Gujarat Mineral Development Corporation Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Global Mining Scenario

The World Banks Metals and Minerals Price Index fell 4.7 percent in the first quarter of 2020 (q/q) following two consecutive quarterly declines. The fall reflects a sharp slowdown in Global manufacturing activity due to the COVID-19 pandemic, despite unprecedented stimulus measures to support demand. Rising supply disruptions for the most of the metals have not offset demand losses. Metal prices are projected to fall by 13.2 percent in 2020 on expectations of prolonged public health and economic crises. Risks to this outlook are tilted to the downside, including the possibility of a steeper collapse in Global Industrial demand and less effective policy stimulus.

Aluminum prices dropped 3.8 percent in the first quarter, the seventh consecutive quarterly decline. At end-March, prices fell to a four-year low below US$1,500/MT. The COVID-19 pandemic has affected Aluminum largely through its impact on the automotive industry. Global car demand has weakened, and most automotive factories across China, Europe, and the United States have temporarily shut down. Car production was down more than 30 percent in 2020, Q1, the steepest drop since the height of the Global financial crisis. Despite the weak demand, there were limited cutbacks in Aluminum output in China—which accounts for more than half of Global Aluminum production. Production there rose by 2.4 percent year-on-year in the first two months of 2020. Aluminum prices are forecast to decline by 10.8 percent in 2020.

A positive turn in prices is likely to be triggered by a faster-than-expected containment of the pandemic and a sharper economic rebound. Production and supply chain disruptions, which have had limited impact on metal prices thus far, may provide support when recovery gets under way.

(Source: A Commodity Market Outlook, April 2020)

Indian Economy & Mining Sector Perspective

Prior to COVID-19, Index of Industrial Production (IIP) rebounded from negative growth in Q3:2019-20 to 2.2 per cent in January 2020, and 4.6 per cent in February 2020, the highest level observed since July 2019. The sharpest supply shock was witnessed in April, the month of ‘lock-down, with IIP declining by a record 55.5 per cent in April 2020. The record contraction in April was more than three times as compared to a (-) 18.3 per cent growth in March, with several firms reporting nil production.

Mining & quarrying activities, which account for 42.2 percent of primary goods sector, were exempt during the lockdown, thereby entailing a relatively lower negative contribution. Falling production of capital goods and infrastructure & construction goods (20 per cent contribution to de-growth) also indicated a slump in investment demand.

(Source: Ministry of Finance, Department of Economic Affairs, Economic Division, Monthly Economic Report, May 2020)

FDI up to 100 per cent is allowed in exploration, mining, minerals processing metallurgy and exploration of metal and non-metal ores under the automatic route for all non-fuel and non-atomic minerals including diamonds and precious stones. During April 2000-March 2020, FDI inflow in metallurgical industries stood at US$ 13,401.78 million. During the same period, FDI inflow in Mining, Diamond & Gold ornaments and Coal production sectors stood at US$ 2,731.07 million, US$ 1,177.01 million and US$ 27.73 million, respectively.

(Source: Metal and Mining Report, June 2020, Indian Brand Equity Foundation)

The provisional estimates of Gross Value Added (at 2011-12 prices) accrued from mining and quarrying sector for 2018-19 is at 1370,564 crore. Similarly, the provisional estimates of GVA (at current prices) for 2018-19 is at 1410,151 crore. The mining and quarrying sectors contribution (at current price) to GVA accounted for about 2.38% for the year 2018-19.

(Source: Ministry of Mines Annual Report 2018-19 )

India is the third largest producer of coal. Coal production in the country stood at 729.10 million MT in FY 201920. India ranks fourth in terms of iron ore production globally. Production of iron ore in FY 2019-20 stood at 205.70 Million MT. India has around eight per cent of the worlds iron ore deposits. India became the worlds second largest crude steel producer in 2019 with production at 111.2 Million MT. Production of Aluminium stood at 3.65 Million MT in FY 2019-20. Aluminium export from the country reached US$ 18.24 million MT in FY 2019-20 (till January 2020).

