Fundamental and Technical Analysis of Mining & Oil & Gas Sector

Name of the sector: Mining and Oil and Gas

Sector analysis of mining industry

India hosts a wide range of globally significant mineral resources, including: four fuel minerals (such as coal and uranium); 11 metallic minerals (such as iron); 22 minor minerals; and 52 non-metallic minerals (such as clay). The country ranks among the world's top five nations for its core competency commodity reserves of coal and iron ore. Iron ore reserves are estimated in the region of 23bnt (bn tonnes) and account for 6% of global reserves, while coal reserves are reported to be around 255bnt. India is the world's third-largest producer of coal, fourth-largest producer of iron ore and the fifth-largest producer of bauxite. However, only 10% of the country's landmass has been explored due primarily to significant regulation and bureaucratic obstacles.

India's mining industry is set to reach US$36.2bn by 2016, as output growth of key minerals remain strong. However, growth in 2012 and beyond will continue to be curtailed by India's poor operating environment. A bright spot, however, is the increasing number of Indian companies venturing overseas to secure stable, long-term supplies of minerals such as coal and iron ore in a bid to meet fast-rising domestic demand.

India's regulatory environment is prohibitive for investors although recently proposed legislation is a step in the right direction. In the past, mining permits/licences are issued contingent on success in the reconnaissance phase. This practice exposes firms to high levels of risk. However, the proposed 2011 mines and minerals development and regulation (MMDR) bill allows for the granting of nonexclusive reconnaissance licences and high-tech reconnaissance/exploration licences based on ability and intention to develop an area. The new bill also calls for a system for bidding licences, which can create a market for these licences, increasing transparency. A negative for the proposed MMDR bill will be the additional taxes to be levied for community development.

India's mining sector is highly stratified. There are a number of giant, mostly state-owned mines that have an outsized effect on total output and at the same time there are a large number of small and inefficient mines, many of them illegal. According to Austrade, 5% of operating mines in India 1

Fundamental and Technical Analysis of Mining & Oil & Gas Sector produce about 50% of the country's mineral output. Given the sector's strategic and economic importance, there is significant government involvement, with the sector dominated by state-owned companies or public sector undertakings (PSUs) such as National Aluminium Corp (NALCO), SAIL, National Mineral Development Corp (NMDC) and Coal India. According to the United States Geological Survey, PSUs contribute about 85% of India's total value of mineral production and are the main producers of key commodities such as coal, iron ore, aluminium, copper and gold.

Business Monitor International's India Mining Report provides industry professionals and strategists, corporate analysts, mining associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on India's mining industry. Challenges faced by mining industries

Financing and managing capital projects

As with other aspects of the mining industry, the sheer scale of change in the outlook for capital programmes is truly astonishing. Prior to 2008, the financing issue was how to find the right capital structures in an environment of healthy operational cash flows, while a series of industry bottlenecks were impacting the miners ability to bring new supply on stream. Since the summer of 2008, the environment has been one of restricted access to all types of finance as the global financial crisis persists from IPOs to any refinancing facility. In addition, lower commodities prices have significantly reduced operational cash flows and, therefore, the companies ability to selffinance capital programmes. It is on the demand side, however, where Chinas post-Olympic industrial slump has hit miners the most, raising questions about the logic of bringing new supply into the market.

Due to differences in the scale and nature of their capex programmes, the downturns impact on majors, mid-tier producers and juniors varies; therefore they face different challenges. In addition, the cash flow positions of most juniors are weaker than those of mid-tier producers due to lack of sellable output, making them even more vulnerable.

Most majors have been cutting back on capital programmes mainly by delaying projects, but in some cases shelving entire projects. Although the capex cutbacks are mostly driven by the need to preserve cash, they are also the result of uncertainties in the short- to medium-term supply-demand balance. On the other hand, the crisis has presented miners, particularly the majors, with

Fundamental and Technical Analysis of Mining & Oil & Gas Sector opportunities to review and reduce development costs as the slump in demand works its way through the suppliers value chain. Mobile equipment suppliers have been receiving requests for delayed deliveries and even order cancellations.

