Deccan Gold Mines Ltd Management Discussions.

Introduction

Deccan gold mines limited ("dgml") is the first and only gold exploration company listed on the bombay stock exchange limited (bse). It was established in the year 2003 by australian promoters with deep roots in the mining and exploration sector. Since its inception, dgml and its wholly owned subsidiary deccan exploration services private limited (despl) have actively pursued gold exploration activities through adoption of modern methods and latest technology in all of its exploration prospects.

With a portfolio of green-field and advanced stage gold projects, dgml has been accumulating and developing some of indias finest gold prospects and is continuously working towards its long standing vision of bringing into production the first private sector gold mine in the state of karnataka, south india.

The key project of despl is the ganajur gold project situated in the state of karnataka. Apart from this, dgml and despl have also got high potential pipeline of projects that are at various stages of development like mangalagatti, bhavihal and hirenagnur projects in the state of karnataka.

Industry review

As per the world gold councils report, 2017 on "gsts impact on indias gold market", gst represents a radical step forward for indias economy. It will boost the economy and make the gold industry more transparent to the benefit of gold buyers. This should support indias gold demand, which is expected to touch 850-950 tonnes by

2020. (source: indian minerals yearbook 2018, part ii: metals & alloys published by indian bureau of mines – july, 2019). Against this, it may be noted that indias gold production averages just about 2 tons a year with demand not only being the highest in the world but also the fastest growing.

Some of the reasons that could be attributed to the low level of production of gold in india despite having a good geological potential are touched upon hereunder.

In 2017-18, indias annual exploration expenditure was approximately usd 0.17 billion which was much smaller than a small country like peru at usd 0.56 billion. Further, it was taxpayers money which was spent in india unlike resource-rich countries like canada and australia where the taxpayers money is not spent on such risky ventures. Secondly, mineral taxation plays a key role in exploration as well as overall growth of the mining sector. The existing mineral taxation regime is not conducive to attract private /junior exploration companies to work in india. Mining industry in india is the highest taxed in the worldwitheffectivetaxrateashighas64% profitfor the existing mines. Therefore, mineral taxation needs to be rationalized and brought at par with the mineral-rich countries so as to boost exploration, sustain mining as well as derive long-term benefits in terms of raw material security for the country.

Thirdly, the central government being the custodian of the mmdr act and rules, has to take the responsibility to see that the state governments follow the legislation in true letter and spirit and adhere to time schedule in grant of mineral concessions by simplifying procedures. There is also an urgent need to simplify the process for forest and environment clearances both at state and central governments level.

Fourthly, the concept of captive mines for an industry is typical to india and has not been able to unleash the full potential of mining in india. Since the area granted for captive leases is large, exploration activities are minimal and limited to the requirements of the mineral processing plant(s). There is no benefit to down-stream users of the products; inter-sectoral subsidy from mining sector (captive mine) is not passed on to them and hence no multiplier benefits. The concept of captive mine to an industry or plant should be discouraged and slowly done away with as it limits the growth of the mining industry. (source: fimi workshop on "exploration key to resource development" october, 2018) recent policy initiatives - national mineral policy, 2019:

Recently, the central government approved the national mineral policy, 2019 (nmp) which aims to be a more effective, meaningful and implementable policy that brings in further transparency, better regulation and enforcement, balanced social and economic growth as well as sustainable mining practices.

Some of the provisions of nmp which are expected to give a boost to the mining and exploration sector are summarized hereunder:

Introduction of right of first refusal for reconnaissance permit (rp) / prospecting licence (pl) holders encouragement to private sector to take up exploration auction of virgin areas for composite rp cum pl cum ml on revenue share basis encouragement of merger and acquisition of mining entities transfer of mining leases and creation of dedicated mineral corridors to boost private sector mining areas grant of status of industry to mining activity to boost financing of mining for private sector and for acquisitions of mineral assets in other countries by private sector rationalisation of reserved areas given to psus which have not been used and to put these areas to auction, which will give more opportunity to private sector for participation harmonization of taxes, levies & royalty with global benchmarks to help private sector

National mineral policy 2019 replaces the extant national mineral policy 2008 ("nmp 2008") which was announced in year 2008. The impetus to review nmp 2008 came about by way of a direction from the honble supreme court vide its judgment dated august 2, 2017 in writ petition (civil) no. 114/2014 entitled common cause v/s union of india & others.

Whilst we welcome the positive steps proposed in the nmp, we also hope that it will be implemented in right earnest.

Performance

Full details of exploration work undertaken by the company are contained in "report on exploration activities" forming part of this annual report. The status of our applications is contained under the heading "status of mineral concession applications". It is pertinent to note that exploration companies by their very nature will not generate mining revenues until commencement of mining operations.

Risks and concerns

Our interactions with the government (at both central and state level), particularly post the coming into effect of the mmdr amendment act, 2015 reveals a hesitation / reluctance to process the mineral concessions applications falling under section 10a(2)(b) of the mines and minerals (development & regulation) act, 1957 ("mmdr") which clearly protects the rights of existing concession holders and applicants. Further, there is also a mindset favouring auctioning of areas for mining under the provisions introduced in mmdr vide the mmdr amendment act, 2015. Whilst things stand thus, the following provisions of mmdr are worth noting.

Section 10a(2)(b) of mmdr protects the rights of existing concession holders and applicants in respect of mineral concession applications lodged before the commencement of the mmdr amendment act, 2015 w.e.f. January 12, 2015.