(Source: Metal and Mining Report, June 2020, Indian Brand Equity Foundation)

Geological Survey of India (GSI) has augmented coal resource in different states and the total resource of coal of the country stands at 3,19,020.33 million MT and that of Lignite stands at 45,663.58 million MT as on 01.04.2018. (Source: Ministry of Mines Annual Report 2018-19)

According to Ministry of Mines, India has the 7th largest Bauxite reserves which was around 2,908.85 million MT in FY 2018-19. India was the fourth largest producer of aluminium in the world with a share of around 5.33 per cent in Global aluminium output. Aluminum production increased to 2.52 million kgs between April 2018-Feb 2019. Over the course of last four years, Indias aluminium production capacity has increased to 4.1 MMTPA, driven by investments worth Rs 1.2 lakh crore (US$ 18.54 billion).

(Source: Metal and Mining Report, June, 2020, Indian Brand Equity Foundation)

India is the worlds second largest cement market, both in production and consumption. Indias overall cement production capacity was nearly 502 million MT in FY 2018-19 and consumption increased 5 per cent during this period due to high growth in housing segment and higher infrastructure spending. Indias cement production capacity is expected to reach 550 million MT by 2025. India is the second largest cement producer in the world and accounted for over 8 per cent of the Global installed capacity as of 2019. Indias cement production is expected to rise between 5-7 per cent in FY 2019-20, backed by demands in roads, urban infrastructure and commercial real estate. Cement production reached 334.48 million MT in FY 2019-20. Indias export of cement, clinker and asbestos increased at a CAGR of 6.44 percent between FY 2015-16 to FY 2018-19. In FY 2019-20 (till February 2020), it reached US$ 1.83 billion. Sale of cement in India stood at 158,407 crore (US$ 8.29 billion) in FY20. (Source: Sectoral Report on Cement, June 2020, Indian Brand Equity Foundation)

The power sector accounts for a large share of the consumption of coal in the country. Installed capacity have increased steadily over the years, posting a CAGR of 7.19 per cent in FY 2015-16 to FY 2019-20. With electricity production of 1,252.61 billion units (BU) in FY 2019-20, the country witnessed growth of around 0.26 percent over the previous fiscal year. Energy generation from conventional sources stood at 97.70 billion units (BU) in March 2020. Between 2017 and 2022, conventional sources are expected to witness capacity addition of 58.38 GW (gigawatt). Around 81 percent of the total power generation was done through thermal power plants, while hydro and nuclear plants contributed 15 percent and 4 percent respectively in FY 2019-20.

(Source: Metal and Mining Report, June 2020, Indian Brand Equity Foundation)

Industry Structure and Development

The country is endowed with huge resources of many metallic and non-metallic minerals. Mining sector is an important segment of the Indian economy. Since independence, there has been a pronounced growth in the mineral production both in terms of quantity and value. India produces as many as 95 minerals, which includes 4 fuel, 10 metallic, 23 non-metallic, 3 atomic and 55 minor minerals (including building stones and other materials).

(Source: Ministry of Mines Annual Report 2018-19)

India metals and mining sector has witnessed strong growth over the past few years. GVA from mining and quarrying reached US$ 56.02 billion in FY20. Mineral production in India also surged, achieving a CAGR of 6.40 per cent between FY 2009-10 to FY 2018-19 and reached US$ 17.74 billion in FY 2018-19. The number of operative mines (excluding atomic minerals, petroleum (crude), natural gas (utilized) and minor minerals) in India reached 1,405 in FY 2018-19 from 1,430 in FY 2017-18. Production of as many as 95 minerals is undertaken in India, including 4 fuel minerals, 10 metallic minerals, 23 non-metallic minerals, 3 atomic minerals and 55 minor minerals (including building and other materials). Odisha was the leading producer of minerals with production worth US$ 3.94 billion in FY 2018-19, followed by Rajasthan, Chhattisgarh, Karnataka and Jharkhand with production of minerals worth US$ 1.65 billion, US$ 1.37 billion, US$ 1.17 billion and US$ 0.33 billion, respectively. Production of metallic minerals in the country increased from US$ 4.81 billion in FY 2015-16 to US$ 8.73 billion in FY 2018-19. During the same period, production of non-metallic minerals increased from US$ 1.08 billion to US$ 1.29 billion. (Source: Metal and Mining Report, June 2020, Indian Brand Equity Foundation)

Favourable Policies are Supporting the Sector Growth

• Aims to open a new era in Indian coal & mining sector, specially to promote ‘ease of doing business.