As for juniors, the majority of their capital programmes are subject to financing and therefore their challenges are even greater in the current financial environment. Most juniors have reduced development costs substantially and entered in to hibernation mode to weather the storm.

Mining transactions and industry consolidation

High levels of transactions across all segments of the sector involving industry players of all sizes seeking deals all over the world continue to rapidly change the face of the global mining industry. The industry's biggest companies have and will continue to seek opportunities to further distinguish their market leading scale. The global economic slow down has presented emerging economies with the opportunity to acquire assets/companies at reduced prices in order to expand the size/scope of their operations and secure much needed resources to fuel their burgeoning economic engines driving rapid growth. The challenges brought by the global financial crisis require companies to obtain access to new technologies and competencies, streamline their operations and asset portfolios, and consider novel and sometimes radical solutions to address their financing needs. The demands of the global market have been pushing the mining sector to evolve and the pressing need to explore undeveloped areas, restart stalled operations, and strategically restructure will continue to push companies to consider all available funding sources, form new ventures, invest in consortiums, acquire competitors, and dispose or acquire specific assets. Whether it be the ongoing expansion of the super-majors, the consolidation in the middle and lower tiers, integration of downstream operations in metals or power segments, or the search for resources by emerging economy players, the mining industry is poised to see more and more transaction activity off the back of already unprecedented deal volume in recent years. Being in a position to anticipate deal opportunities or threats from competitors will be critical for any mining company navigating today's very dynamic global mining market. Responding quickly and appropriately to these deal opportunities, bridging language, legal and cultural gaps, and building the most realistic business case for a transaction decision can be challenging. At the same time, heightened transaction risks arise when there is insufficient time to learn all pertinent facts, a cultural nuance or practice is misinterpreted, or the consequences of a hostile bid are not fully understood. 3

Fundamental and Technical Analysis of Mining & Oil & Gas Sector

Improving performance and operational effectiveness

As a mature industry, mining companies must achieve enhanced profitability, in large part, through best in class performance and disciplined cost control as market demand for their products strongly fluctuates. At any point and time, commodity prices may be high or low, but management teams know that commodity price levels are cyclical. In the face of fluctuating demand and cyclical pricing, operating an efficient and streamlined business, as well as squeezing costs, is critical.

Industry consolidation in mining has created large companies who are still discovering synergies to be achieved from merger and acquisition activity. Compliance costs for environmental remediation and enhanced safety standards have trimmed already thin margins. Achieving internal efficiencies ahead of the competition is a key challenge. Investing in medium and longer term process improvements and cost control measures makes good business sense whether prices and demand are high or low.

Managing risk

The global mining sector has experienced dramatic changes over the past five years. A sustained period of high commodity prices has been followed by falling industrial demand for raw material inputs, recent sharp corrections in all commodity prices, constraints on access to capital and the subsequent need for reassessment of corporate strategies.

This correction has followed a period of unprecedented global merger and acquisition activity. The previous high commodity prices, buoyant market capitalisations and optimism about the industry's long-term growth and profitability had previously seen mining companies embarking on ambitious long-term growth strategies. Consolidation through acquisition has been increasingly viewed as a way for mining companies to overcome record high exploration costs, achieve production synergies through scale, circumvent protracted exploration and greenfield mining regulatory processes, and address specific mining skills shortages. Major capital investment decisions are being made in this increasingly volatile operating and price environment, where future returns on the capital invested are increasingly uncertain.

Given these attributes of their operating environment, global mining companies are placing increasingly higher priority on the need for effective corporate risk management.

Complying with regulatory & reporting requirements 4

Fundamental and Technical Analysis of Mining & Oil & Gas Sector Regulatory compliance and reporting needs to be viewed as a natural extension of the governance duties shouldered by top management and corporate boards. Moreover, only good governance can ensure that compliance is aligned with the companys business objectives and risk management strategies and is thereby adding real value (and not just cost) to the organisation. Ultimately, the goal is to ensure that the spirit of compliance as well as the letter of the law is embraced in every corner of the enterprise.

