1. Mining 101 January 8th, 2008

2. Current State of Mining 2 Proposed Changes 3 Augmenting State Revenue – issues and analysis 4 Feedback 5 1 Basics of Mining Tabs

3. Basics of Mining Mining comprises of the following basic stages –  Regional Exploration: aimed to identify large areas bearing deposits through non-invasive techniques such as geological and theme mapping, aerial photography, satellite imagery, topographic and underground surveys and in some rare instances limited sample drilling.  Detailed Exploration: confined to smaller areas following findings from regional exploration. Its much more intensive and comprises of activities such as close distance drilling, large-scale mapping, and very substantial geophysical and geochemical testing to establish economically recoverable ore bodies.  Extraction or Actual Mining: Follows detailed exploration if economically recoverable ore bodies are found. P1 P2 E1 E2 GSI Flow of Mining Operations

4. Current State of Mining in India - I Exhibit 1A – Total Mineral Potential Exhibit 1B – Scheduled Minerals  Very low mineral exploitation.  Attributed to heavy government regulation. GSI was primarily responsible for exploration.  Privatization laws were enacted in 2000 to increase private sector investment in mining.

5. Current State of Mining in India - II Exhibit 1C – Impact of Private Sector Investment, July 2005  Private sector investment didn’t drastically change the exploration scenario.  Large amount of the potential mining area was granted to private companies under the new policies enacted.  There was a slight increase in the total area explored, but the conversion from area granted to area explored was very low.  The conversion rate from a PL (Prospecting License) to a ML (Mining Lease) was also very small  Further deregulation recommended by National Mineral Policy, 2006. Area granted to Private Sector under RPs and PLs for exploration between 2000 and 2005 RP – Regional Exploration PL – Prospecting License ML – Mining Lease Exhibit 1D – Grant of Mining Permits 10,000 sq. km, Non-Invasive, Exclusive 25 sq. km, Invasive, Exclusive 10 sq. km, Invasive, Exclusive

6. Proposed Changes in Mining Policy- I Exhibit 1C – Current Mining Policy  RP – Reconnaissance Permits to be made non-exclusive to allow more competition and better coverage of unexplored mining area.  Introduction of exclusive LAPL – Large Area Prospecting License to allow for shallow pitting, trenching and surface drilling in addition to reconnaissance operations. This is short of Detailed Exploration.  LAPL contingent upon promise of use of advanced technology and increased expenditure. This allows for money to be pumped into exploration and the use of new techniques such as Electromagnetic Probing and Deep Imaging.  Allow direct LAPL/PL application on the basis of available data and use of advanced technologies RP – Regional Exploration LAPL – Large Area Prospecting License ML – Mining Lease Exhibit 1D – Proposed Changes 10,000 sq. km, Non-Invasive, Non-Exclusive 5,000 sq. km, Invasive, Exclusive 100 sq. km, Invasive, Exclusive PL – Prospecting License RP – Regional Exploration PL – Prospecting License ML – Mining Lease 10,000 sq. km, Non-Invasive, Exclusive 25 sq. km, Invasive, Exclusive 10 sq. km, Invasive, Exclusive 500 sq. km, Invasive, Exclusive

7. Proposed Changes in Mining Policy- II RP – Regional Exploration LAPL – Large Area Prospecting License ML – Mining Lease Exhibit 1E – Proposed Changes PL – Prospecting License RP + PL/LAPL < 8 yrs Explored Area Unexplored P1 P2 E1 E2 Fully Explored Exploration StatusUnexplored AreaDuration and Area Granted < 10,000 sq. km, < 3 years < 5,000 sq. km, < 6 years < 500 sq. km, < 5 years < 100 sq. km, 20 yrs<ML<30 yrs  Seamless transition from PL/LAPL to ML. No government veto powers.  Tender/auction process to grant MLs for already prospected ores by GSI or expired PLs/LAPLs whose lock in period has expired.  State government may waive the tender/auction process in favor of an application on the basis of value addition (promise of setting up downstream industry within the state).  In all cases, full cost of exploration shall be recovered. Auction Value Addition OR

8. Value Addition and Augmenting State Revenues - I  Revenues from mining come from two sources  Dead Rent: Charge paid by lessee for the area included in the ML and not mined. The charge is based on area and value of the minerals prospected.  Royalty  Three prevalent systems of Royalty exist – 1.Quantity Based/Rate per tonne  Pros: Suited for low quality and high volume minerals.  Cons: Doesn’t account for rising prices of mineral. 2.Ad-Valorem/Rate per dollar of market price  Pros: Indexed to market prices of minerals, accounts for rising prices.  Cons: High Ad-Valorem rate can make mineral economically unviable. Not suited for low volume, high price minerals such as diamonds. 3.Profit based/ Percentage of Profit  Pros: Adds the profit element to the royalty. Suitable for low volume, high price minerals.  Cons: Profits can go under-reported by private companies. Possibly impede exploration and mining operations by making them economically unviable.

9. Value Addition and Augmenting State Revenues - II  Current Royalty Regime in India  Fixed Royalty rates : most major minerals  Ad-Valorem rates : few minerals  Consensus is to move into Ad-Valorem system to augment state revenues  Ad-Valorem rates are easy to implement for major minerals such as aluminum, gold, silver copper, lead, zinc and tin as market prices are easily available (London Metal Exchange)  Ad-Valorem rates not easy to implement for others where no such benchmark exists. Currently state governments add 20-25% to benchmark value for domestic sales to account for irregularities in reporting by private companies.