• It will boost coal production and will reduce dependency on import.

• To bring more transparency, better regulation and enforcement, balanced socio-economic growth along with sustainable mining practices.

• Proposed to grant ‘Industry status to mining with an objective of boosting financing of private sector.

• Supported Merger & Acquisition (M&A) of mining players.

• FDI up to 100 percent is permitted under the automatic route to explore and exploit all non-fuel and nonatomic minerals and process all metals as well as for metallurgy.

• FDI cap in the mining and exploration of metal and non-metal ores have been increased to 100 percent under the automatic route.

• In March 2018, the Government allowed 100 percent FDI in coal mining.

• Government of India is encouraging private ownership for steel operations and other high priority Industry.

• Government of India significantly reduced the duty payable on finished steel products and has streamlined the associated approval process.

• Focus on upgradation of skill sets to foster adaptation of new state of art technology.

• Increase the capacity and quality of training infrastructure and trainers to address human resource needs.

(Source: Metal and Mining Report, June 2020, Indian Brand Equity Foundation)

Growth Drivers for Mining Sector

• India is witnessing a sustained growth in the infrastructure build up. The construction Industry has witnessed a strong growth wave powered by large spends on housing, road, ports, water supply, rail transport and airport development.

• In March 2020, NHAI accomplished the highest ever highway construction of 3,979 km of national highways in FY 2019-20.

• Freight earnings in FY 2019-20 (till February 2020) stood at 1119,216.11 crore (US$ 17.06 billion), while its gross revenue stood at 1183,092.74 crore (US$ 26.20 billion) during the same period.

• Cargo traffic handled stood at 707.4 million MT in FY 2019-20.

• Electricity production reached 1,252.61 billion unit (BU) in India in FY 2019-20.

• It has been estimated that India is going to require US$ 4.5 trillion of investment by 2040 for infrastructure development.

• Government introduced National Infrastructure Pipeline with plans to invest 1100 lakh crore (US$ 1.43 trillion) over the next five years.

• Gross Value Added (GVA) in the construction sector grew almost 1.3 percent y-o-y to 110.33 trillion (US$ 146.58 billion) in FY 2019-20.

• Iron and steel being a core component of the real estate sector, demand for these metals is set to continue given strong growth expectations from residential and commercial building industry.

(Source: Metal and Mining Report, June 2020, Indian Brand Equity Foundation)

Performance of GMDC (FY 2019-20)

A. Product-wise Performance

a. Lignite:

Lignite mining continues to be the main operation of the company. GMDC currently has 5 operational Lignite mines. The mines are located in Kutch, South Gujarat and Bhavnagar region. Out of total Profit Before Tax (PBT) of the company about 70% is from Lignite Mining Operations.

GMDCs Five active Lignite mines together produced 69.55 lakh Metric Tonnes of Lignite during the FY 201920. GMDC is the largest merchant seller of Lignite in the country.

Lignite sale of GMDC has decreased by nearly 24.32% in FY 2019-20 compared to FY 2018-19.

b. Bauxite

Other than Lignite, GMDC is also operating Bauxite mines in Gujarat. The operations are located in the districts of Kutch as well as Devbhoomi Dwarka. The Bauxite deposits of Gujarat are clustered deposits with numerous pocket deposits present in near-by vicinity. GMDC is currently mining nine Bauxite deposits, of which eight are in Kutch and one is in Devbhoomi Dwarka. In FY 2019-20, GMDC has produced 3.76 lakh metric tonnes Bauxite from its operating mines (Gadhsisa Group of Bauxite Mines) in Dist. Kutch and has produced 0.742 lakh metric tonnes Bauxite from its Mevasa Bauxite Mines in Dist. Devbhoomi Dwarka. GMDCs production capacity of Bauxite is likely to be stable in coming years. GMDC envisages to cater the needs of major value addition plants of mineral in the state.

c. Power

GMDC Power Division consists of Akrimota Thermal Power Plant, Wind Power Plants and Solar Power Plant. A total 1164.98 Millions Units of power was produced in the FY 2019-20.