Addressing sustainability issues

Leading mining companies are successfully integrating sustainability into their overall strategies by:
1. 2. 3. 4.

Building trust with their key stakeholders through balanced reporting on their activities Actively managing their risks Maximising the positive effects of their operations Embracing a growing body of international best practice on non-financial matters

There has also been an increase in the regulation of the mining industry in relation to issues such as: 1. Local economic development 2. Beneficiation (specifically in South Africa) 3. Environmental management 4. Climate change strategies Sustainable development practices have the potential to leave a legacy of positive impact long after the life cycle of a mine has ended. Financial markets also are increasingly assigning a greater value to effective risk management of non-financial issues.

Recruiting and retaining a skilled workforce

Mining companies have large workforces with diverse skills and operations, often in numerous locations across the world. Relocating employees (and their families) overseas, often to developing countries where both living and working conditions are challenging, adds a further dimension and complexity to recruiting and retaining a workforce with the requisite skills and experience. The aging workforce, downturn in students from mining fields such as mining engineering and geology, and socio-political challenges such as HIV in the workforce and legislation regarding black empowerment present just a few of the HR challenges that mining companies are facing.

Fundamental and Technical Analysis of Mining & Oil & Gas Sector

The above issues were difficult enough to deal with in bull markets, but the global economic downturn presents further business challenges around production, capital efficiency and cost-savings (including managing headcount). The ability to recruit strategically and retain key employees and scarce skills in mining companies is more important now than ever and is imperative to the future of the industry.

PESTLE Analysis of mining industry

Political Factors
1.

Difficulty in obtaining clearances and leases from the state governments

There are various clearances which need to be obtained from different ministries stated below which is a cumbersome and time consuming process:
2.

Department of Mines Indian Bureau of Mines Goa State Pollution Control Board Geological Survey of India Ministry of enviromental and forests Central Board of Excise and Customs Department of Heavy Industry Ministry of labour The contribution of iron ore to inflation

Domestic inflation has also been rising since December 2007. The iron and steel products constitutes 3.64 per cent of the wholesale price index (WPI). Hence, controlling the sharp rise in domestic steel prices, and thereby containing inflation, had become a priority for the government. The government had since been taking measures to soften the iron ore prices.
3.

Governments approach of giving priority to the domestic players

To curb the increasing pressure on the domestic steel industries due to increasing global prices after recession, the Government used duties and royalty as tools to keep the supplies in the domestic

Fundamental and Technical Analysis of Mining & Oil & Gas Sector market. An ad valorem duty of 15% was imposed on all grades of ore export in June 2008, as against a specific duty applicable earlier. Economic Factors 1. The fluctuations in the exchange rates impact the performance of the mining Industry Indian iron ore industry thrives on exports. Goa exports 96% of its iron ore production and 84% of revenues is accounted for by exports to China. As per mining legislation of India there is no restriction on foreign equity holdings in mining sector companies registered in India. China being the highest buyer of iron ore, it is the key driver of the global iron ore industry. Its economic scenario impacts the entire industry.

2. Change in the scale of steel production The free on board (FOB) price of reference grade Indian iron ore dropped from US$ 140-US$ 145 per MT in the beginning of August 2008 to US$ 52 in March 2009. However, now the scenario is changing. Chinas crude steel production increased 12.6% y-o-y in July 2009 to 50.7 mmt. This increase in steel demand is expected to result in higher demand for iron ore, thus keeping the iron ore prices firm. Social Factors The problem of mining-induced displacement and resettlement (MIDR) poses major risks to societal sustainability. The closure and suspension of work in more than 50 iron ore mines in Orissa over the past few months has hit supplies for export. The unrest among local residents due to landlessness, joblessness, homelessness and changes in population dynamics. Technological Factors In India, there are no exploration programmes undertaken for locating new additional deposits of iron ore. Many technological improvements have helped the mining industry in cost controls, emission controls, and mineral conservation and in bringing down the alumina content of the ore. Legal Factors

