The mining policy has recently been modified to enhance private sector participation. The PSU companies are being increasingly run on commercial lines and have started mobilising funds from the debt markets. Crisil has pioneered credit rating of the mining companies, having rated several of these entities including a few large PSUs, in this sector. Crisil's analysis of a mining company comprises assessment in respect of the following aspects:Pricing characteristics: The minerals being commodity items, the pricing characteristics would be significantly important. Internationally, the metals prices fluctuate widely and are affected by factors that generally arebeyond a producer's control. In assessment of pricing characteristics, Crisil analyses competitive position of the company in its market areas. Crisil assesses the threat of import substitution.

In the event of feasibility of the import substitution, Crisil analyses the financial performance of the company under different price scenarios and thereby, the flexibility offered by the cost structure of the company to absorb the price variation. In evaluating pricing flexibility of the company, Crisil also looks at supply and demand fundamentals of the mineral being mined. Crisil's analysis of demand for a given mineral considers historical domestic and international usage and cycli0cal trends.

In a transition economy like India, the analysis of various policy measures which may have a material impact on demand are also factored in. In India, since most of the mining companies are state-owned monopolies, they face limited domestic competition.

Operating efficiency: A low cost position becomes criticallyimportant in an industry where the pricing flexibility available with the producers is of limited nature. Crisil believes that the cost position of a company would depend on its ability to access inputs at a low cost, quality of ore reserves, ease of mining, technology employed and location of the mine and associated transport costs. An adequately trained labour force at a low cost would also be a key success factor.

Crisil evaluates the labour structure in terms of the manning levels, the financial implications of the new contracts being negotiated, the extent of social welfare costs that mining companies have to bear and their implications on future profitability and the productivity of the labour employed. The quantity and quality of a company's proven and probable ore reserves are important success factors. In Crisil's opinion, the quality of ore would have a direct reflection in the pricing flexibility of the mineral.

Also, a higher quality of ore would allow higher acceptability of ore. A case inpoint is National Mineral Development Corporation's Bailadila mines. The ore from these mines is considered to be of the highest quality in the world and regularly finds international buyers, even in situations of international recession. Crisil also looks at the ease of access to low-cost energy and crucial raw materials. Crisil reviews whether these inputs are purchased under long-term contracts. It also analyses the proximity and sourcing of raw materials. The potential for "creeping cost increases" attributable to inflation is also assessed. Production diversification: The diversity in operating assets contributes to the credit strength of the company by reducing the exposure to disruptions from unforeseen operating, geological or politically related events. Crisil assesses the extent to which the continuation of operations are threatened by the lack of backup systems. Crisil believes that companies with well diversified production bases could insulate themselves from considerable operatingrisks.

However, in exceptional circumstances, it is still possible for single-mine companies to achieve investment-grade status. Although having a number of operating mines serves to reduce operating risk, Crisil believes that one mine with multiple operating faces within the same pit, or a number of separate pits within one mine site or one mine with vertically integrated operations can provide some degree of production diversification.

Reserve replacement: Reserve replacement strategy of the company is a critical factor in assessing its credit quality. Because ore reserves are depleting assets, producers are always faced with the task of replacing current production and finding additional reserves. In case of mining companies choosing to explore and develop their own reserves, Crisil evaluates the quality and location of the assets within its portfolio of exploration targets, financing plan for exploration and development of the new mines. Crisil also reviews past record of the company in respect ofexploration success, which includes bringing targets into the company's production in a timely and cost-effective manner.

Management: Crisil assesses management of the company in terms of its depth, level of experience and record of proven success. Crisil factors in the management's philosophy regarding growth and diversification plans and its track record in managing and disposing of under-performing assets. Crisil also examines the financial policies practised by the management and the degree to which the policies are consistent with business strategies. While some companies wish to emphasise key financial measures over others, the consistency of financial policies within the industry is examined and Crisil benchmarks the policies of each rated mining company within its peer group.

Safety and environmental record: Crisil reviews the safety measures of the company in terms of past track record of lost-time accidents, severity and frequency of the same, the safety guidelines being practised, the potentialliabilities stemming from historical mining activities or any other legacy costs and the indemnification measures against such potential liabilities. Given the toxicity of many of the products and by-products of the mining process, mining concerns face the risk of the on-going operations violating the environmental regulations. Crisil assesses the existing measures as well as the past track record of the company in respect of compliance with environmental codes.

Regulatory risk: Crisil believes that the regulatory scenario is set to undergo a significant change, especially in the area of environmental regulations, private sector participation and import barriers. Crisil therefore, monitors and factors in the effect of the expected changes in the fundamental functioning of the mining industry in the country.

Government support: Since public sector enterprises dominate the Indian mining industry, Crisil, in its assessment, takes into account the possible support that would be available to the PSU companies.