you begun drilling in North Hutti basin? We have so far identified 22 independent exploration targets in the Dharwar- Shimoga block which is spread out over 5000 square kms. Over the last few weeks we have been drilling in 4 of the 22 targets. The drill results have come through very positively. The program was designed to find wide zones of gold mineralization to shallow depths of 40 to 60 metres to define potential blocks for open pit mining. As a result, we have delineated a 470m long and 27m wide gold bearing zone at Ganajur near Haveri. The zone has the potential to host an open pittable gold deposit with an inferred resource of about 60,000 ounces (2 tons) of gold. We now propose to conduct detailed drilling to define the reserve and also to discover additional resources. We also completed a limited reconnaitory drilling program at Mangalgatti and Bhavihal near Dharwad with very encouraging results. Visible gold has been encountered both at surface and in drill samples at Mangalgatti.

The Bhavihal prospect gave an average gold value of 1.26g/t over a true width of 17 metres corroborating the good results obtained in surface rock-chip sampling. The best intersections assayed 2.81g/t and 3.19g/t over a 4m width. Yes, we have commenced drilling at our Uti prospect in the Hutti belt. The prospect was earlier explored by us by surface sampling, which resulted in the delineation of 4 mineralized lodes. Values in the lodes range from 2.23g/t to 6.7g/t with widths ranging from 4m to 8m. Our prospect lies adjacent to the Uti (open pit) Gold Mine, presently being mined by The Hutti Gold Mines Ltd. We will soon also commence drilling in our North Hutti prospect where our exploration is focused on finding the extensions of the currently producing gold reefs of The Hutti Mine into our North Hutti prospect. In addition, we are also conducting exploration activities in the Ramagiri greenstone belt and the Mangalur RP block. You have appointed an Australian geologist. How similar are the two countries in terms of exploration? Mr Vince Roberts, a senior exploration geologist from Australia, has joined our team and is based in Bangalore. Roberts has over 39 years experience in gold and nickel exploration in Australia, Fiji, Zimbabwe, Mozambique, Papua New Guinea, Republic of Yemen, Brazil, USA and South Africa.

Our Indian geologists have a very good knowledge and understanding of exploration in India. Quite a few of them have joined us from The Geological Survey of India, The Bharat Gold Mines Ltd, The Department of Mines and Geology, all institutions active on the exploration front for the last several decades. However, our geologists don’t have exposure to taking a good prospect to feasibility and discovery as there has been little in terms of gold discoveries in India over the last few decades. Mr. Roberts on the other hand has participated in many discoveries in Australia. His experience will help us take the giant strides forward in making economically feasible gold discoveries and help rejuvenate the gold mining industry in India. Remember the gold mining industry in India dates back to some 8000 years with some 900 gold panning and mining locations. Whilst the nationalistic policies of the Indian government had closed the gold exploration and mining industry to private sector and foreign investment, countries like Australia went the opposite way and opened its doors to exactly that with amazing results.

Australia now ranks as the leading producer of gold supplying about 12% of world gold production. There are some 540 listed exploration and mining companies on the Australian Stock Exchange. In India, there are only a handful with Deccan Gold the only listed gold exploration company. India is a non performer as a producer. In this respect therefore the two countries are vastly dissimilar. Geologically, though, it is a different story. The Indian and Australian terrains are very similar. There should therefore be every possibility of making some big discoveries in India over the next few years and following the Australian example. What India needs is large doses of exploration capital to augment the development of its gold mining industry as has happened in Australia over the last three decades. How economical is it in India to develop small mines? Abroad they have proved expensive? I think India has tremendous potential to develop small mines. It has vast manpower at affordable rates, it has access to international expertise and has lots of pockets capable of delivering small mines. By small scale mining I mean gold reserves that are in the category of 200,000 – 300,000 ounces (6 -10 tons) upwards that we can produce. Just within the areas held by our subsidiary company, Geomysore Services (India) Pvt Ltd, I can think of several resources which subject to additional work can be clubbed together to develop small scale mining activities.

There are several such mines in China. A rising gold price certainly tilts the odds in favour of small scale mining. Small deposits that were previously uneconomical to mine may become feasible. Whilst we shall not ignore small scale mining, our focus remains on finding deposits capable of delivering between 500,000 ounces and a 1,000,000 ounces of gold at the very least. What is the average gold grade you have achieved so far? What is your break-even point per ton? The grades have varied from prospect to prospect. I cannot therefore give you an average grade. However, I can tell you that for an open pittable mine, a grade of between 2-3 g/t may prove feasible for mining. In underground mines, we would look at around 6 g/t upwards because the cost of mining is significant here. Are you looking at metals other than gold for mining? Yes. We are looking at nickel, zinc and also diamonds. Our Australian shareholders are keen to promote a Nickel and a Zinc company in India. We have identified several Nickel and Zinc prospects in India and utilized the services of Professor Naldrett, a UK based nickel expert, to guide us in developing our Nickel prospects. One of our Zinc prospects located in Maharashtra has been drilled extensively by The Geological Survey of India which have estimated the ore reserves in the prospect to be about 8.27 million tons with an average grade of 6.79% zinc. We have an exploration program to increase the ore reserves.