Fundamental and Technical Analysis of Mining & Oil & Gas Sector The Central Government, in consultation with the State Governments, formulates the legal measures for regulation of mines and minerals in order to ensure basic uniformity in mineral administration as well as to maintain the pace of development of mineral resources, in consonance with the national policy goals. The Mines and Minerals (Development and Regulation Act, 1957, (MMDR) and the Mines Act, 1952, together with the rules and regulations framed under them, constitute the basic laws governing the mining sector in India. The National Mineral Policy in 1993 recognized the need for encouraging private investment, including foreign direct investment and for attracting state-of-the-art technology in the mineral sector. Environmental factors Extraction and development of minerals are closely interlinked with other natural resources like land, water, air and forest. Hence, the management of this precious resource and its optimal and economical use are matters of national importance. The Mining Companies has to take steps in executing the highest standards of quality, environment health and safety (QEHS) management systems. All its mines and their support services are to be certified to be compliant with ISO 140012004 Environment Management System, ISO 9001-2000 Quality Management System and OHSAS 180011999 Safety and Health Management System compliant. The Mining Companies also have to comply with the regulations of the Environment Protection Act. There are certain restrictions on undertaking new development projects or expansion and modernization of existing ones, unless prior environmental clearance has been obtained from the Ministry.

A SWOT Analysis of Indian Mining Industry Strengths: 1. The government offers a wide range of concessions to investors in India, engaged in mining activity. The main concessions include, inter alia: * Mining in specified backward districts is eligible for a complete tax holiday for a period

Fundamental and Technical Analysis of Mining & Oil & Gas Sector
of 5 years from commencement of production and a 30 percent tax holiday for 5 years thereafter. * Environment protection equipment, pollution control equipment, energy saving equipment and certain other equipment eligible for 100 percent depreciation. * One tenth of the expenditure on prospecting or extracting or production of certain minerals during five years ending with the first year of commercial production is allowed as a deduction from the total income. * Export profits from specified minerals and ores are eligible for certain concessions under the Income tax Act. * Minerals in their finished form exempt from excise duty. * Low customs duty on capital equipment used for minerals; on nickel, tin, pig iron, unwrought aluminium. * Capital goods imported for mining under EPCG scheme qualify for concessional customs duty subject to certain export obligation. 2. World's largest producer of mica; third largest producer of coal and lignite & barytes; ranks among the top producers of iron ore, bauxite, manganese ore and aluminium. 3. Labours easily available 4. Low labour and conversion costs 5. Large quantity of high quality reserves 6. Exports iron-ore to China and Japan on a large scale 7. Strategic location : Proximity to the developed European markets and fastdeveloping Asian markets for export of Steel, Aluminium Weakness:

Fundamental and Technical Analysis of Mining & Oil & Gas Sector
Coal mining in India is associated with poor employee productivity. The output per miner per annum in India varies from 150 to 2,650 tonnes compared to an average of around 12,000 tonnes in the U.S. and Australia; and Historically, opencast mining has been favored over underground mining. This has led to land degradation, environmental pollution and reduced quality of coal as it tends to get mixed with other matter; India has still not been able to develop a comprehensive solution to deal with the fly ash generated at coal power stations through use of Indian coal. Clean coal technologies, such as Integrated Gasification Combined Cycle, where the coal is converted to gas, are available, but these are expensive and need modification to suit Indian coal specifications. Poor infrastructure facilities Mining technology is outdated Low innovation capabilities Labor force is highly un-skilled and inexperienced High rate of accidents Lack of R&D programs and training and development Most of the Indian mining companies do not have access to Indian capital market There is a lack of respect for the mining industry and it suffers from the incorrect perception that ore deposits are depleted. There is limited access to capital, and mines are increasingly more costly to find, acquire, develop and produce. There are long lead times on production decisions. The Indian mining industry suffers from an out-dated, unattractive approach to mining education that is partly to blame for insufficient human resources. Improvement in operational efficiency of the mining companies - Mining companies are in need of an organizational transformation to gradually align its operating costs to international standards. Mining costs of Indian companies are at least 35 percent higher than those of leading coal exporting countries such as Australia, Indonesia, and South Africa. To match productivity, they will need to invest in new technologies, improve processes in planning and execution of projects, and institutionalize a comprehensive risk management framework. Mining operations are not environment friendly. Least importance is given to environment concerns. High rate of illegal mining

