India Resources: a turnaround story becomes a mining contractor and Indian GDP play

Although not widely known, Arvind Misra was instrumental in successful turnarounds of Norseman Gold Ltd and Brandrill Ltd – so he knows a thing or two about adding shareholder value.

India Resources (ASX:IRL) started as Exploration Company in 2007. It accumulated debt which has now been pared to negligible levels.  Now stabilised and re-positioned by Misra as a cash flow positive mining contractor, with a solid  order book, it has hallmarks of other early stage ASX-listed mining contractors like Macmahon Holdings (ASX: MAH). MAH has an order book of A$2.2 billion and a market capitalisation of A$495m.  IRL has an order book of $800m and market capitalisation of $5.0m.

It is the “first foreign owned company with a mining operation in India,” and it is poised to leverage this growth with additional mine contracting deals.

Recent Highlights

- Reduced debt from $3.0m to $1.0m
- $0.75m in cash
- Additional $0.85m to be received by Oct 2010
- Cash flow positive: operating cash flow of $4.0 - $ 5.0m per annum from Surda Copper Mine
- Retired convertible notes, cleared “overhang” of shares
- Placement to raise $0.6m
- Brought in experienced locals – reduced head office expense to $150k per month
- Commitment from a broker and a private investor to raise further money if required
- Signed the Bankura Coal Letter of Intent – making progress on final clearances
- Prism Coal Block contract - Preferred Contractor
- On track for delivery of net profit FY2011

As a mining contractor, IRL has been profitably operating the Surda Copper Mine, which has an order book of over A$70m. With announced deals to operate the Bankura Coal Mine (order book of A$450m) and the Prism Mine (order book of A$350m), IRL has undergone a metamorphosis.

Given the order book the market valuation is low at present. Given this, IRL is under the radar.  Yet India Resources will be operating some very substantial mining projects at attractive margins. 

Why India?

Year-on-year GDP growth has averaged 9% pa.  Impact of the GFC has been less than most. The government was re-elected in May 2009 with a mandate for much needed reforms.

Energy demand is outstripping supply in many areas, most notably: coal – a rapid increase in domestic demand for power generation IRL can claim to be a member of a very exclusive group, it is an Australian company that operates a producing mine in India and there is significant potential to gain additional mine contracts. India is the world’s largest democratic nation with an average GDP growth rate of around 9% per annum and rivals China for growth prospects and has massive mineral wealth available for exploration and development.

Management changes

With solid experience operating mines for Rio Tinto, Coal India Limited, Griffin Coal and Mt Isa Mines, managing director Arvind Misra was part of the turnaround at drill operator, Brandrill Ltd (ASX: BDL) in 2001 and at gold miner, Norseman Gold (ASX: NGX) in 2006.  When he arrived at IRL, Misra inherited a number of investments.  Since then he has re-positioned IRL as a mining contractor tapping Indian economic growth and developed a solid team at IRL in Australia and in India. IRL has significant scale with over 1,300 employees in India.

Contracting

Smart Management at Surda Copper Mine

IRL’s modus operandi is the small-medium project space in India.  At the Surda Copper Mine in India’s Jharkhand region, IRL has been able to operate the mine to greater effect than the former operator, India’s largest copper producer, Hindustan Copper Ltd.  IRL operates the mine in return for a fee. The project has been net cash flow positive since December 2009.

IRL operates the mine under long-term contract and sells copper concentrates back to Hindustan for refining. Surda has produced copper for several decades. IRL has spent AU$15 million introducing modern mine management and technology, buying new equipment, upgrading underground operations and installing new equipment to crush, grind, separate and concentrate copper ore.

Fresh drilling has also confirmed a JORC resource of 13.1 million tonnes of ore grading 1.1% containing approximately 144,100 tonnes of copper with excellent exploration potential for more resources. At current copper prices and planned production at a rate of 4,500 tonnes per year this could produce annual revenues approaching AU$25 million per year for at least 30 years. All of the drives, shafts and ore resources are now digitally mapped in three dimensions allowing for more efficient extraction of copper ore and plans for further production increases.

IRL has an off take agreement with HCL until 2014. The Surda Copper Mine and Mosaboni Concentrator are located in close proximity to HCL’s copper smelter.  As a measure of the turnaround under Arvind Misra, IRL is producing at 275 – 300 tonnes copper per month with 850 employees compared to HCL’s historical average of 215 tonnes per month with 1,200 employees.