As far as diamonds are concerned, it would most likely be as a joint venture with one of the leading MNC diamond companies working in India. Our immediate focus will remain with gold. We would like to see Deccan Gold become the first private sector listed gold exploration company in India to deliver an economically feasible gold deposit. So are you planning to set up different subsidiaries for other metals? Absolutely. Development of Nickel and Zinc prospects requires a special type of expertise and rightfully should be developed by independent metal specific companies. The activities of Deccan Gold solely comprise gold exploration with a view to development of gold mining operations upon discovery of gold deposits from the prospects transferred to the company by Geomysore Services and other Indian subsidiaries of Australian Indian Resources. What is the quantum of investment you intend to make in terms of exploration and mining? It could vary based on exploration activities pursued and the size of the gold deposit when found. Our first objective is to deliver to India a deposit capable of being mined. We shall spare no effort in doing so. Exploration activities will continue beyond the first such delivery. In this respect we want to produce many babies. We have around 28 prospects granted to our subsidiary companies throughout the country comprising an area of some 34000 square kms. We are very bullish in terms of discovery in the short term.

Over the next twelve months we intend to spend the whole of Rs 5crore that we now raised on exploration programs. When we find a gold deposit, we would consider setting up a processing plant which may cost around Rs 40-50crore. How do you plan to raise the amount? There are various options. Once the feasibility of mining a gold deposit has been established, there are various MNCs who we can approach or who may come to us to partner the development of the mine. We could alternatively raise money through a public issue of shares or could approach a bullion bank which could provide funding against the security of the gold metal in the ground. When do you expect to break even as a company? To give you a brief idea, 30000 ounces (1 ton) of gold at today’s price is worth around Rs 60crore. With the price of gold at around US$400 an ounce and the average cost of processing the gold ore at around US$160- $180 per ounce, the margin in India could be very substantial. You are recouping between US$ 220-$240 per ounce on the processing costs. We are yet to study Indian costs of mining in detail. The above figures are therefore indicative only but do point to estimated returns. Then there is the initial capital invested. If we were to process say 60000 ounces of gold over two years, we would generate about Rs120 crore.

If you allowed for the write off of the processing plant over say 10 years and therefore allowed for a 10% write off every year, you would add Rs 4-5 crore to your processing costs every year. The cost of processing 60000 ounces using the above figures would be about Rs 45 crore or Rs 50 crore with the write off. You could in that event aim to return a substantial profit in the vicinity of Rs 70 crore over the two years. Do you plan to go outside the country? While our focus remains on developing virgin Indian prospects, and bringing up the gold mining industry in India, it does not restrict us from looking at opportunities outside India. If everything is so rosy in India, what prevented the development of mining and exploration? If you look at the history of gold in India, it is over 8000 years old. There were around 900 mining locations throughout the country only a few decades ago. What put a halt to the development of mining activities was the nationalization policies of the then government. What has brought back the interest in the industry is the opening up of the sector through foreign direct investment. What about competition? We take great pride in saying that we are the largest in gold exploration in India. There is very little competition.

There are Indian companies also exploring but the gap is considerable. There are other MNCs operating in India but their focus is not on gold. How bright are the chances of Deccan Gold being a takeover target? Internationally, in the gold mining sector, we are seeing a lot of consolidation. The last five years have seen a lot of big companies making offers for the stock of not so big companies. In that respect, Deccan Gold could always become a takeover target. But do remember Rama Mines Mauritius Ltd, the promoter company holds a substantial equity in the company which even after some dilution will control Deccan Gold’s destiny. Our Chairman, Charles Devenish and I are also on the Board of Rama Mines Mauritius and will not entertain any such proposition unless it is in consultation with and in the best interests of all our shareholders. As an industry what are some of the factors slowing the growth? One of the problems we face is that the mining regulations are still not very friendly in terms of procedures and formalities. The whole process of applying for reconnaissance permits (RP), then applying for prospecting licences (PL) followed by Mining Leases (ML) is very time consuming and sometimes quite frustrating. We have to approach several authorities at the District, State and Central Government level, particularly for PL and ML applications quite apart from approaching land owners where areas we propose to work in are not in government hand. We have made submissions to the government to considerably simplify the procedures.

The government is listening but we are not expecting quick results. We remain optimistic though. There are also restrictions in terms of the areas being granted under a PL which need to be addressed. A 25 sq km limit under a PL is too small for us particularly when we have prospected large areas of between 500 to 1000 sq kms under an RP. Roughly how long does the legal process take? The Reconnaissance permit (RP) is much faster as this is the initial application. Prospecting license (PL) application is a very tedious process because it requires some inputs at the grass-root level. We have to go to all the land owners and the tehsildar’s office. A PL allows for more detailed exploration, particularly beneath the surface not generally allowed under an RP. A PL grant could take around 9 months. A Mining lease grant could take a similar time. What the Government should have is a single window, where once you get an initial permit, you can take it all the way to the mining lease. That would make progressing a prospect to mining stage so much easier. Roughly how many shareholders do you have? It’s increasing.

Since the completion of the rights issue in March 2004, we are roughly adding 100 shareholders a week in India. We now have close to a 1000 shareholders. Deccan Gold is substantially owned (85%) by Rama Mines (Mauritius) Ltd. The shareholders of Rama Mines Mauritius are the same as in our parent company, Australian Indian Resources (AIR) which has several subsidiaries in India holding reconnaissance permits (RPs) for gold and base metal exploration. We do plan to invite more Indian participation through dilution of Rama Mines Mauritius equity in Deccan Gold. What would be your message to your shareholders? We believe in the potential of gold discoveries in India. We are very committed to the development of the gold mining industry in India. Our immediate objective is to come out with a discovery that is economically feasible. We have access to the best expertise both within India and overseas to achieve our objective. We have a choice of some of the best gold prospects in India. Some of these prospects are geologically similar to areas where big discoveries have been made internationally. It is simply a matter of time and maybe a little luck. We believe that we are on the right track.