The Opportunities

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector
India has an estimated 85 billion tonnes of mineral reserves remaining to be exploited. Besides coal, oil and gas reserves, the mineral inventory in India includes 13,000 deposits/ prospects of 61 non-fuel minerals. Expenditure outlay on mining is a meager sum when compared to other competing emerging mining markets and the investment gap is most likely to be covered by the private sector. India welcomes joint ventures between foreign and domestic partners to mobilise finances and technology and secure access to global markets.

Potential areas for exploration ventures include gold, diamond, copper, lead, zinc, nickel, cobalt, molybdenum, lithium, tin, tungsten, silver, platinum group of metals and other rare metals, chromite and manganese ore, and fertiliser minerals.

The main opportunities in the mining sector (excluding coal and industrial minerals) are in the development and production of surplus commodities such as iron ore and bauxite, mica, potash, few low-grade ores, mining of small gold deposits, development of placer gold resources located on the frontal belt of the Himalayas, mining known deposits of economic and marginal categories such as base metals in Bihar and Rajasthan and exploitation of laterite for nickels in Orissa, molybdenum in Tamil Nadu and tin in Haryana.

Considerable potential exists for setting up manufacturing units for value added products.
There exists considerable opportunities for future discoveries of sub-surface deposits with the application of modern techniques. Current economic mining practices are generally limited to depths of 300 meters and 25 percent of the reserves of the country are beyond this depth Strengthening of logistics in coal distribution - In India, the logistics infrastructure such as ports and railways are overburdened and costly and act as bottlenecks in development of free market. Privatization of ports may bring the needed efficiencies and capacities. In addition, capacity addition by the Indian Railways is necessary to increase freight capacity from the coal producing regions to demand centers in the northern and central parts of the country. On the Indian rail network, freight trains get a lower priority than passenger trains, a problem that promotes delays and inefficiency. Special freight corridors would raise speeds, cut costs, and increase the system's reliability.

Focusing on technology for future - India's numerous technology research institutes are working on energy related R&D. However, there is a possibility that they are operating in a fragmented fashion. The Government may get improved recoveries on its investment by concentrating on few important technology areas. To start with focus may be applied for tighter emission standards and

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector
development of inexpensive clean-coal technologies viz. extraction of methane from coal deposits. Estimated 82 billion tonnes of reserves of various metals yet to be tapped While India has 7.5% of the world's total bauxite deposits, aluminium production capacity is only 3% of world capacity, indicating the scope and need for new capacities Threats: Foreign Investment in the Mining Sector During 1999, the Government had cleared 7 more proposals of leading international mining companies for prospecting and exploration in the mineral sector to the tune of US$ 62.5 million. 65 licenses have been issued till date for prospecting an area of around 90,142 sqkms in the states of Rajasthan, Maharashtra, Gujarat, Bihar, Haryana and Madhya Pradesh. Prospecting licenses have been granted in favour of Indian subsidiaries of well-known mining companies. These include BHP Minerals, CRA Exploration supported by Rio Tinto (RTZ-CRA), Phelps Dodge of USA, Metmin Finance and Holding supported by Metdist Group of Companies UK, Meridien Minerals of Canada, RBW Mineral Industries supported by White Tiger Resources of Australia, etc. Large integrated international metal manufacturers including POSCO, Mittal Steel and Alcan have announced plans for expansion in India Mining companies and equipment suppliers are under the constant threat of being taken over by foreign companies. A heavy tax burden discourages further investment. Politicians undervalue the industry's contributions to the economy. Stricter environment rules restricting mining activities