Akrimota Thermal Power Plant (ATPS):

The Generation as well as PLF of ATPS for FY 2019-20 was 740.17 Millions Units and 33.71% respectively.

Wind Power: GMDC consists of 200.9 MW Capacity of Wind Power projects and are situated at different locations in Gujarat. The PLF of wind projects reported 23.75% in the FY 2019-20 with total Generation of 419.15 Million Units.

Solar Power: GMDC have 5 MW Solar Power Project is situated at Panandhro Lignite Project. The solar power generated 5.66 Million Unit Power with PLF of 12.89%.

d. Exploration Activities

Exploration activities are kept ongoing in upcoming project area as well as unexplored area of existing mines, if any.

To establish behavior of mineral deposit along with quality & quantity of the ore, GMDC has initiated latest mineral exploration practices by study of Satellite Imagery and GIS Technology using latest computer software as per requirement & feasibility. Geological Mapping & Geo - physical surveys, Pitting and trenching as well as Conventional Mineral Exploration by drilling for Lignite, Bauxite, Manganese and other associated mineral deposits are also carried out followed by mineral analysis and preparation of exploration report as per the requirement of Ministry of Coal & Ministry of Mines.

For establishing additional Bauxite bearing areas for stage - II exploration, geological mapping with the help of satellite images & GIS technology was used over possible Bauxite & laterite bearing areas in Kutch.

B. Financial Performance

The companys Net Profit After Tax has improved from 1138.69 Crore to 1202.68 Crore over the past year. Total market capitalization of the company stands out at 11003.29 Crore as on 31st March, 2020.

Rs. in Lakhs
Particulars 2017-18 2018-19 2019-20
Turnover 2,06,996 1,87,968 1,52,095
Profit before Depreciation, Tax & Exceptional Items 54,784 70,099 35,258
PBT 55,692 60,485* 26,100
PAT 43,460 13,869 20,268
Dividend (%) 175 100 100
(*before exceptional item)

The details of significant changes in key financial ratios, along with detailed explanation thereto are given hereunder:-

Financial Year

Explanation for significant change in Accounting Ratios
Sr. No. Name of Accounting Ratio 2019-20 2018-19 Change %
1 Debtors Turnover Ratio 10.48 14.53 -27.87 On account of reduction of Sales of 19% without corresponding reduction in Trade Receivables.
2 Inventory Turnover Ratio 15.74 22.04 -28.58 On account of reduction of Sales of 19% without corresponding reduction in Inventories.
3 Current Ratio 5.37 6.06 -11.39 No Significant change.
4 Operating Profit Margin 17.16% 32.18% -46.67 On account of reduction of Sales of lignite by 24.32% coupled with increase in stripping ratio & also payment to employees under VRS.
5 Net Profit Margin 13.33% 7.38% 80.49 On account of reduction in Income tax liability due to reduction in Operating Profit Margin of 46.67% in the year 2019-20 and also on account of increase of Income tax liability in the year 2018-19 due to disallowance of loss of 129,765 Lakh on investment in Bhavnagar Energy Company Limited (BECL). which has been shown as exceptional item in the statement of Profit and Loss also.

Opportunities and Threats for GMDC:

Opportunities

• As six mining leases are reserved by Central Government to GMDC, it will boost the Lignite Production which will help in increasing revenue of GMDC.

• There are large amount of reserves of Limestone at our upcoming Lakhpat Punrajpur Mining, Panandhro Extension & Bharkandam projects. GMDC is approaching various cement companies across India for setting up of Cement Plant where GMDC will be a long term Limestone supplier.

