Just months after launching an audacious raid to buy into rival London miner Anglo American, Vedanta Resources is betting on gold, an area which is relatively new for the Anil Agarwal-promoted company.
Vedanta has initiated talks with South India-based Deccan Gold Mines Ltd (DGML) to acquire a controlling stake in the company as it seeks to get a bigger foothold in the new segment of precious metal mining in the country, said three sources aware of the development.
Vedanta is negotiating to buy a 26% stake to begin with and that in turn will trigger an open offer, giving it the opportunity to get a controlling ownership, the sources said. The promoters own 27.59% of the company, held through Rama Mines (Mauritius Ltd) while the rest are held by public shareholders.
DGML’s market capitalisation based on Thursday’s closing share price was Rs 402.83 crore. Analysts believe the stock is significantly undervalued as its reserves alone are worth Rs 700 crore. One of the sources said the company ideally is looking to divest only a minority stake but that may not attract strategic players.
In the past one month, the Deccan stock has appreciated 18.3%, compared with a 4.6% gain in the Sensex. On Thursday, it closed at Rs 43.70.
When contacted, Vedanta denied any talks. “The information is baseless and entirely incorrect. We do not comment on such speculations,” a spokesperson said in response to ET’s queries.
A mail sent to Deccan remained unanswered at press time Thursday.
Established in 2003, DGML is India’s first private sector gold exploration company and the sole gold exporter. The company has a large portfolio of exploration prospects in Karnataka and Andhra Pradesh. As many as 15 of its prospecting licence applications and three mining lease applications are awaiting approvals from government authorities. But as a midsize mining company, it has been struggling for funds to bankroll its huge capital expenditure needs.
The company has so far explored an area of around 6,574 sq kms. Commercial gold production is yet to start. It expects to bring its flagship Ganajur project in Karnataka into production in 2017, according to a recent Wold Gold Council report. The annual output is estimated at just over 50,000 ounces.
The Ganajur main gold deposit project is located in the Haveri district of Karnataka. DGML has applied for a mining lease on this. New resources have also been estimated in Ganajur SE Prospect, which is considered as a continuation to the Ganajur main prospect. In addition, the company has made significant discoveries in Mangalagatti and Bhavihal prospects located within the Dharwar-Shimoga greenstone belt as well as in Hirenagnur of Hutti-Maski greenstone belt. The Hutti gold mine is in the same geological belt as Kolar.
Earlier this year, Deccan hired PwC to find a strategic or financial partner through a formal process. The company expects due diligence by potential investors this month or the next and start negotiations with a selected party by August-September. It is also hoping to get a binding terms sheet signed by September-October, the company said in a recent filing with stock exchanges.
“Potential investors have approached us to facilitate funding for the development of Ganajur Gold Project. A feasibility study report has been made available to the investors for their review. The potential investors have reviewed the project of the company and its subsidiaries as well,” Deccan Gold said in the regulatory filing on July 19.
There is no certainty that any bid from Vedanta will materialise once they conclude the ongoing due diligence or that it will meet the price expectation of DGML’s founder promoters, the sources mentioned above cautioned.
Vedanta, one of the world’s largest natural resources companies with presence across the entire value chain from exploration and asset development to extraction, processing, and value addition, has been increasing its gold mining and exploration footprint in recent years. It acquired Sterlite Gold in 2006 to expand its gold business and, last year, further consolidated the position when it beat three other bidders in the inaugural gold auction to bag the Baghmara mines in Chhattisgarh. The company expects to begin production in two years from the mine that has potential reserves of about 2,700 kg. Group company Fujairah Gold is into refining precious metals like gold and silver as well as copper, out of Dubai’s special economic zone. The company had previously looked at acquiring gold mines in the southern belt of Karnataka and Andhra Pradesh. In 2013, it made an attempt to acquire Bharat Gold Mines, which runs the famous Kolar Gold mines.
India’s imports of gold, silver and precious and semi-precious stones more than doubled in May, government data showed. Gold imports surged 236% to $4.9 billion that month.
India has been the No.1 source of global gold demand for decades, importing close to a 1,000 tonnes in good years. Following the closure of the iconic Kolar Gold Field in 2001 after more than 120 years of production, India has not been home to a single gold mine.