Economic impact of the mining sector

Mining is an important contributor to economic growth, employment, income and wealth generation, government revenues, and exports for developed and less-developed

countries alike. Mining, in addition, provides essential minerals without which the most basic and the most advanced industrial production would be impossible. Mining is also of immense geopolitical significance. The quest for minerals has been a fun demented force throughout human history. For example, many of the worlds current conflicts have their roots in imperial expansion going back at least to the 15th century, much of it driven by the 12

Fundamental and Technical Analysis of Mining & Oil & Gas Sector need to acquire both precious and industrial minerals to raise and equip armies and to build industry. What Joseph Conrad in Heart of Darkness termed the vilest scramble for loot that ever disfigured the history of human conscience continues today in the civil war in Democratic Republic of Congo, which has claimed an estimated four million lives over the past 10 years. The rapid industrial development of emerging economies especially China, but also in many other countries has vastly increased the demand for minerals and other commodities, and has significantly altered international markets and political and economic relations among countries. Different countries depend on mining to very different degrees. According to the U.S. Geological Survey the value of primary non-fuel mineral production in the United States, the worlds largest producer, amounted to $68 billion in 2007 . This represents only 0.5% of American GDP. Coal production amounted to a further $30 billion, about 0.2% of GDP. The value of processed non-fuel minerals, however, was $575 billion, or 4% of GDP. The value added to GDP by industries that consume processed minerals mainly construction, consumer durables, and some consumer non-durables amounted to $2,210 billion, or 16% of GDP. In 2007 the mining and primary minerals processing industries employed more than 1.5 million people, about one per cent of the total labor force. Production workers these industries earn higher wages than most other industrial workers. In 2008-08 U.S. coal and metals miners earned an average of $1,020 per week, as compared to the average weekly construction wage of $841 and the average weekly manufacturing wage of $725. Mining workers in other countries including many emerging economies earn significantly more than workers in other sectors. Mining is even more important economically to other countries. In 2007 Canadas non-fuel primary mineral production amounted to C$40.4 billion (about $37.8 billion), or about 4.2% of GDP, while federal and provincial revenues from royalties and corporate and personal income taxes levied on the mining sector totaled C$5.25 bn or roughly one per cent of total government revenues Australias non-fuel minerals production of a$48.8 bn (US$41.2 bn) in 2006-2007 accounted for 5.1% of GDP, while total mining and minerals processing accounted for nearly 9%. In many emerging economies, mining accounts for an even larger portion of economic activity. In South Africa mining contributes about 5.8% of GDP down from about 14% in the 1970s and 1980s - but remains the countrys largest source of formal private sector employment, with 460,000 workers or 3% of the economically active population. Chiles mining sector produces 7.3% of GDP and nearly half of export revenues . In Mali, 2007 mining revenues were FCFA 300 bn, or $609 million, representing 9.1% of GDP, while mining taxes and royalties amounted to 18% of total government revenues. Kyrgyzstan s mining sector

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector accounts for over 10% of GDP and nearly 50% of total industrial production. Mining accounts for 11% of Zambias GDP and about 85% of its total export revenues . In Botswana, mining accounted for 39% of 2007-2008 GDP, down from 42% the previous year. The sector also generates 90% of the countrys exports and 50% of government revenues These figures understate the true importance of mining to these economies. Mining feeds downstream metals beneficiation, processing, and manufacturing, and is a big consumer of energy, later, inland transport, and shipping services as well as equipment, spares, and other goods. All industries show some form of multiplier with regard to output, employment, and individual earnings, but the multiplier in the mining sector tends to be higher than in other sectors. In the United States, for example, the mining output multiplier is 1.6, meaning that every dollar of mining output creates an additional $1.60 in output in other areas. The jobs multiplier is 1.8, meaning that for every direct job created in the mining industry another 1.8 jobs are created elsewhere in the economy. The earnings multiplier is 1.7, meaning that for every dollar earned by employees in the mining sector a further $1.7 is earned elsewhere in the economy. The figures may vary from one country to the next and from one year to the next, but the multiplier effect remains real. The Australian and New Zealand Minerals and Energy Council estimated for South Australias mining industry an output multiplier of 1.0, an income multiplier of 2.0, and an employment multiplier of 3.0. These were the highest multipliers of any industry sector and nearly twice the state average . Multipliers are due not only to direct linkages between mining companies and their suppliers and customers, but also to the salaries and spending of mine workers, which create employment and earnings in a wide range of sectors, including housing, construction, health, education, wholesale and retail distribution, consumer durables and non-durables, and much more. Overall, mining provides a significant source of high paying employment in many countries and can be an important factor in facilitating economic development, trade, progress and poverty reduction.