Mine upgrades have already increased production by over 30% with 25% less manpower. Current monthly production has reached a record of 300 tonnes and is planned to reach 350 tonnes. The mine employs 900 miners, 250 at the process plant and 150 in administration. IRL are smart enough to know that it makes good economic sense to mix modern technology with a trained pool of low cost labour.

IRL has a production target at Surda of 4,500tpa of copper (Cu) building to 9,000 tonnes per annum. How? IRL intends to negotiate with HCL for an enhancement. IRL has recently secured the services of a recently retired director of Hindustan Copper Limited whose primary role is to expand IRL’s copper business in India.

Management provides training programs for the underground workforce which contains 82% of new hires who have never worked in a mine before. They can deploy large numbers of miners at multiple mine faces and get more ore at lower cost while maintaining safety standards that are recording accidents at half the rate of modern Australian mines.
 
Surda Copper is now operating profitably even though the refiner imposed a 16.6% revenue deduction against Indian excise duty which is under legal challenge. In the last two quarters revenue has jumped in rupee terms from 102,000 million to 123,000 million. This number is reflected in the Australian GAAP accounts for the recent March quarter showing revenues of approximately AU$3.2 million. Ore production is slated to increase by another 10-15% so profitability will jump higher and cash flow growth will feed further development.

With IRL reliably and profitably operating the Surda mine, IRL has turned to add other mine contracting projects.

Biharinath Coal Mine (Bankura DRI)

IRL has signed a Letter of Intent with Bankura DRI Mining Manufacturers Company Private Ltd. for a 30 year contract worth A$450 million to IRL to develop and operate the Biharinath Coal Mine.  IRL has agreed to mine and supply coal to Bankura at a rate per tonne of coal, loaded onto Bankura’s trucks.

Commercial terms agreed on the base price results in an IRR of 15%, however this return could be boosted as IRL will also be provided an incentive to produce more coal with an upward revision in coal price.

The Biharinath block lies approximately 120 kms north-east of IRL’s Surda Copper Project in the neighbouring state of West Bengal. 

IRL plans to develop a new underground mine that will build up to a full annualised production rate of 480,000 tonnes per annum.

The Letter of Intent with Bankura was extended to December 2010 to allow for sufficient time to obtain final environmental clearances from the Indian government.  IRL is making progress on the outstanding matters.

The deal provides a low-risk entry point for IRL to enter and participate in India’s booming coal mining industry.

Prism Coal Block

The tender for operating the Prism Coal Block was submitted during the previous quarter and a number of discussions have since been held with Prism Cement, as well as a site visit by the Prism Senior Project Management to the Surda operations. Awarding of this project is expected in the coming months. IRL is optimistic that it can secure the tender to operate the Prism coal block. News is expected in H2 2010. The value of the order book is in the vicinity of A$350 million.

The Coal Block is held by Prism Cement and requires approximately 300,000 tonnes per annum of coal to be mined once two declines and a vertical ventilation shaft have been sunk.

IRL’s strategy is to develop a positive cash flow generating contracting order book that can support mine development and exploration by IRL in its own right.

Aravalli Project – Base Metals

A subsidiary of IRL, Crown Mining Pvt Ltd has completed the application process for the Mining Lease, applied for over the lead-zinc mineralisation defined at Sindesar Khurd-Rajpura Dariba. Representations have been made to the Indian State and Federal Governments to progress the approval of the lease. Crown Mining has the preferential right to be granted the Mining Lease.

Valuation

IRL currently has 370 million shares on issue.

Taking a line through other mining contractors, such as Macmahon Holdings (ASX: MAH) and their valuations, allowing for risk factors such as: sovereign risk, delays in approvals, financing could place a market capitalisation valuation on IRL of $15m of 4.2 cents per share (cps).  If IRL can provide further time-lines on Bankura and Prism this would lift valuation closer to 6.5cps.  While not without risk in terms of volatility in share price, current market valuation would seem to have factored in the past and not the future prospects.

Why the low market valuation?

IRL was hampered by a substantial investment in a legacy gold project that went awry but is now getting back most of its investment and expects to receive A$1.7 million.  The company has also taken longer to re-vamp and turnaround.  There has been an overhang of shares due to the convertible note issue; this is now no longer a factor.

With mining projects and cash flow opportunities coming its way, it may pay to follow IRL. The wait may be worth it for the market to re-value this under followed minnow.