Section 10b deals with ‘grant of mining lease in respect of notified minerals through auction. Sub-section (1) of section 10b clearly states that the provision of this section shall not be applicable to cases covered by section 10a or section 17 a or to minerals specified in part a or part b of the first schedule or to land in respect of which minerals do not vest in the government.

A classic example to illustrate the case in point is the ganajur mining lease (ml) application. Our subsidiary, deccan exploration services private limited (despl) lodged this ml application way back in 2006 after carrying out reconnaissance and prospecting operations under reconnaissance permit (rp) and prospecting licence (pl) granted to it.

We may highlight that despls ganajur ml application was recommended by the government of karnataka and has also received the central government approval under section 10a(2)(b) of mmdr way back in 2015 followed by a clarificatory letter in 2017 clearly directing the government of karnataka to get the ml executed in accordance with law at the earliest and to expedite the clearances & approvals for starting the mining operation. Further, the area covered under the ganajur ml application cannot be put up for auction as section 10b of mmdr clearly excludes the cases falling under section 10a of mmdr.

The legal position being thus, despl still awaits the issue of grant notification letter for its ganajur gold project from the government of karnataka despite the said government: a) having received prior approval from ministry of mines under section 10a(2)(b) of mmdr during 2015 / 2017 to get the mining lease executed at the earliest and to expedite the clearances and approvals for starting mining operations; b) having received a positive opinion from its own law department, government of karnataka during april , 2018; and c) being served an order dated march 21, 2019 passed by the honble high court of karnataka on the writ of mandamus filed by despl directing the government of karnataka to consider the ganajur ml application within an outer limit of six weeks from the date of receipt of its order. It may be noted that the six weeks period ended recently and the company is contemplating initiation of contempt proceedings.

Due to this delay, we are unable to make further progress in implementation of the gold project and suffering huge financial losses. We were originally planning to commence commercial gold production by the end of year 2019. It may be noted encouragement to the gold exploration and mining industry would facilitate increase in production of gold within india helping reduce its dependency on gold imports and facilitating the central governments "make in india" campaign. Further, it would also contribute to reduction in current account deficit largely caused by outflow of funds to import gold.

To conclude, a clear directive from the central government (ministry of mines) to all the state governments to act in accordance with law and process and issue the grant notification letter / execute mining lease in respect of mineral concession applications protected under section 10a (2)(b) of mmdr is what is urgently required. Our interactions with the government (both at central and state level) reveals that the matter is under the active consideration of niti aayog and a policy direction is in the offing.

Outlook and opportunities

Historically, investors have purchased gold as a safe haven, hedge against economic failures, portfolio diversifier and store of wealth. India is a traditional and stable market for gold consumption. The present and future production of gold will not be sufficient to meet the ever increasing demand. Therefore, efforts will be required to reduce the gap beween production and demand (source: indian minerals yearbook 2018, part ii: metals & alloys published by indian bureau of mines – july, 2019).

Resources of deep-seated minerals such as gold for which india is dependent on imports at present have not been fully explored and their potential realized because of lack of finances and the latest techniques. Strategic minerals / metals as well as precious metals occur usually in very low concentrations (<1% and in parts per million) in rocks. It is difficult to discover themandmuchmoredifficultto define their resources. The success rate of discovery is 1 in 400 to 1 in 800 prospects.

Such precious / strategic minerals need to be explored with modern concepts and techniques, tools and dedicated softwares by well trained professionals for breakthrough requiring state-of-the-art technologiesandheavyfinancial expenditure. To achieve this, private explorers popularly known as ‘junior exploration companies who are specialists in exploration of a mineral or a group of minerals and who raise funds from stock exchanges / venture capital should be engaged on first-come-first-served (fcfs) basis to undertake detailed greenfieldexploration by providing all available baseline geosciences data and incentives like security of tenure; seamless transition from reconnaissance permit (rp) to prospecting licence (pl) to mining lease (ml) as well as freedom to sell / transfer the concessions.

It is our view that india should adopt fcfs system (at least in the case of deep-seated minerals like gold) which is prevalent in advanced and developing resource-rich countries. Whilst the regulations do vary between these

Regions, the spirit of fcfs for mineral exploration where explorers have to commit minimum exploration expenditure remains similar and entrenched. In its strategy paper published in november, 2011 the ministry of mines, government of india has stated that the indian minerals sector holds a huge potential for all stakeholders, including the government, community and the entire economy. However, in order to unlock this potential and enable increased gold production in the country, government of india should promote and facilitate gold exploration and mining by improving the regulatory environment and fast-tracking grant of mineral concession licences.

To sum up, if a proper blend of strategy and policy is adopted, which is attractive, stable and long-term, indias gold production could grow from its current low level and the company will play a leading role in this direction.

Adequacy of internal control

The company has in place adequate internal control systems commensurate with its size and operations, which assure proper recording of transactions of its operations and also ensure protection against misuse or loss of the companys assets. The company has constituted an audit committee and has assigned to it tasks that will further strengthen the internal audit system.

Sustainable development

Dgml is committed to sustainable development; we believe in creating sustainable values that our employees, business partners and shareholders can uphold and believe in. We strive to meet the needs of all our stakeholders. Dgml believes in making a positive contribution to the community in which we are involved. Our mission is to increase the known gold resources base of the country in a way that enhances the well being of its people, the environment, and the investors and stakeholders of the company.

Cautionary statement

Statements in the management discussion and analysis report describing the companys objectives, projections, estimates, expectations or predictions may be "forward looking statements" within the meaning of the applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the companys operations include the availability of economically viable deposits, changes in government regulations, tax regimes, economic developments in india and other incidental factors.