Recent trends in the mining sector

The mining sector is highly cyclical with significant movement prices over time, in response to changing market conditions and broader geo-political and other factors. For example, commodity prices experienced an almost unprecedented boom in the five years to mid-

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector 2008, when the financial crisis and recession provoked a deep slump. After reaching highs in the 1970s, prices for minerals and other commodities such as food, oil, and gas stagnated and even declined for nearly 20 years . Although the run-up in prices from 2003 to 2008 clearly reflects some speculative excess, it also reflects the growing demand from large emerging economies, especially China and including other countries such as India, Brazil and several countries in the Middle East. The current world-wide economic slowdown also has resulted in Chinas, Indias and other large countries GDP growth declining, along with a decline in the prices of minerals and other commodities. As a consequence, several large mining projects, including development of the worlds largest cobalt-nickel deposit in Cameroon and a huge iron ore mine in Guinea, were put on hold in 2009. Development of the $3 billion Oyu Tolgoi copper mine has been slowed and 40% of the work force laid off because of falling copper prices. Some of these developments, however, may have as much to do with the difficulty of raising capital as with depressed mineral prices. The stock price of Rio Tinto, one of the two main non-government partners in the venture, fell by 76% during 2008. The recent economic crisis, volatility in mineral prices and mining company valuations, and the temporary suspension of many mining projects, are temporary phenomena unlikely to affect long term trends. Barring a world economic contraction of the order of the Great Depression, a long term upward trend for minerals demand and prices seems almost certain. As this trend picks up again, probably within the next few years, many of the mining projects placed on hold will be revived as the price outlook improves and it becomes easier to raise capital. Countries, especially emerging economies, are likely, on the one hand, to try to attract a large share of new mining investment but may, on the other hand, be tempted to exploit the upturn in demand and prices to impose additional restrictions and taxes on mining companies to the detriment of the mining sector in that country.

Metals & Mining

Levy of export duty at the rate of 10% on bauxite. Levy of export duty at the rate of 10% on unprocessed ilmenite and at 5% on upgraded ilmonite. Levy of excise duty at the rate of 4% on silver manufactured from smelting zinc or lead.

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector

Compounded levy on stainless steel Patta Patti increased from 30,000 to 40,000 per from machine per month. Reduction of basic customs duty from 10% to 5% on stainless steel wire cloth stripe and from 7.5% to 5% on wash coat for use in the manufacture of catalytic convertors and their parts. Full exemption from export duty to galvanized steel sheets falling under certain subheadings, retrospectively with effect from March 1, 2011.

Neutral
The levy of export duty at the rate of 10% on bauxite is aimed at improving domestic availability and benefitting the domestic aluminium industry, which uses bauxite as a key raw material. However, it will have only a negligible impact since exports account for a small proportion of domestic production of bauxite. Further, the other Budget announcements made for the metals & mining industry are not likely to have any significant impact on the industry, mainly as there have been no major announcements for the key sectors such as steel or aluminium. Nevertheless, announcements pertaining to the infrastructure and housing sectors are expected to provide some fillip to the metals industry, particularly the steel industry. Hence, the overall impact of the Budget announcements on the metals and mining sector is neutral.