• As the market of overburden minerals like Silica Sand, Ball Clay & Bentonite is increasing, entering into the beneficiation industry of these overburden minerals will have a larger scope in terms of revenue, customer base and market share. GMDC is planning to enter into this beneficiation Industries by the way of long term supplies of respective minerals.

• Joint Detailed Exploration of Manganese bearing area in Dist. Panchmahal & Baroda to be carried out with M/s MOIL Ltd. for further development of a new business prospects.

• Exploring new business opportunity for Rare Earth Minerals at Ambadungar, Kwant Dist. Chhota Udepur jointly with M/s IREL & M/s AMD

Threats

• Imported Coal

• Shifting technology from Coal/Lignite to alternate fuels like Natural Gas, Furnace Oil, etc

• Land acquisition

• Covid - 19 Pandemic

Outlook

GMDCs measured drive is outlined by extension of activities on three facades, namely, venturing into exploration activities; increasing the geographical reach within Gujarat, and diversifying operations in sectors such as renewable power generation and other minerals. The future outlook of GMDC may include the following:

• To identify and reserve new Lignite and Bauxite leases within Gujarat and Coal Blocks outside Gujarat

• To establish itself as a nodal agency for exploration in scientific manner within Gujarat as well as India

• To venture into renewable power generation options in its mined out area as reclamation of exhausted projects need to be carried out

• To promote training and development in the mining sector to cater the need of skilled manpower in the sector

• To cater Limestone to the Cement Plants in Kutch from our upcoming mines

• To explore new business opportunities for Manganese in Dist. Panchmahal & Baroda jointly with M/s MOIL Ltd.

• To explore new business opportunities for Rare Earth Minerals in Dist. Chhoda Udepur jointly with M/s IREL & M/s AMD

Risks and Concerns

Various activities undertaken to achieve the goals make the Company susceptible to various risks. It has to be recognized that risks are not merely the hazards to be avoided but in many cases offer opportunities which create value ultimately leading to enhancement of shareholders wealth and ensuring sustainability of operations.

Mining companies are required to ensure restoration of mined areas, and that some of the revenue/costs of the mining go towards strengthening of environmental resources and ecosystem resilience in adjoining areas. GMDC is actively undertaking activities to ensure sustainable development. Increasing environmental concerns will lead to higher costs. Land acquisition is also a challenge for GMDC as the new legal framework for land acquisition would result in higher land cost.

Internal Control and its Adequacy

GMDC has put in place all the necessary internal controls adequately. The company has an in-house Internal Audit Department and internal check procedures on the purchase of items such as stores, chemicals, machinery. Similar checks and procedures are also devised for sale of goods. The company has appointed Internal Auditors for various Projects and Head Office, who are required to submit periodical reports to the top management. The company also avails services of professional and Chartered Accountants for physical verification of assets.

e-Governance

GMDC adopted e-Governance for its major business processes like Sales, Dispatch, Finance & Accounts, Material management using renowned ERP system (i.e Oracle EBS) & by facilitating stakeholders by Online Order Booking, Payment and Receipt by digital mode. All the project sites are interconnected with centralized system, resultant to high level of transparency which maintain faith of the various stakeholders of GMDC.

Human Resource and Industrial Relations

During the year under review there was no material development in human resource and Industrial relations. The Company had harmonious relations between management and the employees. As on 31st March, 2020, the Company had 1227 employees.

Cautionary Statement

Statements in the Management Discussion and Analysis, describing the Companys objectives, projections and estimates, contain words or phrases such as will, aim, believe, expect, intend, estimate, plan, objective, contemplate, project and similar expressions or variations of such expressions, are forward-looking and progressive within the meaning of applicable laws and regulations. Actual results may vary materially from those expressed or implied by the forward looking statements due to risks or uncertainties associated therewith depending upon economic conditions, Government policies and other incidental factors. Readers are cautioned not to place undue reliance on these forward looking statements.