Sector analysis on oil and gas

Crude oil and natural gas are naturally occurring substances present in rock amidst the earth's crust. The origin of oil and gas is organic material - the remains of plants and animals - compressed in sedimentary rock such as sandstone, limestone and shale. Sedimentary rock is a product of sediment deposits in ancient oceans and other bodies of water. As layers of sediment were deposited on the ocean floor, decaying remains of plants and animals were integrated into the forming rock. This organic material eventually transformed into oil and gas after being exposed to a specific temperature and pressure range deep within the earth's crust.

Because oil and gas are less dense than water, which occurs in huge quantities in the earth's subsurface, oil and gas migrate through relatively porous sedimentary source rock toward the 16

Fundamental and Technical Analysis of Mining & Oil & Gas Sector earth's surface. When the hydrocarbons are trapped beneath relatively less porous cap rock, an oil and gas reservoir is formed. These reservoirs, which are simply layers of rock containing relatively large quantities of oil and gas, are our source for crude oil and gas.

In order to bring the hydrocarbons to the surface, a well must be drilled through the cap rock and into the reservoir. Drilling rigs work in a similar fashion as a hand drill; a drill bit is attached to a series of drill pipes and the whole thing is rotated to make a well in the rock. Once the drill bit reaches the reservoir, a productive oil or gas well can be completed and the hydrocarbons can be pumped to the surface. When the drilling activity does not find commercially viable quantities of hydrocarbons, the well is classified as a "dry hole". Dry holes are typically plugged and abandoned. Exploration and production (E&P) companies focus on finding hydrocarbon reservoirs, drilling oil and gas wells and producing and selling these materials to be later refined into products such as gasoline. This activity is usually referred to as upstream oil and gas activity. Today, there are hundreds of public E&P companies listed on U.S. stock exchanges. Virtually all cash flow and income statement line items of E&P companies are directly attached to oil and gas production; therefore, investors should develop an understanding of basic production terminology when assessing E&P stocks.

Exploration and production companies measure oil production in terms of barrels. A barrel, usually abbreviated as "bbl", is 42 U.S. gallons. Companies often describe production in terms of bbl per day or bbl per quarter. A common methodology in the oil patch is to use a prefix of "m" to indicate 1,000 and a prefix of "mm" to indicate 1 million. Therefore, one thousand barrels is commonly denoted as "mbbl" and one million barrels is denoted as "mmbbl". For example, when an E&P company reports production of 7 mbbl per day, it is referring to 7,000 barrels of oil per day.

SWOT ANALYSIS OF OIL AND GAS INDUSTRY Strengths

India is the worlds fifth biggest energy consumer and continues to grow rapidly

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector Major natural gas discoveries by a number of domestic companies hold significant medium- to long-term potential.

Demand for petroleum products

Increase in demand for oil and gas High exploration portfolio

Opportunities Liquefied natural gas (LNG) imports are still set to grow rapidly over the longer term as domestic consumption expands India has freed gasoline retail price controls Untapped domestic oil and gas potential Strong domestic energy demand growth

Weaknesses The oil and gas sector is dominated by statecontrolled enterprises, although the government has taken steps in recent years to deregulate the industry and encourage greater foreign participation Threats Increased competition within government and private players Continuing government interference Changes in national energy policies Increase in oil prices Inadequate and slowly developing infrastructure Lack of awareness in safety issues Environmental issues

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector

TAXATION Petroleum Product Pricing Taxation comparisons

In April 2002 India abolished the Administrative Pricing Mechanism (APM) controlling the domestic price of petroleum products in India. Under the APM, product prices were directly administered by India Central Government based on an opaque and complex cost of operating capital plus formula.

Effect of Taxation and Subsidies: A Comparison The effect of lower product prices than input prices - a large effective subsidy has been the increasing accumulation of under-recoveries by OMCs. Under-Recoveries represent the difference between the trade-parity cost of Refined product paid by OMCs and their realised change frequently depending on a number of factors.

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Fundamental and Technical Analysis of Mining & Oil & Gas Sector

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